Friday, 2 April 2010
How We'll Work in 2025
A slideshow from www.fastcompany.com, a great website for innovative companies and individuals to keep up with evolving business practices. The slideshow is mainly of pictures of what is known as a 'mobile office',a modern-age office whereby people are not assigned a fixed workplace but instead move around day-to-day. Although it took some years for the concept to be tried and tested, employees seem to be responding positively to the idea. The picture below is from the new sydney-based offices of the Macquarie Group--shockingly, a bank. As the slideshow notes, “Everything is designed to be ergonomic... something might look like a sofa, but the measurements are made for sitting up and working.”
Wednesday, 31 March 2010
28 Places to See Before You Die
Smithsonian Magazine has compiled a list of 28 places to see before you die. The Giza Pyramids and the Louvre inevitably make the list, but I was particularly struck by the tremendous beauty of the Iguazu Falls, which lie on the Argentina-Brazil border and are a true testament to the dizzying natural beauty of South America (Machu Picchu also makes the list). I've reproduced a picture of the Iguazu Falls below (unfortunately low quality), but if you're reading this make sure to google it and look at some pictures.
Monday, 29 March 2010
Arab Summit
Foreign Policy reports on the continuing annual mockery that is the Arab League Summit, which is held in Tripoli this year amid declining attendance by Arab leaders and low expectations by foreign observers. As the short article notes, given the deteriorating relationship between the U.S. and Israel, it would seem that this is a particularly opportune moment for Arab leaders to mount a renewed diplomatic effort for or against the Arab Peace initiative. In my view, while Palestine remains (perhaps vaguely) a unifying theme for Arabs everywhere, the divergence between Arab countries--politically, socially, economically--has become too wide for there to be any Arab united front in a meaningful way, and this will forever hinder any progress in these summits.
Friday, 26 March 2010
Hedge Fund Homes at a Discount
A slideshow. Not all the houses are that cool, and they're all located in the U.S. north-east (NY and CT), but some of them are nice. I wonder how many people can afford houses priced at $10mm+ and whether they buy them outright or take mortgages. For those London-based, house prices are even more depressing. In fact, given the terrible economic climate, rising taxes, and horrible weather, I'm beginning to wonder why anyone (me included) wants to pay so much money to live in that city.
Thursday, 25 March 2010
Edward Burtynsky
Burtynsky is a Canadian photographer whose work depicts natural landscapes altered by industry; among the works which treat this theme are photos of mines, ships and ship-making, an industrializing China, and oil, the subject of his latest photo-book. The following is a picture from his China collection which depicts the dizzying urbanization of Shanghai; almost nothing natural remains in the vast expanse of drab high-rises.
Burtynsky acknowledges the inherent tension between the themes he treats and his ability to do his work: without modern industrial advances, he wouldn't be able to travel to the places he does.
Burtynsky acknowledges the inherent tension between the themes he treats and his ability to do his work: without modern industrial advances, he wouldn't be able to travel to the places he does.
Wednesday, 24 February 2010
More from PIMCO
Scott Mather, head of global portfolio management at PIMCO, gives his views on the climate for bond investing here.
In general, Mather sees a fairly bond-friendly investment climate going forward, due to a backdrop of low growth and benign inflation. He acknowledges that there are tail-risk scenarios worth considering: on the one hand, the possibility of hyperinflation due to massive monetary expansion, and on the other, a deflationary cycle similar to that of Japan. He sees the balance of risk falling towards the deflationary/disinflationary possibility.
Even in an environment where the inflation/rates and growth outlooks are benign, a headwind for bonds is the credit issue: namely, the deterioration of fiscal positions for developed countries, which is not happening in emerging countries. Mather sees the long-term secular outlook for emerging markets as positive, but still prefers to hold on to only high-quality credits at this stage, as these outperform whenever risk gets repriced.
On a country-specific basis, Mather has a favorable opinion of European bonds relative to U.S. bonds--he prefers France and Germany to the U.S., as they have similar yields but a much better debt dynamic: lower deficits, debt:GDP ratios, similar growth, and no headwinds from ending quantitative easing (which might cause demand/supply imbalances). Like Gross, Mather sees the UK as a must to avoid, with the added point that the UK is more dangerous than the U.S. because the pound doesn't have the advantage of a reserve currency status. Finally, he gives his view on Japan:
"There is virtually no conceivable way that Japan can get its debt dynamics under control through normal ways – and that means it will resort to either default or inflation through massive monetization, and yields are low. It might muddle through in the short-term, but in the long-term it has problems."
