One of the most important lessons Mr Miyagi ever taught Daniel-san was, ‘Don’t forget to breathe, very important.’ Well-regulated breathing can slow your heart rate down. It may also short-circuit some of the positive feedback loops in your brain which lead to emotional decision making. But no one thinks about breathing. It’s something you do unconsciously.
The purpose of today’s Markets and Money is not to encourage you to take deeper breaths (although it’s not a bad idea). It’s to remember that investing is about evaluating businesses and cash flows. You can’t forget that, even in the midst of all these overwhelming stories.
So – taking a deep breath – there is the matter of Spanish bond yields to briefly address. The yield on ten-year Spanish government debt climbed as high as 7.28% on Monday. Italian 10-year yields climbed back up over 6%. Aside from being numbers, what does this mean?
Greece has done nothing to solve the structural debt problem in Europe. Rising bond yields are the market’s way of saying government finances in Spain are unsustainable. It’s not realistic for the Spanish to pay that much to borrow for ten years. The market has concluded the Europeans are not being realistic.
And don’t you go thinking China is going to save us again! China says a repeat of the $586 billion 2008 fiscal stimulus is ‘unsustainable’. There’s that word again. China’s banks paid the tab for the 2008 spending spree in the form of forced loans to local government. Those loans have left Chinese banks weaker in terms of capitalisation, according to Bloomberg.
It’s also possible that the leaders of the Communist Party of China (CPC) have decided it’s better to seek political approval at home than to curry favour with their European trading partners. China may be better off investing in its own economy than financing government deficits in Europe (or America). Either way, there will be no ‘Deus ex dragon’ this time around.
Australian investors may have realised that this morning. There will be no easy way out. Shares opened down almost one per cent. Confidence in ‘policy’ is not strong.
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From the Archives…
The Disconnect Between US Household Wealth and GDP Growth
2012-06-15 – Bill Bonner
Playing The Financial Markets – The Greatest Game of All
2012-06-14 – Greg Canavan
The RBA’s Mortgage Market Denial
2012-06-13 – Dan Denning
Spanish “Assistance” or “Bailout”
2012-06-12 – Satyajit Das
Priming Your Investment Returns
2012-06-11 – Nick Hubble