Archive for Chart Of The Day – Page 2

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.

Chart of the Day: Showing up Late to the Party

Here’s some nice perspective on the market cycle from Lance Roberts:

An interesting article this morning via Investment News caught my attention:

“After watching the stock market climb from peak to peak last year, investors are finally starting to warm up to equities.

More than 85% of investors are feeling optimistic about the investment landscape, and 74% think stocks have the greatest potential of any major asset class, according to a survey of 500 affluent investors released Monday by Legg Mason Global Asset Management. The survey was conducted in December and January.

The survey also shows that investors still hold relatively conservative portfolios, but are increasingly willing to increase exposure to international assets.”

This is not a surprising survey by any measure. In fact, it is typical of what you would expect from a group of individuals whose investment decisions are primarily driven emotional behavior rather than a disciplined investment process.

“At the time this survey was conducted, investors had experienced in the U.S. a pretty positive stock market,” said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management.“Markets are typically forward looking, while investors are typically backward looking.”

Investors are indeed backward looking as shown below. The Investment Company Institute (ICI) began tracking flows into equity funds in 2007 which I have overlaid with the investor psychology cycle. In this manner, you can witness investor behavior in “real time.”


Chart of the Day: New DM-EM Equity Convergence

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic, created on Bloomberg, depicts the MSCI equity index for the developed countries (orange line) and the emerging markets (white line).

dm em

The charts begins at the start of last year. In the first several months of 2013, DM outperformed EM. The big EM sell-off coincided with first hint from the FOMC about tapering. EM recovered and tracked the DM until October. A new phase of divergence, with DM outperforming again lasted into early March.

Since mid-March the performance is a study in contrasts. MSCI emerging market equity index is up about 8.4%. During the same time the developed markets index is up a little less than 1%.

In the foreign exchange market over this period, the dollar-bloc is the strongest. The Australian dollar is easily the best performer rising 3.3% against the dollar, followed by the Canadian dollar (1.7%) and the New Zealand dollar (1.5%). Sterling is a distant fourth, up 0.4%, and all this was recorded today. The other major currencies have lost ground against the dollar this period.

Among the emerging market currencies, the Brazilian real (5.8%), Colombian peso (5.5%) and Turkish lira (5.5%) have led the advance. Chilean peso (3.5%) and the Russian rouble (3.0%) round out the top five. As with the majors, the high yielding/high beta currencies has generally outperformed.


Chart of the Day: Estimating Wage Growth

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic was tweeted by the Financial Times’ Cardiff Garcia, which he got from Goldman Sachs. It tries to assess the outlook for wage growth based on different measures of unemployment, including short-term unemployment rate.


The problem is that wages do not seem to be tied to the measures of the unemployment rates. This is to say that wage growth is been considerably weaker than the improving labor market would suggest.

Wages are understood to be an economic function of supply and demand. Yet the relationship appears to have broken down. One response is that it is simply a question of time, Back in 1998-19900, wages grew faster than expected based different unemployment measures. This was a short run anomaly. An alternative hypothesis begins with the observation that since 2001, wage growth has typically under performed what the levels of unemployment would suggest. Could this be the implicit threat posed by China? It joined the WTO in late 2001. This hypothesis suggests that politics, as in power, is may be a better explanatory variable for how the social product is divided between profits and wages.

Given that the forward guidance of the Federal Reserve is evolving and, most recently, it dropped the reference to a 6.5% unemployment rate, and the comments by Yellen, investors will be watching earnings very closely. Recall that in February, the weather prevented many from going to work, but their salaries were not impacted. This helped generate a statistical quirk of a larger than expected increase in hourly earnings. They rose 0.4% for a 2.2% year-over-year rate, which is the upper end of the range for the past three years.


Where We Are in the Cycle – Connecting the Dots

Last week I posted a good chart from Morgan Stanley showing where some countries are (potentially) in the business cycle.  Of course, the business cycle is not the market cycle so this doesn’t really connect the dots to anything.  Luckily, David Rosenberg has some data for us (at least as it applies to the USA):



Source: Gluskin Sheff

Worried About Rates? Worry About Growth.

I like this chart from ValueWalk showing the correlation between interest rates and growth.  We often hear about how the bond market is a good forecaster of future economic growth.  I usually describe the structure of interest rates as being a function of the way that traders view the way the Fed sees policy.  In other words, bond traders are always trying to front-run the Fed.  And the Fed is always trying to front-run the economy.

One of the more common concerns in this market environment is the concern about interest rates and the likelihood of a big move higher.  But as the following chart shows, if you’re worried about rates you really should be worried about growth.  After all, if the Fed is watching the economy then higher rates aren’t likely to transpire without much stronger growth.