In general, Mather sees a fairly bond-friendly investment climate going forward, due to a backdrop of low growth and benign inflation. He acknowledges that there are tail-risk scenarios worth considering: on the one hand, the possibility of hyperinflation due to massive monetary expansion, and on the other, a deflationary cycle similar to that of Japan. He sees the balance of risk falling towards the deflationary/disinflationary possibility.
Even in an environment where the inflation/rates and growth outlooks are benign, a headwind for bonds is the credit issue: namely, the deterioration of fiscal positions for developed countries, which is not happening in emerging countries. Mather sees the long-term secular outlook for emerging markets as positive, but still prefers to hold on to only high-quality credits at this stage, as these outperform whenever risk gets repriced.
On a country-specific basis, Mather has a favorable opinion of European bonds relative to U.S. bonds--he prefers France and Germany to the U.S., as they have similar yields but a much better debt dynamic: lower deficits, debt:GDP ratios, similar growth, and no headwinds from ending quantitative easing (which might cause demand/supply imbalances). Like Gross, Mather sees the UK as a must to avoid, with the added point that the UK is more dangerous than the U.S. because the pound doesn't have the advantage of a reserve currency status. Finally, he gives his view on Japan:
"There is virtually no conceivable way that Japan can get its debt dynamics under control through normal ways – and that means it will resort to either default or inflation through massive monetization, and yields are low. It might muddle through in the short-term, but in the long-term it has problems."
Monday, 22 February 2010
Bill Gross
I have mentioned PIMCO a few times already in my posts, and in this entry I want to take a look at Bill Gross's latest 'investment outlook' article (link here), which he writes with his usual urbane wit and intellectual panache. I will quote extensively from the article (I can't write better than him). The past few posts about sovereign debt provide a fitting segue for this discussion.
As Gross says, the recovery from the financial crisis has been driven very much by government support, and while the private sector underwent a hard deleveraging process, the public sector piled on debt. This rise in government debt levels is typical in the aftermath of financial crises, according to the book of the moment, This Time is Different, by Kenneth Rogoff and Carmen Reinhart. Now that most of the government support is due to run its course, many are expecting (or hoping) that the private sector can resume its cyclical bounce, as in other recoveries.
However, while part of the corporate sector may well have gone some distance in repairing its balance sheet, individuals and households remain levered, face grim job market prospects, and along with small businesses, lack access to credit. This, according to Gross, is what puts the operative word "new" in their "new normal", the term used to describe the feeble growth we should expect in the post-crisis developed world.
Perhaps the word "new" is used to drive home the point to those who expect a normal cyclical recovery. However, as Gross acknowledges, if one looks at historical crises where the prevailing conditions were of private sector deleveraging and public sector leveraging and re-regulating, one finds that the "new normal" is perhaps not so "new." Reinhart and Rogoff undertake exactly such a study of debt cycles, and have three main conclusions (quoting Gross):
"1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%."
He continues,
"These conclusions are eerily parallel to what has been happening in the past 12 months."
This discussion has major implications to investment choices going forward. From a macro perspective, investors should keep in mind the following:
1. Risk and growth-oriented assets should be generally positioned in Asian and developing countries, which are less levered, have stable debt:GDP ratios, and are thus less easily prone to bubbling and experiencing the negative deleveraging process. In Gross's words (bold emphasis mine),
"When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy."
2. Although you should seek to invest less risky and fixed income assets in these same countries if possible, bear in mind that they are less liquid and less developed financial markets. Thus, fixed income choices must still be oriented towards developed countries, which have a consistent track record of delivering payments and respecting property rights. However, differentiation within these countries is important (see 3).
