Monthly Archives: August 2012

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)

 Read more

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