Who’s Where in the Economic Growth Cycle?

Here’s a nice bit of global macro perspective on the state of different economies in the business cycle.  Clearly, this is an approximation, but I have a feeling they’re pretty close to right here:



Source: Morgan Stanley

Inflation Expectations – on the Fast Track to Nowhere

If you’re worried about high inflation then you must definitely think that the markets have things all wrong.  As we all know, inflation, as measured by the CPI has been extremely low for the last 5 years.  The latest reading of 1.1% is well below the historical average reading of about 3.5%.

But the past is the past.  One of the better ways to gauge the market’s expectations of inflation is to look at the 10 year break-even.  This is just the yield on the 10 year versus the inflation protected equivalent.  When this rate is moving higher it means that the market is pricing in higher inflation expectations and vice versa.

So, what’s it telling us today?  Not much.  In other words, if the markets are right then low inflation is here to stay.


Chart of the Day: the CRB and Oil Prices

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

Commodities are very much the center of attention in the financial markets. The first Great Graphic, created on Bloomberg, is the CRB index. Through last Friday (March 7) it had rallied 13.5% since January 9.

It gapped higher on March 3and gapped lower earlier today, leaving a bearish island top in it wake. Technical indicators like the RSI and MACDs have turned lower. The gap extends from yesterday’s low (304.75) to today’s high (303.72). Completing the gap and moving above it would negate this bearish views. In late morning activity, there was an attempt to close the gap but it was rebuffed and the CRB returned to the middle of its range. We suspect is break away gap, meaning that it is unlikely to be filled in the near-term.


The CRB index also gapped higher on February 19. This gap has not been completed. In can be found between 298.55 and 299.29. A move to this area will be the first bearish objective. The next one is 294.50 We suspect there may be potential toward 290.

The lower chart, also from Bloomberg is a chart of the May US crude oil futures contract. The rally was not as impressive as the one in the CRB. It did not gap lower and there is not island gap, but the technical condition appears almost as bearish. The RSI and MACDs are trending lower.

It closed yesterday at the psychologically and technically important $100 a barrel level, but follow through selling today has seen it loss another 2%. It has moved toward the 61.8% of the rally off the the early-January though early March high (found near $96.60). That rally has carried oil up a little more than 15%.


Today’s sell-off may have been aggravated by conspiracy theories sparked by the unexpected announcement by the US Department of Energy. It said it would sell up to 5 mln barrels of crude oil from its strategic reserves as a test of its systems. It is the first sale since 1990 specifically for test purposes. It will off sour crude and bids are due March 14.

The test apparently has been subject of internal discussion for some time and was timed to be the most helpful for refineries in term of their maintenance schedule. The 5 mln barrels is roughly equivalent to the US daily import of crude oil and about 25% of the US daily consumption.

Many observers initially linked the release of the strategic reserves to confrontation with Russia over Ukraine and Crimea. Yet, 5 mln barrels is a drop in the bucket, so to speak and it is not clear, in any event, how much the announcement weighed on prices, which were already moving lower before announcement. If the US were really trying to depress oil prices, the amount would have been bigger and, more than likely, it would have tried coordinating with Europe as was the case when the last time the reserves were tapped. In 2011, in response to the civil war in Libya, in coordination with Europe, the US sold 30 mln barrels of oil from its reserves.

At the present, none of the major currencies, including some crosses, are particularly closely tied to the CRB in general or oil prices in particular. Sterling against the yen may be about the best (highest correlation with oil) and that is only about 0.28 correlated ( 60 day percentage change basis) We have looked at a number of emerging market currencies and the results were similar results.


SocGen: 2 Reasons to be Bullish About Peripheral Europe

Here’s a contrarian view for you (via Societe Generale):

“Financial markets have taken note of the improving situation in southern European countries, with major equity indices and bonds posting double-digit performances over the past six months. Although an acceleration of the recovery may not be in the cards for the moment, we believe it is still time to invest in peripheral assets considering: 1) the ECB should remain accommodative; 2) attractive valuations compared to the US (more expensive) and EM (more risk ahead). In particular, in book value terms, eurozone and peripheral valuations are still attractive compared to the US which is trading at 2.6x book value whereas the eurozone is trading at 1.5x (the historical discount is 34%, vs 43% at present), leaving room for further performance of European assets.”


