Many leading indicators are pointing lower. Further on the subject of leading indicators, the mighty QE and the overvalued markets. By Hussman Funds.
In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators (see Leading Indicators and the Risk of a Blindside Recession) as well as more statistical signal processing methods that extract “unobserved components” from noisy data (see the note on extracting economic signals in Do I Feel Lucky?). As Lakshman Achuthan at the ECRIhas noted on the basis of different but related evidence, the verdict has been in for a while. The interim has been little more than waiting for the coincident data to catch up to the leading evidence that is already in place.
This wait is by no means over. As Achuthan has observed, economic data such as GDP and employment data are heavily revised over time. Very often, the first real-time negative GDP print occurs about two quarters after the recession actually begins. It is only later that the data are revised to show an earlier downturn. For that reason, it’s important to pay attention to the joint action of numerous economic data points, rather than selecting any specific indicator as an “acid test.” The joint evidence suggests that the U.S. economy has entered a recession that will later be marked as having started here and now.
The following chart shows the most leading economic component (blue) that we infer from a broad composite of economic indicators. This component has a lead of several months, relative to broadly observed economic data. Importantly, even the observable data has now predictably turned down, as evidenced for example by the “surprising” weakness in the Philly Fed data last week. We expect further weakening in employment data, coupled with an abrupt dropoff in industrial production and new orders.
Mutualising sovereign bonds is equivalent to forming a linear combination of the underlying bonds, i.e. a portfolio of them. Hence the risk associated to the portfolio is a function of the risks of the constituents and their correlations.
- In tranquil periods these risks have a linear nature,
- In periods of turmoil non-linearities appear, namely due to extreme events, that induce non-linear -or tail- risks.
Figure 1 shows the quarterly cross-sectional average correlations (from 2005Q1 to 2012Q2) for the Sovereign bond yields of all the Eurozone countries (solid blue), the core countries (dotted red), the peripheral countries (doted and dashed green), and the peripheral countries but Greece (dashed purple).
Prior to the crisis correlations were very close to unity, reflecting the almost perfect co-movements among the yields. Since the beginning of the crisis the correlations have sharply decreased for all countries and groups of countries. From a risk perspective, the creation of the Eurobonds may be seen as appropriate since the benefits (creditworthiness, resilience, stability, and liquidity) offset the slight increase of risk associated to the small correlations.
“This threatens to turn the June (28) summit into a fiasco which may well prove fatal because it will leave the rest of the euro zone without a strong enough firewall to protect it against the possibility of a Greek exit,” Soros wrote.
“Even if a fatal accident can be avoided, the division between creditor and debtor countries will be reinforced and the “periphery” countries will have no chance to regain competitiveness because the playing field is tilted against them.” (CNBC)
Guest post by Azizonomics.
These gargantuan global conferences where the emissaries of governments meet in hallowed halls to thrash out a global planning agenda — dressed in the clothes of ecology, or sustainable development, or whatever the buzzword of the day — are a waste of time.
They are a waste of time for the taxpayer, who has to stump up to pay for such efforts. They are a waste of time for the protestors who swarm to such events holding placards and shouting slogans. They are a waste of time for the ecologists who — whether right or wrong — believe that the present shape of human civilisation is unsustainable. Possibly the only group that really benefits are the self-perpetuating bureaucratic classes, who often take home huge salaries they could never earn in the private sector.
And the Malthusian targets of the bureaucracy have a history of missing.
The Guardian notes:
Rio+20 was intended as a follow up on the 1992 Earth Summit, which put in place landmark conventions on climate change and biodiversity, as well as commitments on poverty eradication and social justice. Since then, however, global emissions have risen by 48%, 300m hectares of forest have been cleared and the population has increased by 1.6bn people. Despite a reduction in poverty, one in six people are malnourished.
If these bureaucratic classes knew the first thing about economics or markets, they would begin to question whether such conferences — and all the promises, intergovernmental commissions, and regulatory pledges they spawn — are necessary. The more I question, the more I come to believe that all that is needed to halt any man-made ecological crises are free markets and free speech.
Must watch video by Bill Moyers below.
The disappearance of knowledge from human consciousness is a rare phenomenon, but there are recorded instances of knowledge which has evaporated. As a curious example, Pancirollus, writing in the 16th Century mentions that, among many other cases of lost technology, in the time of the Roman Empire a man who had invented flexible glass was presented to Emperor Tiberius. Tiberius condemned the poor man to death and ordered the destruction of all his products, considering that such an invention was detrimental to society.
A striking case of general human amnesia is that of Aristarchus of Samos (born 310 B.C.) who was the first man to declare that the Sun is the center of the solar system, and that the Earth and all the other planets revolve around the Sun; he also arranged the Earth and planets in the correct order of their distance from the Sun. This knowledge was fairly soon forgotten and only rediscovered by Copernicus – 1800 years later!
A couple of points on recovery values, via Voxeu.
‘Recovery value’ is a crude means used by some investors when evaluating sovereign default risk.
Guest post by Vix and more.
The last four days have seen a dramatic decline in all things related to the VIX. The cash/spot VIX is down 26% from last Wednesday’s close as I write this and the VIX futures have followed the VIX down to varying degrees. The graphic below shows the changes in all the VIX contracts during the last four days – a period during which the entire VIX futures term structure has fallen sharply.
As is usually the case, the decline in the front month (June) contract is the sharpest of the group and has actually exceeded the decline in the cash/spot VIX during the same period. With the June contract set to expire at the open of trading tomorrow, it is not surprising that the contract have been as volatile as the VIX index in the last few days. Note that at the other end of the term structure, the back month (February 2013) VIX futures contracts have fallen only 6.8%, about ¼ of the decline seen in the front month futures. Given where we are in the current expiration cycle (right at the very end), the changes in the other months relative to the front month VIX futures are in line with historical norms.