3. "Interest rate trends in developed markets may not follow the same historical conditions observed during the recent Great Moderation." Generally, the downward path of yields for developed countries was very similar over the past three decades (with some exceptions, Japan an obvious one). However, going forward, one should not expect to see a coordinated move upwards in yields:
"Each of several distinct developed economy bond markets presents interesting aspects that bear watching:
1) Japan with its aging demographics and need for external financing,
2) the US with its large deficits and exploding entitlements,
3) Euroland with its disparate members – Germany the extreme saver and productive producer, Spain and Greece with their excessive reliance on debt and
4) the UK, with the highest debt levels and a finance-oriented economy – exposed like London to the cold dark winter nights of deleveraging."
Given this discussion, PIMCO sees Germany as good potential value, although it notes that its position toward Euro area bailouts must be watched. The harshest words are reserved for the UK, whose gilts are "resting on a bed of nitroglycerine." It has high debt levels, a serious potential to devalue its currency, and according to Gross dubious accounting standards which influence rates, all which present high risks for bond investors.
As Gross says, the recovery from the financial crisis has been driven very much by government support, and while the private sector underwent a hard deleveraging process, the public sector piled on debt. This rise in government debt levels is typical in the aftermath of financial crises, according to the book of the moment, This Time is Different, by Kenneth Rogoff and Carmen Reinhart. Now that most of the government support is due to run its course, many are expecting (or hoping) that the private sector can resume its cyclical bounce, as in other recoveries.
However, while part of the corporate sector may well have gone some distance in repairing its balance sheet, individuals and households remain levered, face grim job market prospects, and along with small businesses, lack access to credit. This, according to Gross, is what puts the operative word "new" in their "new normal", the term used to describe the feeble growth we should expect in the post-crisis developed world.
Perhaps the word "new" is used to drive home the point to those who expect a normal cyclical recovery. However, as Gross acknowledges, if one looks at historical crises where the prevailing conditions were of private sector deleveraging and public sector leveraging and re-regulating, one finds that the "new normal" is perhaps not so "new." Reinhart and Rogoff undertake exactly such a study of debt cycles, and have three main conclusions (quoting Gross):
"1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%."
He continues,
"These conclusions are eerily parallel to what has been happening in the past 12 months."
This discussion has major implications to investment choices going forward. From a macro perspective, investors should keep in mind the following:
1. Risk and growth-oriented assets should be generally positioned in Asian and developing countries, which are less levered, have stable debt:GDP ratios, and are thus less easily prone to bubbling and experiencing the negative deleveraging process. In Gross's words (bold emphasis mine),
"When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy."
2. Although you should seek to invest less risky and fixed income assets in these same countries if possible, bear in mind that they are less liquid and less developed financial markets. Thus, fixed income choices must still be oriented towards developed countries, which have a consistent track record of delivering payments and respecting property rights. However, differentiation within these countries is important (see 3).
3. "Interest rate trends in developed markets may not follow the same historical conditions observed during the recent Great Moderation." Generally, the downward path of yields for developed countries was very similar over the past three decades (with some exceptions, Japan an obvious one). However, going forward, one should not expect to see a coordinated move upwards in yields:
"Each of several distinct developed economy bond markets presents interesting aspects that bear watching:
1) Japan with its aging demographics and need for external financing,
2) the US with its large deficits and exploding entitlements,
3) Euroland with its disparate members – Germany the extreme saver and productive producer, Spain and Greece with their excessive reliance on debt and
4) the UK, with the highest debt levels and a finance-oriented economy – exposed like London to the cold dark winter nights of deleveraging."
Given this discussion, PIMCO sees Germany as good potential value, although it notes that its position toward Euro area bailouts must be watched. The harshest words are reserved for the UK, whose gilts are "resting on a bed of nitroglycerine." It has high debt levels, a serious potential to devalue its currency, and according to Gross dubious accounting standards which influence rates, all which present high risks for bond investors.
Sunday, 21 February 2010
More on Greece
As many commentators have noted, the brewing sovereign debt crisis isn't anymore about Greece than the financial crisis of 2008 was about Lehman Brothers or AIG. All over the world, government balance sheets have become swollen with debt, and in many places private sector debt has been transfered to public balance sheets, with the result that net debt levels have fallen very little.
Some of the immediate effects of the Greek crisis were a widening of sovereign CDS spreads (Spain hit 170bps, the highest level since Feb 09), a sell-off in risk and a broad dollar rally, and a rise in yields on government debt for other Euro area members, albeit with different degrees for different countries. The Euro was battered, with EURUSD hitting a low of $1.34. I recall in October and November 2009, when stories about dollar doom were in papers everyday, that the magic resistance level for EURUSD was $1.45; later in the year, as it broke that level, it became $1.40.
