Monthly Archives: August 2012

James Mackintosh

My colleague Gillian Tett wrote a nice column today on talk of using the gold reserves of struggling European countries to help lower their financing costs.

She highlights a suggestion from the Gold Council, the miners’ marketing group, that European countries could issue bonds backed by their holdings of goldRead more

James Mackintosh

If it was good enough for Ronald Reagan, it seems to be good enough for today’s Republicans. This week the US Republican party agreed that if Mitt Romney wins the White House in November, a new gold commission will “investigate possible ways to set a fixed value for the dollar” – a gold standard.

The term “gold standard” actually covers a wide spectrum of limits on currencies, but all share a laudable aim: placing a limit on the creation of paper money.

Unfortunately the problems outweigh the disadvantages, and unless central banks and governments mess up so badly that we end up with extremely high inflation, there is little to no chance of any form of gold standard being introduced in the coming decades. Read more

James Mackintosh

A Chinese company is setting out to build the world’s tallest building in Changsha, central China, aiming to go from start to finish in just three months.

Aside from the impact of the amazing technique (assuming it works) on the construction industry, this might send a message to investors: get out of China now!

My colleagues on have put together a pretty graphic showing previous holders of the record for tallest towers. Almost all began construction at or near the peak of a bubble: Read more

James Mackintosh

It may not be the most urgent problem facing the European Central Bank, but as Mario Draghi slaves away on his plan to save the euro – missing out on the hospitality of the US Federal Reserve’s Jackson Hole symposium – one goal must be to find a snappy name.

Central bankers are terrible at it, but central bank watchers quickly converted the dull “quantitative easing” from the Fed and Bank of England into QE and then QE2 (and there’s an outside chance of QE3 being hinted at in the US this Friday). Read more

John Authers

The Shanghai Composite now rests at its lowest level since March 2009 – which is just when stock markets the rest of the world over began to recover. Admittedly, Shanghai bounced several months earlier, once China started administering its stimulus. But still, this is quite a turn of events given that the Chinese economy continues to grow far faster than the rest of the world.

What gives? Specifically with relation to Shanghai, it entered the period in the aftermath of a historic bubble that looked almost exactly like the Nasdaq bubble that had burst seven years earlier. There follows a chart from the Short View back in late 2007, when the Shanghai had indeed, we now know, peaked.


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John Authers

There is an interesting debate over my column on Monday, which looked at evidence for distorted profits in the US. In brief, there is a long-term discrepancy between the earnings yield on the S&P 500 (the inverse of the price/earnings ratio), and the long-term actual real return to investors (what they receive in dividends and in capital appreciation on an annualised basis). The two ought to be very similar. But in fact, earnings yield runs at about 1.5 percentage points per year higher.

The column highlighted research by the great Andrew Smithers who can be seen here discussing his idea with Martin Sandbu, who is doing a great job on the Authers’ Note video:

Mr Smithers’ explanation for the discrepancy, which does not make him popular, is that earnings are systematically overstated – and that the manipulation has intensified now that the modern bonus culture gives executives a much greater incentive to overstate profits in the short term. However, there is another possible explanation. Read more

James Mackintosh

Bonds have been rallying hard since Mario Draghi of the European Central Bank raised the prospect of a eurozone solution.

But perhaps what really matters is the US presidential election in November. Uncertainty ahead of the election tends to push investors into bonds, says UBS. It looked at the development of Treasury bond yields in the run-up to elections (excluding 2008, which was overshadowed by the financial crisis). Read more

James Mackintosh

Junk bonds are offering close to all-time low yields after a 10 per cent return so far this year. They are the beneficiaries of the same hunt for yield that has driven high-quality high-dividend shares to record highs, and to significant valuation premia.

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James Mackintosh

The Vix index has this week closed at its lowest levels since the crisis began five years ago. That means investors feel less need to hedge in the options markets against future (implied) volatility than at any time since the crisis started.

Is this flashing a red warning light that the equity market is overly complacent, and about to crash? Other measures of dollar-linked short-term implied volatility – on bonds, gold and dollar exchange rates – are also very low.

If the Fed is about to put a floor under prices, handing out free “Bernanke puts” via QE3, why pay for put options yourself to protect your portfolio? Perhaps the over-optimism is really focused on the prospects for Federal Reserve action, not merely bets that the summer rally will continue. US economic conditions have been improving a little, and that ought to reduce the chance of QE3.

This idea is backed up by longer-term versions of the Vix, long-dated volatility. This is trading at a significant premium to short-term volatility, suggesting worries remain, particularly around the end of the year. Indeed, the gap between 3-month (November) and 12-month volatility on the euro/dollar exchange rate is the highest on record.

Charts below show the short and long-dated volatility on the S&P 500, and the ratio of bearish put options to bullish call options on the S&P 500 index, which is also extremely low (as a consequence of the collapse in puts). Read more

James Mackintosh

Britain is in a double-dip recession, but it isn’t all doom and gloom. Figures out this morning show the country has, for the first time on record, seen unemployment fall during a recession.

