1. S&P Issues Warning on Corporate Debt
After a lengthy term of benign conditions, rumblings of discontent are beginning to be felt in the U.S. bond market, according to an article published today by Standard & Poor's Ratings Services titled "U.S. Distressed Credits Hint At Breaking Away From Languorous Lows."
Many of the factors that contributed to the bullishness in prior years -- such as low inflation, surging corporate profitability, and an accommodative monetary policy -- are now poised to weaken from previous levels.
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"Continued volatility in the bond market could create pressure points for distressed credits, which have substantially benefited from benign financing conditions," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group.
A rising distressed ratio would signal increased urgent need for capital by those most in need and potentially act as a precursor to higher defaults, if accompanied by a credit crunch.
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2. Dollar Disaster on the Way?
Treasury Secretary John Snow recently sounded off on the dire state of the world's economy.
The Washington Post reports that Snow once again implored China to stop pegging its currency to the dollar and promised a major slashing of the U.S. trade gap.
At the same time he insisted that Japan and Europe must foster growth in an attempt to attract American exports.
If these measures are not successful, the markets could correct themselves through a major collapse of the dollar.
However, few on Wall Street take Snow's declarations seriously.
While he reiterated the Bush administration's plan to slice the deficit to under 2% of U.S. GDP, the Post reminds: "... this plan leaves out the cost of operations in Iraq and the general war on terrorism, and it assumes no reform of the alternative minimum tax and no rise in federal spending."
A more believable projection from the Center on Budget and Policy Priorities sees the budget deficit hitting a low of 2.5% in 2010 and then rising once again.
Meanwhile, America's lack of credibility regarding economic policy has allowed the international community to essentially drag its feet in initiating the structural reform and lower interest rates that could salvage a dangerous situation.
And Japan has been particularly unhelpful by refusing to join the international call for China to change its currency policy.
With high oil prices generating revenue and strong economic growth, Americans won't notice the serious risks posed by the massive trade deficit. In fact, the world economy grew a record 5% last year.
But the trade deficit is growing just as fast -- and it is the largest in history. And that can't last forever.
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3. Survey: Fund Managers Defensive on Stocks
According to a survey, fund managers took a more defensive stance on stocks in April leading up to the recent equity market sell-off.
This represented a huge turnaround from the outlook in March, when "fund managers were fully invested in the market ... and positioned for positive growth surprises," says David Bowers, chief investment strategist at Merrill Lynch.
But according to an article in Market Watch, the March position was all wrong.
"Last week's (worse than expected) economic data was the straw that broke the camel's back and tapped into the unease that was already there," Bowers said.
The survey also found that the percentage of managers with a "low" appetite for risk was up 14% in March. Accordingly, the number of managers expecting strengthened global growth and improved corporate profits dropped appreciably.
Despite the global economic slowdown, managers anticipate a rise in inflation leading to an inevitable interest rate hike.
But the article goes on to say that the majority of fund experts haven't completely given up.
Most would prefer to hold on to cash rather than jump into fixed-income markets at this time.
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4. China Pension Crisis Dwarfs U.S. Problems
Financial Intelligence Report has offered a drumbeat of warnings about the looming pension crisis that will explode as 77 million baby boomers retire. We have talked about the impact here in the U.S., Europe and Japan.
But booming China will face the same financial nightmare.
China is headed for a retirement crisis that makes America's Social Security problems look tame by comparison, USA Today reports.
About 25 years ago, when China initiated a free-market economy, it also did away with its comprehensive social welfare system.
And since 1997, Beijing has been trying to replace the collectivist model with a different system that makes use of smaller guaranteed pensions with individual retirement accounts.
The idea is that these retirement accounts should account for the balance between the phased-out old-style pensions and the revamped version.
The problem? China's government oversees the accounts and has so far chosen to place funds in low-yield conservative investments. All this comes as the population is rapidly aging.
The number of Chinese retirees will jump from 48.2 million last year to 70 million in 2010 and 100 million by 2020, according to the Ministry of Labor and Social Security.