This has taken many by surprise: in a world where currencies everywhere offer derisory yields, many had imagined that the Euro was the safest of the bunch--I had a German colleague who advised me to buy gold or a "real" currency, like the Euro. To an extent this was justified, as it was expected that the usually hawkish ECB would be the first to raise rates in 2010. But Euro area recovery has been feeble at best, and the Greek crisis has made a rate hike more difficult: differentiation within the Eurozone is finally showing, and while some countries can arguably weather a rise, to others it might be unbearable. The result is that you should expect rates in the Euro area to stay low; with the Fed raising its discount rate last week, the EURUSD equation has thus, in a sense, been turned on its head. Has it run its course? I will be an interested observer on how that cross fares, and like I've said before, I expect USD to be a major beneficiary of risk events in 2010-2011.
Finally, I think it is useful (but of course difficult) to look for relative value opportunities that might arise in the sovereign debt space: for example, the Blackrock co-head of fixed income mentioned last week (see story) that while Greek yields nearly doubled Portugal yields on some parts of the curve, the fundamentals in the two countries were not all that different. One of PIMCO's favorite long-term buys is German bunds, especially versus US treasuries and UK gilts. More on that next time!
Some of the immediate effects of the Greek crisis were a widening of sovereign CDS spreads (Spain hit 170bps, the highest level since Feb 09), a sell-off in risk and a broad dollar rally, and a rise in yields on government debt for other Euro area members, albeit with different degrees for different countries. The Euro was battered, with EURUSD hitting a low of $1.34. I recall in October and November 2009, when stories about dollar doom were in papers everyday, that the magic resistance level for EURUSD was $1.45; later in the year, as it broke that level, it became $1.40.
This has taken many by surprise: in a world where currencies everywhere offer derisory yields, many had imagined that the Euro was the safest of the bunch--I had a German colleague who advised me to buy gold or a "real" currency, like the Euro. To an extent this was justified, as it was expected that the usually hawkish ECB would be the first to raise rates in 2010. But Euro area recovery has been feeble at best, and the Greek crisis has made a rate hike more difficult: differentiation within the Eurozone is finally showing, and while some countries can arguably weather a rise, to others it might be unbearable. The result is that you should expect rates in the Euro area to stay low; with the Fed raising its discount rate last week, the EURUSD equation has thus, in a sense, been turned on its head. Has it run its course? I will be an interested observer on how that cross fares, and like I've said before, I expect USD to be a major beneficiary of risk events in 2010-2011.
Finally, I think it is useful (but of course difficult) to look for relative value opportunities that might arise in the sovereign debt space: for example, the Blackrock co-head of fixed income mentioned last week (see story) that while Greek yields nearly doubled Portugal yields on some parts of the curve, the fundamentals in the two countries were not all that different. One of PIMCO's favorite long-term buys is German bunds, especially versus US treasuries and UK gilts. More on that next time!
Saturday, 20 February 2010
Greece
John Mauldin (www.johnmauldin.com) mentioned a statistic in his column last week which is quite startling: Greece, a country of 11 million people, had only six people filing taxes for incomes in excess of 1mn Euros. How is it that we notice these absurd statistics only after a crisis erupts? (Another one of my favorites: in January 2008, there were only 12 AAA-rated companies in the world, but 64,000 structured finance instruments with an AAA rating).
I first heard of Greece's precarious sovereign debt position in November 2009, around the same time stories of Dubai World's voluntary restructuring of its debt surfaced. Since then, many developments have occurred and attitudes about the problem have shifted; consider, for example, the following quote by Swedish premier Fredrik Reinfeldt on December 10, 2009:
"What we now are seeing in Greece is of course problematic, but it is basically a domestic problem that has to be addressed by domestic decisions,"
Obviously, this is no longer the prevailing attitude. In fact, as Mohamed El-Erian wrote in a piece in the FT in early February:
"Without external assistance, any Greek policy efforts would entail such contractionary fiscal policy measures as to cause a disaster locally, especially given the initial conditions (including the size and maturity profile of its debt) and the existing policy framework (anchored on adherence to a fixed exchange rate via the euro), such adjustment is difficult and not sufficient."