What a Repeat of 2009 Would Look Like

Nothing too exciting here, but I thought this chart from MarketWatch was pretty a pretty interesting perspective of some historical bull/bear markets.  It shows how some historical precedents might play out:


Chart of the Day: Both Sides of the Ledger

One of the most important things you learn when you start to think of the world in a macro way is that you start looking at both sides of the ledger before making sweeping conclusions.  This helps you to avoid falling victim to a fallacy of composition.  In other words, you stop extrapolating micro experiences out into the macro with the assumption that what’s true for one person or component is representative of the entirety.  That’s completely false in many cases although it’s easy to relate to or digest.

So I really like this chart from Matt Yglesias who takes it from Thomas Piketty’s new book Capital in the Twenty-First Century which shows the USA’s “debt crisis” in the proper perspective:



This is similar to a point I made a few months back about how the US government is not in the debt hole that many present it to be in.  You have to look at both sides of the ledger as Matt points out.  Looking at one side gives you a totally misguided perspective of the entire picture.  And in the case of the USA, well, we’re doing much better than most people think.

The long decline of the Great British Pound

By Frances Coppola, Proprietor, Coppola Comment

This chart caught my eye:



It’s the GBP/USD exchange rate from 1915 to the present day. Accompanying this chart on Twitter was the comment “quite shocking though how much the pound has been devalued since 1945″.

This is a fine example of the way in which economic indicators can be misinterpreted when the historical narrative underlying them is ignored. What this chart shows is indeed shocking, but not because the value of the pound has fallen. It is shocking because it graphically depicts the decline of British global influence. And it charts the desperate attempts of British politicians to maintain global dominance by propping up the value of the currency.

The start point of this graph – 1915 – was during the First World War and immediately after the failure of the classical gold standard in 1914. Britain borrowed heavily and suffered high inflation during the First World War, and was forced to devalue the pound considerably towards the end of the war. You can see that drop clearly. But instead of accepting devaluation of the pound as part of the cost of fighting a ruinous war, British politicians decided to try to restore the pound to its pre-war value. They imposed severe fiscal and monetary austerity upon the war-damaged British economy, causing a depression that lasted for much of the 1920s. The pound did indeed recover most of its pre-war value, and Britain returned to the gold standard at the 1915 rate in 1925. You can see that the graph flatlines from 1925 to 1932. That was the last time Britain was on a gold standard.

But if Murray Rothbard is to be believed, the price the world paid for Britain’s determination to restore its former glory was the Wall Street Crash and the Great Depression. Rothbard claims that the Fed loosened monetary policy at Britain’s behest, and in so doing caused a credit bubble that burst in 1929. I think blaming the Wall Street Crash entirely on Britain’s need for loose monetary policy is rather far-fetched: Rothbard seems to have a bit of a chip on his shoulder. But Britain’s ill-judged return to the gold standard was almost certainly a contributory factor.

The onset of the Great Depression following the Wall Street Crash placed the British economy, like everyone else’s, under great pressure. Like everyone else, initially Britain tightened monetary policy to preserve the value of the pound. But eventually it was forced to devalue. It came off the gold standard in 1931 and the pound promptly dropped considerably. Barry Eichengreen has documented the role of the gold standard in the Great Depression: it seems clear that those countries that came off the gold standard early, such as Britain, fared much better than countries that remained on it for longer, such as the US. The lesson from this is that a fixed currency regime after a financial crisis and recession is economically disastrous. Sadly we don’t seem to have learned from this. The Euro area is busy repeating exactly the same mistake - it isn’t called a gold standard, but it behaves much like one.

The pound did recover its value as Britain came out of the Depression. But it’s worth remembering at this point that there are two sides to any exchange rate. This is GBP versus USD. The strength of the pound in the later 1930s was due to the weakness of the US dollar as the US first reflated (FDR’s New Deal) and then dipped back into recession again.

Not surprisingly, the value of the pound fell sharply on the outbreak of World War 2. It is quite normal for currencies to devalue in wars: the currency itself becomes riskier because of the uncertainty around the outcome of the war, and economic fundamentals in the countries concerned usually worsen considerably despite the fiscal stimulus caused by the war effort. Wars are expensive: GDP collapses, inflation rises and countries become highly indebted. Britain was no exception. It ended the war heavily in debt to the United States and with a massive balance of payments deficit. This was ON TOP OF the outstanding debt it was still carrying from WW1, which it had never managed to unload. Two world wars and a depression had caused enormous damage to the British economy. It was in pretty poor shape.

