Bernard's Top 10:House prices fall 5.1% in China; Corporate bond bubble; 'Shut your eyes and buy'; Deflation drumming the rate hike hawks into submission; Clarke and Dawe; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz. 

See all previous Top 10s here.

My must read is #4 on how emerging market corporate debt could be the next ground zero in financial market strife, although it's hard to see as the world's central banks (except ours) are firing up their printing presses to wage currency wars on each other. #7 makes me think there could be some rough weather ahead though.

1. A billion prices project - Just about everyone expects the US Federal Reserve will put up its main interest rate from nearly 0% later this year to fight off inflationary pressures building from America's fast growing economy.

Lots of people worry this will disrupt global markets, and in particular emerging markets and global bond markets.

But everyone is assuming that this strong economic growth will automatically generate inflationary pressures.

Everyone needs to look at what is actually happening to prices in America right now.

They are falling and quite fast, as this chart below of the 'Billion Prices Project' from MIT. It measures prices online in a real time way and it's a great predictor of actual CPI infllation.

It is showing outright deflation, and that's not all about fuel prices. Something else is going on and it's not just in America. Very deep structural deflationary forces are building. A technology driven supply shock as services sectors are globalised through phones, apps and the cloud is unleashing deep deflationary forces.

Central banks still think it's cyclical and about a shortage of demand. But is it? What if it's structural and they are flogging a dead horse with freshly printed money? It will certainly do amazing things for asset prices. Until they stop.

Here's the chart:

2. Chinese house price deflation - This is worth keeping an eye on. The FT calculates house prices in China fell 5.1% in January from a year ago, accelerating from an annual fall of 4.3% in December. It may not be coincidental that the People's Bank of China has started easing monetary policy. And it hasn't started printing yet.

3. Negative yields - Over US$2 trillion of investments are now in European Government bonds with negative yields. Think about that for a moment. And realise that 3.5% in New Zealand looks spectacularly attractive.

Yet people are still fixing for five years and think that 5.89% looks about as low as interest rates can go. The Europeans and Japanese would tell us we ain't seen nuthin' yet.

4. Corporate bond bubble? - Some are warning that the rise in the US dollar and interest rates (although I'll believe it when I see it) could disrupt increasingly large emerging market corporate bond markets. Here's Jonathan Wheatley on warnings of a bubble. There could be some interesting times ahead for New Zealand's richest man, Graeme Hart, who is a huge user of corporate bonds.

I've bolded the key quote.

“If I give my money to an asset manager, German Bunds and US Treasuries don’t cut it,” says Mr Oakley at Nomura. “From retail investors to big institutions, people have been pushed further down the curve into riskier assets.”

This has led to a process that Sergio Trigo Paz, head of EM debt at BlackRock, calls “shut your eyes and buy”. Many crossover investors, who are new and often far from committed to emerging markets, have driven up the price of some bonds even as risks have become more apparent.

5. Oh how familiar - Paul Krugman has published this chart showing the remarkable similarities between the Greek economy now and the Germany economy from 1913 to 1920. And how did that end?

Austerity, it turns out, has devastated Greece just about as much as defeat in total war devastated imperial Germany. The idea of demanding that this economy triple the size of its primary surplus is … disturbing.

6. Deflation killing the hawks - The Guardian documents here how Britain's deflation actuality has shut down the hawks on the decision making committee at the Bank of England. Deflationary drums are beating all over the world.

“If very low expectations of inflation were to become entrenched there would be a risk that the economy would sink into a deflationary spiral. Wages and prices could fall, people might put off spending if they thought things would be cheaper in the future, and they would find that, even though interest rates were very low, their mortgages became a burden which was difficult to manage,” he writes.

He adds: “The further the price of oil fell, and the lower the current inflation rate sank, the bigger this risk became.”

7. China's anti-corruption shock - The ripples from President Xi's anti-corruption crackdown continue to swamp all sorts of people and companies and asset prices. Here's Jamil Anderlini with the tale of the collapse of Kaisa, one of China's bigger property developers. See #2 and #4 above.

The forlorn “Merry Christmas” sign over the doorway suggested the development, which is finished but mostly empty, had not seen a customer for nearly two months. Employees confirmed this, saying the government in China’s southern boomtown of Shenzhen ordered a halt to their sales in December.

“Kaisa’s owners have run to Hong Kong and the government has frozen all the company’s assets because of their ties to Zhou Yongkang [China’s disgraced former head of internal security] and his son,” said Lin Jinwei, a local real estate agent from a rival company who was waiting at the entrance looking for potential customers to take elsewhere.

8. What's at stake - Jamil Anderlini lays it out here:

The speed with which Kaisa collapsed once its sales were halted should also give investors pause for thought. Chinese property companies have become some of the most active borrowers in Asian debt markets, raising more than $80bn in offshore bonds and syndicated loans in the past two years alone, according to Dealogic.

This is partly because they have difficulty raising money from domestic banks and investors, who are put off by ballooning overcapacity and falling sales and prices.

9. Read this - And shudder. Despite the Kaisa collapse, fund managers desperate for yield are piling again. It sums up all the links above, again, courtesty of Jamil Anderlini:

Despite those concerns, the delay in offshore bond sales caused by the Kaisa debacle has already proved brief, with a number of heavily oversubscribed deals completed in the past two weeks.

Bankers say the launch of quantitative easing in Europe in recent weeks has only increased the appetite of international fund managers for the interest rates of 8-15 per cent that many Chinese developers are offering.

“High-yield offshore bonds have been the drug of choice for Chinese property developers for the last couple of years,” said one Hong Kong-based banker who has worked on numerous such deals. “But even though they are absolutely last in line to recoup anything if things go bad, global investors continue to pile in because they are just so hungry for yield.”

10. Totally Clarke and Dawe have a horrible feeling about how it's going to end. I laughed out loud. A lot.