Archive for Chart Of The Day

The Bigger they Come the Harder they Fall

Just passing along an interesting data point from Guggenheim:

“The S&P500 has now gone nearly 800 days since a correction of more than 10 percent – the “meaningful” level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.”



Rail Traffic: Still Chugging Along

Just catching up on an update from last week.  The latest rail data showed a continued downward trend in momentum, but coming off of very strong weekly readings over the last 2 months.

The current 12 week moving average is down to 7.2% which is well off the highs of 9.4% from early June.

If rail is an indicator of broader macro trends then this continues to point to a strong Q2 rebound in economic growth.


The Scale of Monetary Happiness

Does money really buy you happiness?   

The opening quote in my new book is:

“The person who mistakes “money” for “wealth” will live a life accumulating things all the while mistaking a life of owning for a life of living.”

Although my book is all about understanding money, investing and the economy I tried my best to highlight what I think is one of the most important elements of understanding our monetary system – while money is important and necessary in this system it should not be viewed as the ends when it is merely a means to an end.

I got to thinking about this in more detail this weekend as I was reading this piece in the FT which discusses how greater wealth is indeed linked to greater happiness.  I don’t think this is necessarily wrong, but I would argue that greater wealth has a diminishing rate of return with regard to how effectively it can contribute to our happiness.

In order to conceptualize this I took Maslow’s Hierarchy of Needs and applied it to a spectrum showing that the higher up the hierarchy you go the less effective money is in helping you attain certain things.


Money is obviously a necessity because we all need things at the bottom of the hierarchy.  But as you climb higher you find that money has a diminishing rate of return in helping you acquire those things.  Money cannot buy you morality, purpose, meaning or many of the things that are higher on the scale.

So, does money buy you happiness?  Money can buy you a certain level of happiness and there is little doubt that money makes life easier in many ways.  But money cannot buy what might be seen as the ultimate forms of happiness. That includes things like purpose, meaning, friends, family, etc.  So don’t confuse the means with the end.  Doing so will warp your perspectives on what matters and what doesn’t.

Reminder: Tapering is not Tightening

A strange thing has happened ever since the “tapering” began last December – interest rates have fallen, stocks have risen and inflation expectations have actually increased.  This is almost exactly the opposite of what many people might have expected.  After all, if “tapering is tightening” and QE is “money printing” then something doesn’t add up here because stocks should have fallen and inflation expectations should have declined.  But when we look at the operational realities of QE it becomes clear that “tapering” really isn’t “tightening” in any meaningful sense.

As you can see in the chart below, the Fed really hasn’t started tightening in any meaningful sense.  In fact, their balance sheet is still expanding quite rapidly.  So, as I explained early last year, if we want to call QE “money printing” then tapering is really just “less money printing”.  Of course, that’s not how I view QE at all (see my QE primer here), but if you want to remain consistent with the mainstream view of things then that’s one way to view the tapering.



Perhaps more importantly, the stock market doesn’t even perform poorly during the early phases of a tightening.  And the logic behind that is rather simple – the Fed reacts to an improving economy and if the Fed isn’t even reducing their balance sheet then we’re not even at the point in the economic cycle where the Fed thinks tightening is necessary.  And that means the economy is probably still too weak to warrant a real tightening.  And that, in a counterintuitive sort of way, is actually a good thing.

Chart o’ the day: Dividends and Buybacks Jump to new All-time High

We’ve officially round tripped it now.  Not only is the VIX at pre-crisis lows, but corporations are now issuing dividends and buying back shares like the crisis never happened (via Fact Set):

“Dividends per share (“DPS”) for the S&P 500 grew 12.5% in the trailing-twelve month (“TTM”) period ending in April. This also marks the thirteenth consecutive quarter in which DPS has grown at double-digit rates. Long-term, significant dividend growth—coupled with growth in share repurchases (which grew over 50%)—has helped quarterly shareholder distributions to reach record levels since at least 2005. In total, $249.1 billion was distributed to shareholders in Q1, which modestly surpasses the $242.1 billion distributed in Q3 2007.”



Chart O’ the Day: Round Trippin’ it

Not much to say here.  Just a chart of the volatility index.  Right back to where we were before the crisis occurred and fast approaching the all-time lows (via Bloomberg):


U.S. Home Prices Still Rising Double Digits

Home prices continued to accelerate at a double digit pace in April according to CoreLogic.  The latest reading came in at 10.5% year over year which is the fifteenth consecutive double digit reading.  Since 1977 the CoreLogic housing price index has averaged a 5.7% annual change so the current rate of change is substantially higher than the historical norm.