China faces a danger the United States and Europe never encountered: Its citizens will get old before the country gets rich.
"Today, we're using money from younger and middle-aged workers to pay for retirees' pensions. But when these younger people get old, there's no money for them," says Tao Liqun, director of the social security division at the China Research Center on Aging.
Officials claim the national pension fund lacks the $300 billion necessary for current retirees.
Today's problems are the result of China's "one child" policy and the collectivist welfare system introduced by Mao Zedong and the Communists after they took power in 1949.
The controversial population-control measure led to a situation in which one worker supported two parents and four grandparents.
But today's brisk economic development and a more mobile society are destroying that custom.
In 1970, there were eight Chinese workers for every retiree. Today, there are around six. By 2040, there will be only two -- less than in the far more prosperous United States, where the ratio is projected to be 2.3 to 1.
Back when the majority of people didn't live long enough to collect them, China was able to promise relatively generous pensions. But today's Chinese live to an average of 70 years, up from just 41 years in 1950.
As China has become more and more market-oriented, many of the state-owned factories that propped up the old system have disappeared. And surviving businesses have cut millions of workers just to stay afloat.
Some provincial governments, responsible for doling out pensions, are now seizing the individual retirement accounts intended to supplement workers' social security payments.
About $72 billion from those accounts has been used to pay current retirees' pensions, according to officials.
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5. Analysis by Andrew Wilkinson: Mixed Messages in the Market
At the moment, it seems to be open season for people taking a stand on the economy and stock market.
But they don't appear to be applying any real rationale -- and when they do, their logic is massively flawed.
Markets are supposed to efficiently react to new news, but that's not what we are seeing. The response to three doses of inflation data in recent days proves this point:
First: Producer prices (or prices of raw materials) were remarkably downbeat, encouraging stocks to rally, even in light of a recent sharp slump in equities. At the same time, bond traders breathed easier and pushed down expectations about future rate increases.
Second: Consumer prices came in unexpectedly higher than anticipated, providing fresh fears for bond traders. At the same time, stocks actually rallied. It was only very late in the day that stocks staged a fresh plunge and bond traders reconsidered, sending the yield on the 10-year note down on the day.
This reaction made no sense at all.
And it wasn't as if corporate earnings concerned equity traders. Things have been looking decidedly cozy on that front.
So what IS creating these mixed signals?
Perhaps it was the third link in the inflation chain -- when the Federal Reserve published its Beige Book, a survey report covering all 12 Fed districts.
The report itself continued to describe Goldilocks conditions: Not too hot ... and not too cold. But perhaps the worrying angle was the announcement of increased pricing power by the retail sector.
While that is usually good news when it comes to retailers' ability to boost profits, the mixed signals continue as the Fed reports that retail spending is decidedly hampered by higher gas and energy costs.
The report stated that in some areas of the country, factory owners were successfully passing on higher energy costs to their own consumers, while in other regions businesses had to sacrifice their margins.
The bottom line? There continue to be signs of inflation in the pipeline. The Fed will clearly keep raising rates despite early signs that economic activity could well be slowing.
While the bond market gets the message that rates could still rise, they may be close to peaking. But the stock market is taking a less rosy view.
It is saying that uncontrollable inflationary pressures building in the pipeline might require a hefty dose of medicine from the Fed. That salve would have to be applied even after it was clear the economy was cooling -- so as not to allow inflation to spiral uncontrollably.
The stock market is feeling decidedly blue about the prospects for the future. It is beginning to discount that dreaded "R" word. The current cozy level of quarter one earnings could be the top of a very slippery slope.
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Editor's Notes:
- Go Here Now to get this valuable report: How to Live, Do Business or Retire in 6 of the World's Most Beautiful and Affordable Offshore Edens.
- 5 Best Buys to Beat a Dollar Dive -- Go Here.
- Funds That THRIVE on Inflation -- Get Them Here.
- Sectors to Save You From the Coming Baby Boomer Crisis -- Learn More.
- The Natural Miracle Oil That Could Save Your Life -- Go Here Now.
- You Can Jump On the Commodity Bull Now -- Find Out How.
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