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.
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
Humphrey-Hawkins testimony is not always a non-event. Six years ago, Ben Bernanke used his first Humphrey-Hawkins testimony to signal to the market that the steady rise in the Fed Funds target rate was going to end at 5.25 per cent. That seems an impossibly long time ago now, as does the last big surge in the S&P 500 during the “fool’s rally” of the mid-naughties, which that testimony provoked.
Today’s testimony, however, does indeed appear to have been a non-event, as accurately predicted by Mike Mackenzie, deputising for James Mackintosh, in Monday’s Short View:
The line in his testimony that appears to have attracted most attention is that the Fed “is prepared to take further action as appropriate to promote a stronger economic recovery” – it is hard to see how he could possibly have said the opposite. Judging by Twitter, there is also interest in his comment that QE has been “effective” so far but should not be used “lightly”. It is hard to disagree. Some might disagree about the “effectiveness” line, but successive waves of QE have at least succeeded in holding up asset prices and buying time for US banks, which was probably the main intent. Read more
Does Spain really need to leave the euro? There is a pervasive argument that it does. That would restore its competitiveness, and allow the country to inflate away its debts.
But Xavier Vives, an economist at the IESE business school in Barcelona, suggests otherwise. Spain obviously has some serious problems, but an overvalued currency is not one of them. The charts he presents show that Spain’s share of global merchandise exports has barely declined during the eurozone era – quite a feat given that even Germany’s share has declined during the rise of China. Meanwhile Spain’s services exports have gained market share quite healthily. Devaluation would help but it is not desperately needed.
Will the Olympics have a positive economic impact? The question is a big, and very political one in the UK at present, as London prepares to lock down for the games. But Goldman Sachs’ big analysis, just published, suggests there really could be a return on the London games. Watch the video with Huw Pill, Goldman’s chief European economist:
Among many other points covered in the report that we didn’t reach in the video interview: Read more
Companies are talking down their earnings prospects at a record rate. For the second quarter of this year, negative pre-announcements have outnumbered positive ones by the most since the third quarter of 2001 – the quarter that included the 9/11 terrorist attacks.
That kind of shift in earnings sentiment would usually be damaging for stocks. But in this interview, Citigroup’s Tobias Levkovich comes up with an interesting argument that the worst is already over – providing the US avoids a recession.
Stocks have never been so correlated. The specifics of each company’s profit and loss account have become secondary to the broader factors of the market.
The figures demonstrate this beyond argument. In October last year, for example, the one-month correlation between individual S&P 500 stocks reached 90 per cent. The average since 1990 has been 30 per cent. Similarly, the correlation of different geographical indices has increased steadily. Twenty years ago, emerging markets offered great diversification from the developed world, with a correlation of almost zero. Now, that correlation is close to 80 per cent, according to MSCI indices. Read more
Was Keynes a Keynesian? I had to answer this essay question at university and managed to answer No. The issue was whether John Maynard Keynes’ 1930s ideas really entailed the interventionist policies that bore his name, and which rightly took much blame for 1970s stagflation.
Since then, an era of distinctly non-Keynesian economics by any definition has culminated in a global crash, leaving the world in what looks like what Keynes called a “liquidity trap” – where lower interest rates have little or no effect. In a week when the European Central Bank, the People’s Bank of China and the Bank of England have all eased monetary policy, the debate about Keynes’ legacy rages. It is barely a debate at all – a sterile recitation by each side of a preconceived position. Read more