As of yet, no external bailout has transpired, but the EU has come out and said it will take "determined and coordinated action" to help Greece with its debt problems (as far as I can tell, no one knows what that means exactly). This gave Greece some respite, with its yields and ballooning CDS spreads falling. It's also important for another reason: as the U.S. learned during Mexico's debt crisis in 1994, instilling confidence in a country can massively reduce a bailout package by allowing the government to refinance itself.
According to Fitch, Greece needs to raise around 50bn Euros in 2010, both to cover deficits and roll over maturing debt. So far, Greece has managed to raise 8bn Euros in 5-year bonds via a syndicated issue in late January priced at 6.2%, around 350bps over mid-swaps rate, the rate for credit-worthy borrowers of Euros. The syndicate of banks drummed up massive interest in the bonds, with orders for the issue hitting 25bn Euros. (Despite this massive interest, the bonds quickly sold off on the secondary market, perhaps a sign that many had bought in to the issue for a quick profit, a practice known as "flipping").
My instinct tells me that it will have a much harder time raising the rest of money (it will need some new financing as early as April), due to a host of issues:
- According to the numbers I have seen (see aforementioned John Maludin column for details) and based on historical precedent, Greece’s 3-year plan to reduce its deficit from 13% to 3% of GDP is not credible and/or impossible;
- There are major issues with data collection and book-cooking in Greece, although Greek authorities seem genuinely intent on changing this;
- Over 50% of Greece's GDP is government spending, 30% of its economy is underground, and it has powerful trade unions and major problems with tax collection. These are not issues the market can gloss over, and are not problems which Greece can solve in the short-term.
Thus, to many the question is shifting from if to rather how (and by whom) Greece will be bailed out.
In the next post I consider the implications of a Greek default for markets, and how the Euro is faring during this crisis.
I first heard of Greece's precarious sovereign debt position in November 2009, around the same time stories of Dubai World's voluntary restructuring of its debt surfaced. Since then, many developments have occurred and attitudes about the problem have shifted; consider, for example, the following quote by Swedish premier Fredrik Reinfeldt on December 10, 2009:
"What we now are seeing in Greece is of course problematic, but it is basically a domestic problem that has to be addressed by domestic decisions,"
Obviously, this is no longer the prevailing attitude. In fact, as Mohamed El-Erian wrote in a piece in the FT in early February:
"Without external assistance, any Greek policy efforts would entail such contractionary fiscal policy measures as to cause a disaster locally, especially given the initial conditions (including the size and maturity profile of its debt) and the existing policy framework (anchored on adherence to a fixed exchange rate via the euro), such adjustment is difficult and not sufficient."
As of yet, no external bailout has transpired, but the EU has come out and said it will take "determined and coordinated action" to help Greece with its debt problems (as far as I can tell, no one knows what that means exactly). This gave Greece some respite, with its yields and ballooning CDS spreads falling. It's also important for another reason: as the U.S. learned during Mexico's debt crisis in 1994, instilling confidence in a country can massively reduce a bailout package by allowing the government to refinance itself.
According to Fitch, Greece needs to raise around 50bn Euros in 2010, both to cover deficits and roll over maturing debt. So far, Greece has managed to raise 8bn Euros in 5-year bonds via a syndicated issue in late January priced at 6.2%, around 350bps over mid-swaps rate, the rate for credit-worthy borrowers of Euros. The syndicate of banks drummed up massive interest in the bonds, with orders for the issue hitting 25bn Euros. (Despite this massive interest, the bonds quickly sold off on the secondary market, perhaps a sign that many had bought in to the issue for a quick profit, a practice known as "flipping").
My instinct tells me that it will have a much harder time raising the rest of money (it will need some new financing as early as April), due to a host of issues:
- According to the numbers I have seen (see aforementioned John Maludin column for details) and based on historical precedent, Greece’s 3-year plan to reduce its deficit from 13% to 3% of GDP is not credible and/or impossible;
- There are major issues with data collection and book-cooking in Greece, although Greek authorities seem genuinely intent on changing this;
- Over 50% of Greece's GDP is government spending, 30% of its economy is underground, and it has powerful trade unions and major problems with tax collection. These are not issues the market can gloss over, and are not problems which Greece can solve in the short-term.
