James Mackintosh

Economists often seem to be living in a different world, not least when their forecasts of future recessions – or more precisely the lack of them – are examined.

Now two economists have confirmed that economists are on a quite different plane to the rest of the population, by exploring their views on policy issues facing America. Two Chicago-based finance professors, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth, tried to identify issues on which economists generally agreed.

Only two issues garnered complete agreement: every single economist questioned (as part of a regular survey) said it was hard to predict share prices, and not one thought US healthcare was sustainable.

By contrast only a small majority of Americans (55 per cent) agree that share prices are tough to forecast, and two-thirds think US healthcare is financially sustainable.

This might just suggest that the average American hasn’t paid enough attention, since shares are patently hard to forecast (not necessarily impossible, as the efficient market theory beloved of so many economists posits, but certainly very difficult). Equally, even America’s politicians agree that healthcare spending at the current level is unsustainable; part of the original justification of Obamacare was to reduce costs, after all.

But the general pattern is continued on many other topics: the views of economists are furthest from the general public on those issues where the economists agree the most. Read more

James Mackintosh

Much to the frustration of journalists, all we know officially about the Twitter IPO is this:

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James Mackintosh

1997 was not a great year for music lovers. True, Daft Punk burst on to the English speaking world (or at least the British top 10), and Texas, Blur and Jamiroquai were all going strong, but March alone saw Ant & Dec, Boyzone, Wet Wet Wet and the Spice Girls all near the top of the charts.

It was a far worse year for emerging markets investors, and one which is now being resurrected for comparisons like a bad best-of album. Back then, EM investors lost their shirts, and now some are losing them again, as the US Federal Reserve talks about “tapering” its bond purchases.

First, a chart for those who doubt the impact of the taper: this shows shares for each Asian emerging market, with the grey bars showing the weekly rise or fall in Treasury yields (treat this as indicative: I left off the bond yield axis as it was already looking pretty confusing).

Asian EMs v US bond yields Read more

James Mackintosh

Christmas has come early for US traders – Christmas trading levels, that is. Volumes in the benchmark S&P 500 index are down to levels only seen in the last five years in Christmas week. Perhaps investors are just determined to enjoy their time at the beach after having to deal with a crisis every summer for the past three years.

Whatever the cause, the volumes are miserable. The thick line here shows the five-day moving average, smoothing out the daily swings in the thin line. The five-day average has just dropped below the low point of last August and is now the lowest apart from Christmases since Bloomberg’s data series started in 2008. Read more

James Mackintosh

Value investors are getting excited about emerging markets again after their terrible performance over the past few months.

The problem, as Arjun Divecha, chairman of Boston’s GMO, says, is that mostly what’s cheap is commodity-related stocks set to suffer from the slowdown of demand in China. Domestically-oriented companies are down, but aren’t that cheap.

There are a couple of really cheap areas, though. He points to Russian oil shares, and Chinese banks.

Both have horrible fundamentals. Russia is stuck between recession-hit Europe and slowing China, and has some of the worst corporate governance in the world.

Chinese banks are directly exposed to the slowdown in the country’s economy, are being told to lend less (hurting profitability), face higher funding costs (hurting profitability) and risk the bursting of the credit bubble (which would expose the bad debts from their relaxed lending decisions of the past four years).

Given all that, shares would need to be very very cheap to consider buying them. And they are. Charts showing just how cheap Chinese stocks have become follow after the break. Read more

James Mackintosh

Americans have been wondering if the housing market is in a double bubble for a little while, since Professor Robert Shiller, co-creator of the Case-Shiller house price indices, raised the danger.

The real action has been in housebuilders, though. Their valuations, based on price to estimated book value, peaked in May above where they stood at the height of the property bubble in 2005/6. Prices look very much like the rebound bubble in the Nasdaq, in the Dow Jones Industrials in the late 1930s and in the Nikkei 225 (although it wasn’t quite so big). This chart shows the Nasdaq and Nikkei time-shifted so the peaks overlap with the 2005 peak in housebuilding shares:

Housebuilders, Nasdaq and Nikkei

I’ve circled the point where the rebound went wrong again: seven to eight years later for both Nasdaq and, less spectacularly, the Nikkei (the Dow’s second depression-era boom-bust came in 1937, also eight years after the original bubble).

