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Friday, July 5, 2013


There has been quite a bit of chatter about credit market problems in China.  The yield curve in China has been inverted for quite some time.  I have seen references to it as far back as late 2011.  I have not been able to find a continuous chart of the rates to see it clearly though.  Here is a recent look at the curve.


Short rates are clearly way higher then longer rates.  For comparison here is the yield curve in the U.S. from back in April of 2007.

Inverted yield curves have had very high correlation with recessions in the U.S.  I can't say that I know how well they signal recessions around the world.  I would expect it to work pretty similar though.  Is China in for a more prolonged slow down then many expect?  Check out this chart.


A long term look at the Shanghai index does seem to show a potentially serious break of a long term uptrend.  The index broke the trend line and appears to have moved back up to kiss it good bye and turned down again.  The U.S. economy is sucking wind and Europe is in recession.  What happens to the global economy if China slows down even more then it has been?

This is something to keep an eye on.  In 2007 the global economy was really humming along when it was taken down by the U.S. credit problems and recession.  Even though China's economy is not as big as the U.S. the global economy is possibly already in recession.  To say the least it is sputtering along.  It will not take as big a shock to send it spiraling down now.  It is quite possible that worries over China is what caused the big emerging market bond and stock sell off.  Those would be the economies most quickly affected by China.  This situation will take time to play out.  Credit market problems can affect the economy far out into the future.  It will take some time before we know whether this is nothing or a major storm.  There may be some flare ups along the way that could affect global markets.  You might recall all the talk about how the sub prime crisis in the U.S. was contained just a little while before everything blew up.  If we start hearing talk like that out of China it could be time to buckle on the crash helmets.  Nothing like government officials proclaiming there is nothing to worry about to indicate there is something very real to worry about.


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