Thus, to many the question is shifting from if to rather how (and by whom) Greece will be bailed out.
In the next post I consider the implications of a Greek default for markets, and how the Euro is faring during this crisis.
Thursday, 18 February 2010
The State of the Real Economy
The U.S. reported very good growth numbers for Q4/09, and manufacturing data and ISM indices indicate that Q1 growth should come in strongly too--the one recent blemish is February's non-farm payrolls number. This is important, because it highlights the fact that employment is still not recovering. With no growth in real wages, weak consumption growth and deleveraging households, it is not clear where private demand might arise (or is arising). As PIMCO notes, the growth numbers could very well be driven by inventory rebuilding and fiscal stimulus.
To put the unemployment issue in perspective, I quote David Rosenberg of Gluskin Sheff, an eternal pessimist throughout this crisis (bold emphasis mine):
"While... it could well be argued that we are entering some sort of healing phase in the jobs market... the reality is that the level of employment today, at 129.5 million, is the exact same level it was in 1999. And, during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. That sounds like pretty deflationary stuff from our standpoint."
The last comment about deflation is, I think, also really important, because the strong economic data is not having much of an effect on bond yields, with these staying low across the term structure. QE has obviously contributed to this, but maybe part of the story is that yields are so low because the market in fact does not believe in the strength of the recovery, and expects a benign inflation outlook and policy-makers to keep rates low. As Bloomberg writes:
"Treasuries indicate traders are paring bets inflation will accelerate. The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices, touched 2.22 percentage points, the lowest level since Dec. 14. The so-called breakeven rate reached the intraday high for this year of 2.49 percentage points on Jan. 11."
Going forward, it is crucial to keep re-evaluating this combination of low rates/benign inflationary expectations yet seemingly robust growth.
To put the unemployment issue in perspective, I quote David Rosenberg of Gluskin Sheff, an eternal pessimist throughout this crisis (bold emphasis mine):
"While... it could well be argued that we are entering some sort of healing phase in the jobs market... the reality is that the level of employment today, at 129.5 million, is the exact same level it was in 1999. And, during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. That sounds like pretty deflationary stuff from our standpoint."
The last comment about deflation is, I think, also really important, because the strong economic data is not having much of an effect on bond yields, with these staying low across the term structure. QE has obviously contributed to this, but maybe part of the story is that yields are so low because the market in fact does not believe in the strength of the recovery, and expects a benign inflation outlook and policy-makers to keep rates low. As Bloomberg writes:
"Treasuries indicate traders are paring bets inflation will accelerate. The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices, touched 2.22 percentage points, the lowest level since Dec. 14. The so-called breakeven rate reached the intraday high for this year of 2.49 percentage points on Jan. 11."
Going forward, it is crucial to keep re-evaluating this combination of low rates/benign inflationary expectations yet seemingly robust growth.
Interview Prep
I'm preparing for an interview next week and would thus like to be sharp when talking about markets. I'm going to write up an entry everyday containing interesting information I've learned and any reflections/thoughts I might have--I find that this format helps me remember what I read and learn.
Sunday, 7 February 2010
EURYEN and EURUSD cross vs. S&P500
The Euro-Yen cross is a popular proxy for risk, because of the Yen's status as a funding currency of choice in the carry trade--that is, you can finance positions by borrowing in Yen and investing in higher-yielding instruments. Above is a graph of EURYEN vs. S&P500 over the past two years; the Yen has strengthened versus the euro recently on the back of Europe's sovereign debt problems, and with it the S&P500 is falling. If the Yen carry trade is unwinding, we should expect weaker equity markets going forward.
It is interesting to note that EURUSD (below) vs. SPX is registering a similar effect--despite its ugliness, USD should be a major beneficiary of any risk events in 2010.
Finally, what of USDYEN (at 89.19 now)? Japan is still suffering from a significant output gap, challenging demographic trends, and self-feeding deflationary expectations. The Bank of Japan seems set to maintain its base borrowing rate at near-zero levels; if so, then the driver of the USDYEN cross should be US rates. If the Fed does not raise rates in 2010, then USDYEN has likely seen its bottom. If it does, then USDYEN at its current level could be a good buy.
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