More fab charts, including one must-see on why US housing isn’t as affordable as everyone thinks, after the break. Read more

James Mackintosh

Shocking news from Bloomberg for goldbugs (as if they weren’t hurting enough):

Gold dropped 23 percent this quarter, heading for its biggest loss since at least 1920

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James Mackintosh

Okay, if you have a spare second after liquidating your portfolio, here’s a quick dive into ancient history (pre-taper, or the week up to last Wednesday).

It turns out all that selling in the build-up to last week’s Federal Reserve meeting was flooding not just back into the US, but mostly back into US equities. Here’s a lovely chart of mutual fund flows courtesy of Orrin Sharp-Pierson at BNP Paribas: Read more

James Mackintosh

Amid the post-Bernanke rubble, there are probably a few people sparing time from hedging their interest rate risk to look for bargains.

Look no further: the gold miners are cheap! I mean, really cheap. Gold has tumbled a long way from its peak, but miners have fallen much further – and are now trading at an extraordinarily low multiple of the gold price. This chart shows the ratio of the Market Vectors Junior Gold Miners index of small miners, and of the Arca Gold Bugs index of larger miners, to the gold price.

Miners and gold

Larger miners are now the cheapest relative to gold they’ve been since the aftermath of the dotcom bubble, when they proved a serious bargain. The index of junior miners only started in 2004, but their prices are testing the low relative to gold reached after Lehman Brothers collapsed – after which they offered some of the best returns of any stocks anywhere. Read more

James Mackintosh

The US Federal Reserve’s support for the markets can be measured lots of ways, from the impact on bond yields through to comparisons of equity prices and the central bank’s balance sheet. Here’s one I rather like, with a hat tip over to BNP Paribas’s William De Vijlder.

The third round of the Fed’s quantitative easing, or QE∞, is now 41 weeks old, and during that time there hasn’t been a single really bad week, which I defined as a loss of 2.5 per cent or more. The last time there was such a long period without a big down week was during QE2. Before that it hadn’t happened since early 1997.

Equities and the Bernanke put

The total loss of all the down weeks since QE∞ began, including weeks with only a small loss (a somewhat odd measure, obviously offset by plenty of up weeks) has been just under 18 per cent, close to the lowest reached over rolling 41-week periods during the “great moderation” of 2003-2007, and to that reached under QE2. Read more

James Mackintosh

As the month draws to a close, the old “sell in May” strategy failed miserably for equity investors – except in Japan and emerging markets.

There are a couple of lessons from this May, but first here’s what the major assets did during May, first in local currency then in dollar terms:

Total return month to date local currency

Total return month to date dollars

Since the US is still open, both charts are up to the close of the 30th, for consistency, so not quite the full month; European markets today were down about 1 per cent, and Japan up just over 1 per cent, but the broad patterns remain the same. Read more

James Mackintosh

Here are the two Japan charts that matter after Japanese shares plunged more than 5 per cent today.

First, the Nikkei 225 Average is poised at the 50 day moving average, an important technical support level. If it recovers from here, this will be nothing more than a correction, if a big one, of the excessive optimism which had taken hold. From their peak last Thursday to today’s low Japanese shares were down almost 15 per cent – but are only back to where they stood a month ago. The rally can continue, as the futures market suggests, with futures prices and bond yields both rising sharply after the cash equities market closed. But once the current volatility settles down, a continued rally is likely to come at a far more moderate pace. Read more

James Mackintosh

Ooh la la! French consumer confidence figures just came in, and they aren’t pretty. The index just matched its lows from late 2008, itself the lowest ever.

So far, so eurozone. It isn’t exactly new news that the French economy is in terrible shape. But this chart shows how consumer confidence has broken away from share prices, something it usually tracks closely. Read more

James Mackintosh

While you consider the sell-off in Japan, here are a few charts, as of Thursday night prices:

Total returns (including dividends) on various asset classes for the year to date, in local currencies: Read more

James Mackintosh

The Nikkei 225 is down more than 7 per cent today, its 11th biggest daily fall since it was created in 1950. Explanations abound: the hawkish interpretation of Ben Bernanke’s testimony to Congress (although it can be read either way), the hawkish interpretation of the Fed minutes (ditto) and the surprisingly weak purchasing managers’ index from China, showing manufacturing shrinking slightly.

All these no doubt matter. But the real question is why markets chose to care today. China has been slowing for months, and while Fed-ology always moves prices, it was particularly hard to read anything much new into Wednesday’s comments. Read more

James Mackintosh

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:

Dax 30 Read more

James Mackintosh

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).

Junk bond yield and duration

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

James Mackintosh

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 Générales 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:

Broker recommendations by country Read more

James Mackintosh

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