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 FT.com 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