One single chart: Ten year Treasury yields and the personal saving rate (ie the percentage of income saved).
The correlation is interesting.
The correlation is interesting.
Tuesday, February 13, 2018
Friday, February 9, 2018
Yes, Virginia, There IS Volatility
What happened with US stocks? Why did they tank so suddenly after months of steady gains?
No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.
There was, however, a sort of “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit. It worked like a charm - until it didn’t.
The following chart makes things quite clear. It’s the price of an ETF (exchange traded fund) that shorts VIX futures. Yes, Virginia, there IS volatility!
In my opinion that’s all there was to it - the snap unwinding of short vol trades.
No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.
There was, however, a sort of “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit. It worked like a charm - until it didn’t.
The following chart makes things quite clear. It’s the price of an ETF (exchange traded fund) that shorts VIX futures. Yes, Virginia, there IS volatility!
In my opinion that’s all there was to it - the snap unwinding of short vol trades.
Tuesday, February 6, 2018
USA Margin Debt
Given the stock market plunge of the last few days, the following chart is interesting. It is current to year-end 2017 (latest available), the data comes from FINRA.
Given that total market cap at the time was approx. $32 trillion, margin debt of $650 billion doesn't seem all that excessive. In other words, selling due to system wide over-leveraging isn't the likely culprit of the sell-off.
Given that total market cap at the time was approx. $32 trillion, margin debt of $650 billion doesn't seem all that excessive. In other words, selling due to system wide over-leveraging isn't the likely culprit of the sell-off.
Friday, February 2, 2018
Greek PMI Near Record
Manufacturing in Greece is staging a strong and rapid comeback. The Purchasing Manager's Index for manufacturing is now at the highest level since 2007. Increasing new orders is the biggest contributor to the rise, with new employee hiring also boosting the index.
The PMI is a diffusion index, with levels over 50 indicating expansion and under 50 indicating contraction. The light blue area is annual GDP change, left scale.
Manufacturing accounts for only 12-15% of Greek GDP, but the correlation between PMI and GDP is pretty solid. Interestingly, the last time PMI was at current levels the Greek economy was growing over 5% per year.
Thursday, February 1, 2018
USA Debt: Is It A Threat?
US federal government debt is now at 106% of GDP, the highest in decades. It got there because it was forced to bail out the financial sector during the 2007-10 Great Meltdown, essentially having the Federal Reserve "print" money with its Quantitative Easing (a.k.a. Ben's helicopter).
This debt load certainly looks formidable and perhaps threatening to the economy's health. Is it so? Well, yes. And, no...
Yes, because a highly leveraged economy has, by definition, a lower capacity to overcome recessionary downturns without painful asset liquidations and capital losses, perhaps even social unrest. Just ask the Germans and how scared they (still) are of the Weimar hyperinflation period which paved the way for Hitler.
And no, because it matters very much to WHOM the debt is owed. Just ask the Japanese today, who owe their huge debt (250% of GDP) mostly to themselves (i.e. they are self-financed through a high saving rate).
In the case of the US national debt, 25% is inter-government (mostly held by the Social Security Trust Fund), another 25% is held by American investors (e.g. pension funds, banks, individuals) and 12% by the Federal Reserve. Thus, a total of 62% of the debt is owned directly by American holders. This leaves 32% owned by foreigners, but even there I expect that a chunk is owned by Americans through entities in tax havens such as the Virgin Islands, Channel Islands, Switzerland, etc.
More important still, is how the government is managing its finances. It is doing quite well, as the following chart shows: government spending is back to 34% of GDP, very near a 50 year low.
Bottom line - even though it may seem high, US debt is not a threat to the economy.
Yes, because a highly leveraged economy has, by definition, a lower capacity to overcome recessionary downturns without painful asset liquidations and capital losses, perhaps even social unrest. Just ask the Germans and how scared they (still) are of the Weimar hyperinflation period which paved the way for Hitler.
And no, because it matters very much to WHOM the debt is owed. Just ask the Japanese today, who owe their huge debt (250% of GDP) mostly to themselves (i.e. they are self-financed through a high saving rate).
In the case of the US national debt, 25% is inter-government (mostly held by the Social Security Trust Fund), another 25% is held by American investors (e.g. pension funds, banks, individuals) and 12% by the Federal Reserve. Thus, a total of 62% of the debt is owned directly by American holders. This leaves 32% owned by foreigners, but even there I expect that a chunk is owned by Americans through entities in tax havens such as the Virgin Islands, Channel Islands, Switzerland, etc.
More important still, is how the government is managing its finances. It is doing quite well, as the following chart shows: government spending is back to 34% of GDP, very near a 50 year low.
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