In 1944, Britain entered into the Bretton Woods managed exchange rate system. This fixed the pound’s exchange value to the dollar, which in turn was linked to gold. Once again, British politicians were determined to show that Britain was still a force to be reckoned with, so the exchange rate was set too high for such a damaged economy. Britain was forced to devalue the pound by 30% in 1949. But even that was not enough. The next 18 years were characterised by persistent balance of payments problems and sterling crises: Britain was forced to seek assistance from the IMF more than once. Wilson finally devalued the pound again in 1967. But by this time, inflation was already rising and was made worse by the devaluation. The next 15 years were to be a period of high inflation and dismal economic performance.

In 1971, Nixon suspended convertibility of the dollar to gold, effectively ending the Bretton Woods system. But even after this, Britain continued to prop up the pound against a market that clearly wished it to be lower. The currency simply did not warrant the value that Britain wished it to have, yet successive Chancellors* refused to allow it to float freely, fearing a sterling collapse. In 1976, the Chancellor of the Exchequer called in the IMF to help arrest persistent runs on sterling. On the advice of the IMF, the Chancellor imposed austerity measures, which reduced inflation and improved economic performance. The IMF’s loan was never fully drawn. The pound recovered – but only temporarily. Against a background of rising unemployment, the famous “Winter of Discontent” in 1978 sounded the death knell for the Labour government. In 1979, the Conservatives under Margaret Thatcher won the election.

1979 was a turning point for the pound. Exchange controls were lifted, and for the first time it was allowed to float. And it promptly fell. It takes a great deal of nerve for a Chancellor to allow a previously managed currency to fall freely, but Geoffrey Howe allowed it to do so. But again, we should be mindful that there are two sides to any exchange rate. The fall of sterling in the 1980s was due to the growing strength of the dollar, which climbed steadily against all currencies (not just the pound) until 1985. But in 1985, currency management started again. The Plaza Accord of 1985 introduced active depreciation of the dollar against all major currencies including the pound, a strategy which only ended with the Louvre Accord of 1987.

Howe’s successor, Lawson, was – and remains – a fan of managed exchange rates. From 1987 onwards he unofficially pegged the pound to the German Deutschmark. This caused inflation, a credit bubble and a property market boom which eventually crashed in 1990, followed by a recession. Despite this, Lawson’s successor, John Major, continued to shadow the Deutschmark and eventually joined the European Exchange Rate Mechanism (ERM) at what it soon became clear was too high a rate.

But it didn’t last. Britain’s brief membership of the ERM ended ignominiously when the pound was forced out by sustained speculative attacks. Major’s successor, Norman Lamont, reportedly said he was “singing in the bath” after the pound crashed out of the ERM. It promptly sank to an exchange rate more appropriate for the state of the economy. The independence of the Bank of England in 1997 removed the value of the pound – both its domestic value (inflation) and its external value (exchange rate) – from direct political control. The Bank of England now primarily manages the domestic value of the pound and allows the international value to adjust to domestic economic conditions.

What is perhaps most surprising is how little evidence there is of long-term decline in the value of the pound since exchange controls were lifted in 1979. It looks very much as if most of the needed devaluation had already happened (painfully) by then. In which case the IMF’s intervention in 1976 to halt the slide of the pound was ill-judged. The pound should have been allowed to fall. It would have found its own level eventually.

For me, what this chart proves is that provided monetary authorities are credible, a free float is far and away the best way of managing a currency. What is shocking about this chart is not how much the pound has devalued. It is how long it took to do it, and the economic cost of trying to prevent its fall.

But the real story behind this chart is the end of the British empire and the loss of the pound’s reserve currency status. Prior to WW1 Britain was the dominant economy in the world, controlling the largest empire in recorded history, and the pound was the global reserve currency. The empire gradually disintegrated over the course of the 20th Century, and the pound was supplanted by the US dollar as global reserve currency. The pound had to devalue, and substantially, because of Britain’s diminishing status in the world and the US’s growing dominance. But politicians were unwilling to accept this.

Britain’s history is one of constantly trying to punch above its weight internationally, even at the cost of wrecking its domestic economy. The Geddes axe and ensuing depression of the 1920s, the refusal to devalue throughout the 1950s and 60s, the attempt to prop up the exchange rate in the 1970s, and finally the disastrous entry to the ERM at too high a rate: all of these failed, some disastrously. And all of them had ghastly consequences for the economy. Even today, Britain still tries to act like a larger and more dominant player than it really is.

Britain is no longer a superpower. Indeed it hasn’t been one for a long time, though it doesn’t know it. It is time people recognised this, and stopped hankering after past glories. The value of the pound in 1945 was too high even for Britain as it was then, let alone now. It is time to put the past behind us, and move on.

Related reading:

Currency wars and the fall of empires - Pieria

* Until the independence of the Bank of England in 1997, monetary policy was under the control of the Chancellor, not the Bank.