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On Learning From Japan & Investing In Brazil
The US Treasury’s attempt to free the bond market from the Bond Vigilantes by injecting more liquidity via buybacks recalls Japan’s similar decision prior to its “lost decades.” The US economy isn’t headed for any such abyss, but Japan’s experience nonetheless highlights the tactic’s drawbacks. Liquidity can soothe a market, William writes, but not cure what’s ailing it in the first place. … Brazil’s central bank is in a tough spot: Its push to curb inflation has taken an economic toll right before a presidential election. … And: Toby points out an opportunity in Brazilian stocks. Valuations have dropped as share price gains haven’t kept pace with rising earnings expectations.
Trump Threatens Military Action Against The Bond Vigilantes
The Bond Vigilantes have driven up Treasury bond yields recently, thundering onto the scene in alarm over the government’s huge borrowing needs, record corporate bond issuance, three inflationary supply shocks, a cloudy Fed path, resilient nominal GDP growth, a higher neutral interest rate, and a fragile yen. On the flip side, the Trump administration is determined to keep yields tethered—one way or another. Also holding yields in check are slightly cooler economic momentum, moderating labor costs, and the prospect of less policy uncertainty. Ed and Elias expect those counterweights to keep the 10-year yield mostly within our 4.00%-5.00% expectation range, the “old normal.” … Also: Ed reviews “Tuner” (+ + +).
GLOBAL MARKETS CALL: China Dumping Its Excess Production On The World
The Go Global trade continues to work; August has not interrupted it. Asia's AI-linked stock markets are back in the performance-derby lead after July's shakeout, and the other emerging markets that led this year are leading again. Last week's action was in bonds. Treasury Secretary Scott Bessent doubled the Treasury's buyback program for longer-dated debt, lifting repurchases to at least $4 billion per operation from September through November and telling CNBC that the size could go higher if liquidity stays poor. So far, the global equity rally has absorbed the rout in the bond market, which suggests that investors read higher yields as evidence of economic growth rather than a threat to it. Here's more: I. Stay Home vs Go Global. South Africa leads the mtd rankings at 14.0% in US dollar terms, with South Korea at 13.5% and Taiwan at 8.0% (chart). EM ex-China is up 6.2%, ahead of the ACWX at 3.6%, the ACWI at 2.8%, and the US at 2.5%. Brazil brings up the rear at -4.3%. The US-to-ROW (rest of world) MSCI ratios (in dollars and in local currencies) remain in intermediate downtrends that started in early 2025 (chart). The US-to-Developed World Ex US MSCI ratios climbed for 15 years before halting their climbs in early 2025 (chart). They have been flat since then, suggesting that, solely among developed markets, Go Global is no longer underperforming Stay Home. The two investment approaches have performed similarly since early 2025. This flat trend may continue into 2027. The US-to-Emerging Markets (EM) MSCI ratios remain in intermediate downtrends (chart). The EM MSCI began outperforming in early 2025 after a long stretch on the wrong side of that trade, and their gains explain most of the Go Global outperformance we've seen last year and so far this year. II. Forward earnings. Indexed to zero in 2009, Japan's forward earnings tops the field at 665.0% in yen, with the US second at 488.9%. The big move this year has been in the emerging markets (chart). The EM MSCI’s forward earnings has more than doubled since January to 200.8%, led by the AI-trade-exposed countries’ MSCIs, i.e., South Korea’s and Taiwan’s. III. Valuation. The US MSCI trades at a 20.2 forward P/E against 13.2 for the All Country World ex-US (chart). That discount has not closed even as foreign earnings accelerated, largely because the South Korea MSCI and the memory-related chip stocks remain cheap despite their performances this year. Across the major MSCI indexes, forward P/Es are 15.9 for Japan, 15.0 for the European Monetary Union, 12.6 for the UK, and 10.0 for the EMs (chart). IV. China. Bond yields are rising nearly everywhere. China is the exception, and its bond market is telling us why. The 10-year government bond yield is 1.70%, near the lowest in the series' history (chart). It is signaling deflation because China's economy is still struggling with a major debt crisis exacerbated by a rapidly aging demographic profile. The Shenzhen Real Estate stock price index closed at 982.89 and is pressing against the base of the triangle it has been compressing into since 2018 (chart). Equity investors still see no bottom in the property sector. Bank loans rose 5.1% y/y in July, while M2 grew 7.7% (chart). Both have been in downtrends since the Great Financial Crisis. Chinese bank loans total $41.5 trillion, compared with $13.9 trillion in the US (chart). The two were equal in 2010. Chinese bank debt exceeds US Treasury marketable debt, which just rose to $40.0 trillion. Industrial output rose 4.5% y/y in July, while real retail sales rose 0.4%, barely above zero (chart). Factories are producing far more than Chinese consumers are buying. China's 12-month trade surplus remains at a record high, exceeding $1.0 trillion (chart). What China cannot sell at home is getting dumped overseas. China is exporting deflation. Consumer confidence continues to stall; it has not been above 100 since 2022 (chart). New house prices fell 3.2% y/y in July, and have been falling for three straight years (chart). Household balance sheets are still absorbing that deflation shock. Crude petroleum imports have been flat since the start of the pandemic in 2020 (chart). They may be starting to roll over into decline, as China has been relying more on alternative energy sources and electric vehicle usage has been proliferating.
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WELLS FARGO: FORWARD PROFIT MARGIN
COLGATE-PALMOLIVE: FORWARD P/E
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