Dax redefines “record high”
There’s been quite a bit of excitement about the Dax hitting a record high this week, with the Wall Street Journal even splashing its European edition on it. The chart looks impressive:
Charting not-so-high-yield bonds
There’s a lot of excitement now junk bond yields (at least on one index) have dropped below 5 per cent for the first time. What to call them, for one thing. “High yield” no longer seems appropriate, although frankly “junk” was always better, and remains just as good. The fact that they barely ever default any longer, suggesting on its face that they are no longer junk, is yet another problem – as John discusses with Deutsche Bank’s Jim Reid in today’s Note video.
But hold on a minute. It is true yields have plunged. But the following charts show that junk bonds are much shorter dated now than they were, so the drop in yield is not as dramatic as it looks (if you lend someone money for less time, you should expect a lower yield as the loan is less risky). The average duration on the index is at a record-low three and a half years (modified duration is a tad longer, but still a record low).
On the other hand, investment-grade bonds (and top-grade junk too) have longer maturities – in the case of investment grade, the longest since 1980 at more than seven years. So the ultra-low yields (just over 2.5 per cent) of these better-quality bonds are even lower when adjusted for the risk of lending money for longer. Chart-fest after the jump. Read more
Now then, investor, do you love your country?
Markets aren’t known for their patriotic fervour. Populated by cynics and motivated by money, there is little reason to expect local markets to support their national governments – particularly in the eurozone, where the response by the wealthy in crisis-hit countries has been to ship their cash to Germany or the UK.
But hang on! Perhaps brokers are more patriotic than popularly thought: it turns out that analysts tend to recommend shares in companies from their countries.
A nice piece of work by Charles de Boissezon at Société Générale‘s global equity engineering and advisory unit looked at broker recommendations on German and Spanish blue-chips, the two markets tending to be reasonably domestically-exposed.
Not surprisingly there are more buy recommendations on German than Spanish shares, and more sells on Spanish.
But the breakdown is revealing: analysts at German brokers are much more positive about German companies than analysts working for Spanish brokers, and vice-versa:
Excel, New Zealand and Reinhart & Rogoff
Economic bloggers love Excel, so they have leaped on the discovery that Ken Rogoff and Carmen Reinhart, two of the most famous economists out there, aren’t very good at spreadsheets.
The story is told elsewhere in detail, and the academic paper debunking R&R’s maths is full of delicious examples of mistakes (look at footnote 6 for a lovely example).
The gist of it is that enormous weight is given to one year in New Zealand, 1951, when R&R recorded GDP falling by 7.6 per cent.
This year is given a lot of weight for three reasons: First, four previous post-war years were excluded. Second, the average was worked out by producing an average for each country, then averaging those. The combined effect was to give one year in NZ the same weight as 19 years of Greece. Third, a whole bunch of other countries were excluded by mistake.
R&R admit the Excel error in excluding other countries, but are sticking to their other exclusions (because their data on debt-to-GDP had gaps at that point), and to their method of averaging. They also point out that the broad conclusion, that growth slows as debt rises, is still supported by the data, just not so dramatically.
The New Zealand figure is intriguing, though. The 7.6% drop in GDP appears to come from a series compiled by the late Angus Maddison, the great economic historian.
But 1951 was a very strange year for the Kiwis, and the falling GDP then is not an example of weak growth with high debt. The price of wool tripled in 1949-50, and since it made up about half of the country’s exports this boosted GDP enormously. When prices fell back, GDP fell again. Government debt really wasn’t an issue. Read more
Good as gold
Spandau Ballet’s 1983 anthem Gold could be the national anthem for the world’s inflationistas.
Always believe in your soul
You’ve got the power to know
You’re indestructible
Always believe in, because you are
Gold! GOLD Read more
Getting high on stock market charts
Cue great excitement. All those pre-written articles and commentaries on the S&P 500 passing its previous closing highs can be rolled out, and there is something for the 24-hour TV to talk about other than the rather small queues at banks in Cyprus.
Just a couple of small flaws: Read more
Cyprus upends bank capital structure
Cyprus has finally struck a €10bn deal to become the fifth country “rescued” by the rest of the eurozone, after Greece, Ireland, Portugal and a special loan for Spain. Almost a third of the 17 countries in the single currency have now had to be rescued.
Unlike all the other deals, Cyprus gets immediate deflation, through heavy losses for depositors above €100,000 at its two biggest banks, Bank of Cyprus and Laiki. Read more
Larry Summers, correlation and recency bias
Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:
A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment. Read more
As safe as the Bank of England
Among phrases you don’t hear any much any more are:
It shouldn’t be a surprise that all three are out of fashion, after the US housing bubble that brought down the world economy, the collapse of sterling and the Bank of England’s failure to control inflation over either the past 50 years or the more recent past, when it was aiming for 2 per cent (the blue line on the chart).
Yesterday’s UK Budget avoided the extra inflationary pressure that would have come from fiddling with the target, which should give some support for the pound. But don’t get too positive: outgoing governor Sir Mervyn King voted for a second time for more monetary easing, and while he was outvoted again, Mark Carney is widely expected to be both more dovish and more convincing. I discuss this in today’s Short View column and video, and in greater detail below:
Risk and loss, Cyprus edition
I have a lot of sympathy with the explosion of outrage both within Cyprus and internationally at the decision to default on tax depositors of its banks.
It is just wrong that depositors, even large Russian tax-avoiders, are suffering while other senior bank creditors are excluded. It is wrong that Greek depositors in Cypriot banks are excluded, even though it was the Greek assets bought in large part with those deposits which caused a lot of the problems. And it is particularly wrong that small depositors are being hit, making a mockery of the deposit guarantee scheme.
Yet, there is risk in everything, and depositors were being compensated for the riskiness of Cypriot banks through higher interest rates. This chart shows the deposit rates paid on fixed-term deposits of less than a year (much of Cypriot deposits are fixed term, although even overnight deposits pay more interest than the rest of the eurozone).
Now, it is fair to say depositors generally don’t realise the risks they are running. Even when they do realise, they mostly don’t care (as Icesave showed in the UK): that’s the whole point of deposit guarantee schemes, after all. But in fact the compensation paid for the risk that it turned out depositors were running was about right. Read more
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James Mackintosh is the Financial Times' Investment Editor, writing and presenting the daily Short View column and video. In 16 years at the FT his posts have included comment editor, motor industry editor and hedge funds correspondent, as well as spells in the Parliamentary lobby and Paris. He was the first reporter hired for FT.com, joining two weeks before it launched.
John Authers is the Financial Times' Senior Investment Columnist, writing the Saturday Long View and a regular Monday column. In a 22-year career at the FT, his previous posts have included global head of the Lex column, investment editor, US markets editor, Mexico City bureau chief and US banking correspondent. His latest book is The Fearful Rise of Markets. 
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