On the divergence between stocks and the economy. We are up for a bumpy stock ride in the coming months. By Edward Harrison of Credit Writedowns.
Global Macro Monitor had good charts of the jobs report over the Easter weekend. I didn’t report on them because I was away for the weekend. But the first chart’s visual is similar to the one I showed you two weeks ago on job creation. As I said then, the chart looks good for Obama. If the pattern holds, then the chart will be a good one come the general elections in the fall because it will line up better with what people are feeling by that time. I don’t think it will but let’s see what happens. (Full reading here).
Guest Post by Jessie.
As you know eurodollars are US dollars held anywhere overseas by banks as a foreign currency liability or asset.
Eurodollars were formerly tracked by the Federal Reserve and were included in their M3 figures. In fact, the reason that the Fed stopped issuing its M3 is because it stopped tracking eurodollars. The other components remain.
But the Bank for International Settlements, or BIS, continues to track the dispersion and concentration of global currencies in their reporting banks in their quarterly reports. And this is the source I have been using to derive estimates in the magnitude and changes in dollars held overseas.
For more on M3 and eurodollars read here.
Even a casual glance at the data shows that there was a trend change in the growth of eurodollars in the mid 1990′s. This trend is something I have identified as one potential source of a US dollar crisis if the currency begins to fall in value or lose its appeal US in an uncontrolled manner.
Here is the latest on the falling Spanish properties market. From IMIE’s latest March report.
The General IMIE Index recorded the highest year-on-year decrease in the historical series during the month of March, with a drop of 11.5%, leaving the index at 1631 points. Since peaking in December 2007, house prices have seen a fall in value that now stands at a cumulative figure of exactly 28.6%.
|Capitals and Major Cities||1925||1683||-12,6%|
|Balearic and Canary Islands||1576||1423||-9,8%|
With regard to the performance of the different market segments, “Capitals and Major Cities” once again recorded the steepest decline of 12.6% in March, followed on this occasion by the “Other Municipalities” with a fall of 12% compared with the same month last year. In both cases the reduction exceeded the market average.
Guest post by Vix and more.
It was only a week ago that I discussed the performance of 31 VIX and volatility-based exchange-traded products in VIX ETP Returns for Q1 2012and barely a month ago that I examined in some detail the workings of two VIX ETPs, VQT and XVZ, in Dynamic VIX ETPs as Long-Term Hedges. When stocks fall and volatility rises, however, which VIX ETP hedges work the best?
The answer is not so simple, unless you know when volatility will begin to spike, how far it will go and how long it will take to get there. Even then, it would still be helpful to know what happens to the VIX futures term structure along the way. Also, there are liquidity constraints that will probably limit the choices for most investors to a half dozen or fewer alternatives.
That being said, the current selloff can be used to highlight some important heuristics and alternative approaches. The first graphic below, for instance, illustrates the performance since the April 2 close of five representative and relatively liquid VIX ETPs (TVIZ was excluded on the grounds of liquidity; its performance during the period was similar to that of VXX) that can be used as hedges. For the most part, the performance trend is the opposite of what was observed during the first quarter.
The Spanish situation is rapidly getting worse. Rajoy has stepped up the rhetorics and the blame game will enter a new phase. Investors are losing confidence in Spain. Expect the CDS prices to move further, as Spain (and Italy) now receive the full attention from “confused” investors. From Bloomberg.
“Without a doubt, a good part of Spain’s future is at stake,” Rajoy told senators yesterday, as he urged regional governments to contribute to spending cuts. “The problem is that the markets can lend or decide not to lend.”
Rajoy has stepped up his rhetoric in the past week as he seeks to persuade Spaniards to accept spending reductions and tax increases as a less painful alternative to a bailout. His three-month-old government is struggling to convince investors it can reduce the deficit by a third this year and crack down on overspending by regional administrations.
As Spain’s regions suffer from a slump in tax revenue while most are locked out of capital markets, Esperanza Aguirre, the president of the Madrid region, yesterday proposed handing back responsibilities such as health and education to the central government. Aguirre, once a potential rival to Rajoy for the PP leadership, said the move would save 48 billion euros ($63 billion) by avoiding overlap.
Guest post by Doug Short.
We’re well into our sixth month since the latest Federal Reserve intervention, Operation Twist, was officially announced on September 21. We’ve now seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three month before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the bankruptcy of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy). The thud to the FFR bottom coincided with the first of two rounds of quantitative easing in an effort to promote increased lending and liquidity.
If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.
Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s… print too much and we burn like the Weimar Republic Germany in the 1920s… fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell… they appear to warn us that our resolution to avoid one fate may damn us to the other.
Volatility at World’s End symbolizes a new paradigm for pricing risk that emerged after the 2008 financial crash and is related to our collective fear of deflation. The metaphor encapsulates the unyielding sense of dread that the global economy will plunge into the dark abyss and is the source of major changes in volatility markets. Today the existential fear of world’s end deflation is so powerful investors are willing to pay the highest prices for portfolio insurance in nearly two decades. The market for forward volatility has become unhinged as the SPX variance and VIX futures curves sustain historically high premiums over low spot vol. My argument is not that this extreme fear is misplaced but that it is mispriced. Like Odysseus in the epic poem the global economy is trapped between the monsters of Scylla and Charybdis. We risk one to avoid the other. From one world’s end to the next sometimes I wonder if decades from now we will look back with the hindsight that we were all hedging the wrong tail.