What if interest rates would revert to mean?
We have to agree with some of the emails we have received from our readers lately. Yes, the Eurozone is in a great mess, but countries like Portugal, Greece, Ireland are not of great importance to the World Economy. Investors have been focusing on the Euromezz, and seldom do we hear about the US debt nowadays. Let’s not forget, the US has now joined the 100% club, and counting. With interest rates at record lows, it is easy to forget about what would happens if interest rates start going up to a “normal” average. We doubt this time is different, and rates will stay low for ever….
Below are some charts from last year, still worth recalling.
End of “good” times?
Germany, the main driver of the European Economy could face hard times ahead. If we look beyond the Santa rally, things are boling under the surface. Spiegel reports;
It seemed like hardly a week went by in the latter half of 2011 without a counterintuitive story about how well the German economy was doing despite the euro crisis raging around it. Growth continued, private consumption was up and exports were strong.
2012 has started with another eyebrow raiser. On average in 2011, 41.04 million people in Germany were employed, the most ever since the country’s reunification in 1990. It was an increase of 1.3 percent over 2010.
That, though, might be the end of the good news for a while. It would appear that most in the country, led by Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble, believe that 2012 will be the year when Germany finally begins to feel the effects of the euro-zone crisis which chewed its way through much of the 17-member currency union in 2011.
Volatility Outlook 2012
Many pundits talk about volatility, Vix, fear etc without even having the slightest idea of what volatility is. Others explain complex matters in a complex way, so “ordinary” people don’t understand what these quants actually talk about. One of the brightest minds when it comes to volatility and good reports on volatility, is Marko Kolanovic of JPM. Below some thoughts on volatility for 2012, courtesy Mr Kalonovic.
In 2011 we witnessed two distinct market regimes: very low volatility in H1, and extreme correlation, poor liquidity and high volatility in H2. Escalation of European sovereign credit crisis in August caught investors by surprise, triggering a series of large risk on/off flows. The record drop in equity liquidity and the rise of cross-asset correlations effectively shut off equity markets for fundamental stock investors. In addition, derivative hedging flows at times overwhelmed liquidity, further adding to market volatility and correlation.
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