This makes a nice change from the so-called recovery since the last recession ended in 2009, when the unemployed saw precious little relief. Read more

James Mackintosh

Republican Mitt Romney’s pick of Paul Ryan as running mate for November’s US presidential election has catapulted Medicare to the top of the agenda (along with his budget plan).

Already the attack ads have boiled down the essence of the campaign: Ryan wants to push granny off a cliff by handing Medicare budgets to states and turning the medical support for the elderly into a voucher scheme. The Romney response is to attack “Obamacare”, pointing out the scale of cuts to Medicare made by the president in order to fund a wider healthcare scheme.

As usual in politics, neither is addressing the real question: why is American healthcare such poor value for money?

This is best shown by just one amazing statistic: the US government spends a bigger chunk of GDP on health than the British government – which gets a nationwide  healthcare system for it. Americans only get care for the elderly (Medicare) and the poor (Medicaid). Read more

James Mackintosh

The eurozone may be doing a bit better than expected, but its economy is still weak in the extreme. Today’s Short View discusses the prospects for equities and the likelihood that  eurozone shares beat US shares.

Lex thinks an improved economic outlook should be bad for shares, as equities are more sensitive to future discount rates (ie higher bond yields) than to the prospects of higher revenue.

And research by the London Business School has demonstrated there is no correlation between the performance of an economy and share prices over the past century and a bit.

But both of these miss the idea of what future prospects are already priced in, something extremely hard to measure. What matters is what people expect, and how it changes. If investors are braced for recession and instead get dismal growth, shares should rise – as we saw towards the end of last year. Read more

James Mackintosh

Short View explored the lost-half decade and the returns on leading asset classes since the credit crunch began on August 9, 2007 (including the surprise that high-yield bonds did so well).

Deutsche Bank has produced a more comprehensive look across pretty much all tradeable assets, adjusted (in line with the Short View approach) into dollar terms to remove currency changes.

Asset returns

Asset returns since credit crunch began, in dollar terms

Given the attention that is paid to nominal (local currency) returns, I thought it might be worth an explanation of why it makes sense to look in constant currency terms. Read more

James Mackintosh

There are no summertime blues for the stock market, at least not yet. The S&P 500 may have briefly dipped back below 1,400 today (annoyingly after the video below was recorded) but the rally has delivered 10 per cent returns since shares bottomed out at the start of June.

Can it last? History is not kind to rallies which start in the summer: what starts in the summer tends to end in the summer.

The chart below highlights four summer rallies since 1970, defined as consecutive monthly gains in June, July and August, to the first of the next month. Change the definition slightly and there were also summer rallies in 2003, 2006 and 2009, but the story remains identical. Read more

James Mackintosh

An investor given perfect foresight of how the world’s economy’s would perform after the credit crunch began five years ago today would still struggle to predict some of the most important market action.

Today’s Short View video explores some of the surprises of the last half-decade. The biggest surprise of the next five years would be if we ended up without a Japanese-style lost decade – and the result would be disastrous for bondholders positioned for ongoing economic gloom.

The newspaper version of Short View discusses the shifting patterns created by the changed bond/equity correlations and the hunt for yield.

Here are charts showing the world’s asset returns over the past five, fearful years: Read more

James Mackintosh

♫ Summer’s here, and the time is right, for watching the Olympics ♫

Okay, it doesn’t quite scan, but it has the advantage of being true. Trading floor TV sets have been retuned from CNBC to the live Olympic coverage, and sighs go up at big moments in the Games, rather than big trading moves (the snapping of Cuban Lazaro Borges’ pole in the pole vault this morning, for example).

This all matters to investors. Trading volumes were already low as investors sat on the sidelines, but the combination of holidays and Olympics means even fewer than usual are focused on the equity markets – and that can be bad news, as the chart shows. Read more

James Mackintosh

So the Federal Reserve did almost nothing, and the Bank of England did nothing. All now rests on the European Central Bank for hopes of monetary policy action this week.

The Fed is forgiveable. The Bank, less so: Britain is suffering in a double-dip recession worse than the eurozone (although the eurozone looks set to catch up soon).

Consider this chart: it shows the UK and US inflation expected by bond markets for the five years starting in five years’ time (the 5 year 5 year breakeven, as it is known, derived from bond futures).

UK and US five year five year breakeven inflation (Source: Bloomberg)

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James Mackintosh

You already knew the manufacturing purchasing managers‘ indices mattered, given today’s disappointing figures for the US ISM. But perhaps you hadn’t appreciated how much Wall Street analysts focused on it.

This chart (with a big h/t to Gerard Minack at Morgan Stanley) demonstrates the value of the ISM, the oldest of the PMI surveys. Read more

James Mackintosh

It’s PMI day again, and the news so far is once again terrible for Europe. The manufacturing purchasing managers’ indices are one of the best set of indicators of what is going on in the economy, because they are so much more timely than GDP figures.

The data produced by Markit for the eurozone are awful. Greece goes from bad to worse, and even the motor of the eurozone – Germany – is struggling badly, with manufacturing output and new orders falling at the fastest since April 2009, shortly after the recovery began.

This matters for equities. Consider these two charts: Read more