While the annual rate of change looks strong it has decelerated in recent months from almost 12%.  Still, the housing market in the USA remains robust.  And that’s probably not surprising since Americans have become disillusioned by just about every other asset class as seen in this recent survey on various asset classes.



SocGen: Beware the Global Macro Slowdown

Just passing along this data point from the Cross Asset Research team.  They cite the CitiGroup Economic Surprise Index for several regions to reinforce their case for a global macro slowdown:

  • The macro environment has slowed down in most regions except for the US, which is now enjoying a strong economic rebound.
  • In China, economic data continue to surprise on the downside. Yet, even in a scenario of a severe downturn, the country can still emerge strongly from the crisis in the long term, if its leaders remain on the path of reform. 
  • Emerging markets continue to slowdown as reflected by the contraction in manufacturing activity in major EM countries.


When Was the Last Time Treasury Yields Were This Low?

By Sober Look

We’ve had an unprecedented compression in US (and global) government bond yields in a short period of time. Here is one surprising fact: Treasury yields are now at the level they were during the US government shutdown. The level of uncertainty has diminished dramatically since then and the employment picture continues to improve (see Twitter post). Yet here we are again. This time however it’s the global chase for yield and expectations of ECB’s monetary easing driving rates to new lows.

US 10y bond yield

Why and How the ECB Might Implement QE

Important chart here from Michael McDonough at Bloomberg.   It shows the spread between Italian sovereign bond yields and corporate bond yields.  As you can see, as the government yield has fallen quite dramatically the corporate yield hasn’t followed.



This is not at all what the ECB would like to be seeing.   This is one of the main reasons why the ECB is increasingly likely to implement QE.  It’s also a key reason why QE in Europe might look very different than it does in the USA.  In my opinion, the ECB is likely to focus on private securities markets in addition to the sovereign bonds.  They really would love to see the yield reduction spill over into the private sector so they (hopefully) get some investment boost.

And of course, this means more chase for yield in the coming years as this is just one more set of instruments that are likely to get jammed lower….

Chart of the Day: Bond Bears vs Stock Bears

I liked this post by Surly Trader which highlights an importance difference about stocks and bonds that often goes overlooked – that is, a bear market in bonds is a very different animal than a bear market in stocks.  Given that there seems to be such widespread fear over bonds and rising interest rates, I think this is an important point (via ST):

From the return side, let’s look at the bad days.  If you look at the rolling total returns of the Investment Grade Corporate Bond Index since 1976, the bad 6 and 12 month total returns were shy of -20% in the early 80′s:


The funny thing about bonds is that their returns are “self-fixing”.  The bonds move back to  Par ($100 per face) price at maturity over time.  In addition, the investor continues to re-invest his/her coupons at higher interest rates thereby dampening the changes in price of the underlying bond holdings.

As a comparison we can look at S&P 500 price returns over the same time period.  Total returns are not available back to 1976, but they would be very close to the rolling price returns:


He notes:

“Stocks fix themselves as well, but the drawdowns are more frequent and returns are obviously more volatile”

That’s the key point.  Stocks and bonds are very different types of instruments which serve very different roles in a portfolio.  Comparing them or thinking about “bear markets” or “bubbles” is often done in such a manner that implies an unjust level of fear with regards to how those environments might apply to these very different instruments.  Don’t let a bond bear scare you into thinking that a bear market in bonds is anything remotely similar to a bear market in stocks….

Chart of the Day: Is the Expansion “Long in the Tooth”?

This was a useful chart from the WSJ over the weekend.  It puts the current economic expansion in perspective:



We’re in month 58 of the current expansion, which is right in-line with the post-war average.  I’ve said that the current expansion is a little long in the tooth, but that it’s important to keep that in the right expansion.  While we’re probably closer to the next recession than we are to the beginning of the recovery, it’s also important to remember that the business cycle seems to be getting longer and longer.  As I noted earlier this year:

“it’s also interesting to note that the expansion phase of the business cycle appears to be getting longer.  You’ll notice that 3 of those 6 long recoveries occurred since 1982.  Are these anomalies or are they signs of a changing economic landscape?  I think they’re probably signs of a changing economic landscape and that means that a lot of the data that exists before the post-war era probably doesn’t apply.”

So yes, we’re long in the tooth.  But that doesn’t mean we can’t get longer in the tooth.