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European Equity and Bond Correlation Indicates Growth Fears Highest In 40 Years
In a brief note this morning from Goldman, the correlation between European equities and bond yields is noted at a 40-year high - above the levels reached in the initial credit crunch period of '07/'08. They find that the rolling correlation is highly dependent on the absolute level of bond yields and at current levels is very indicative of significant growth concerns (much more so than any inflation fears) and furthermore that the relationship is starting to look a lot like the lost twin-decades in Japan.
From Goldman's Strategy Espresso: Bond-equity correlation at a 40-year extreme
The way European equities have performed recently suggests investors are more fearful about growth – and less worried about inflation – than at any time in the last 40 years. The chart below shows the rolling correlation between European equities and bond yields; the current correlation at +67% is at a 40-year high.
It’s not dissimilar to the levels reached in the initial credit crunch period of ‘07/’08. A high positive correlation means that rising bond yields are seen as a good thing for equities whereas falling yields are seen as bad as they imply deteriorating nominal growth and growing chances of deflation.
We’ve shown before that the relationship between bonds and equities is a dynamic one and depends not just on the direction of bond yields but on the level. The scatter plot shows that when yields are above 4-5%, correlations between equities and bond yields tend to be negative; equities underperform when yields rise as this is a signal of inflationary problems and it raises the discount rate for equities. But this relationship flips the other way when bond yields fall below the 4-5% threshold; at these levels, rising bond yields are a good thing as this signals growth and moves you further away from the nasty outcomes deflation can involve. Indeed the correlation between bond yields and equities has been high and positive in Japan since the mid 1990s, and reached the same levels we see in Europe today on a temporary basis on several occasions. In Europe, the current point on the scatter plot below is at the extreme top left; we see little chance that it will move away from this point in the short term while concerns about growth risks dominate.
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Huh....well I conclude from the above data its about time to tack on another 10% to equities in the next few days!
Until that leverage decay framework they've set up eats the attempt to honestly make productivity happen.
Aww who cares, the DOW is up, time to Par-ta
Long DAX short S&P
Long DAX Long S&P. Don't let the "Sky is falling crowd" determine investing strategy.
All the markets are undervalued right now.
The markets are undervalued? By what rational? Because "safe" yields are negligible which therefore makes equities attractive?
Idiotic. Safe yields are negligible precisely because the RISK/REWARD dynamic of the equity markets is so unbelievably UNATTRACTIVE. Without QE funny money out there, the DOW completely runs out of steam at 11,500. Potential upside from here--less than 3%. Potential downside....?
Every market but ours already firmly in bear territory, corporate profits at all time highs while growth and forward looking growth estimates are crashing, PIIGS completely insolvent with no relief in sight other than the whispers of a rumor of a plan that involves using 9 to 1 leverage to put Germany on the hook for the debts of all of Southern Europe (good luck getting Germany's consent on that one), China quietly crashing and doing its best to hide a housing bubble virtually identical to our sub prime debacle, dysfunctional governments and central banks destroying free market mechanics.....
SERIOUSLY, EXPLAIN TO ME HOW THESE MARKETS ARE UNDERVALUED? BY WHAT METRIC DOES A MARKET SUSTAINED BY A GLOBAL ECONOMY THAT IS RIGHT ON THE PRECIPICE OF TOTAL SYSTEMIC FAILURE CONSTITUTE A PRUDENT INVESTMENT? I'm not being sarcastic. I really dont see your point of view at all and I wish I better understood what the reasoning is behind wantonly throwing money into a black maw that reapeatedly chews it up and spits nothing but confetti. It makes me feel like, yup, I'm taking crazy pills.
keep the fear coming, we are buying scrap platinum @ bargain prices.
http://expose2.wordpress.com
DAX +5% intraday, Deutsche Bank +12%
This is hilarious. Thank God I'm flat.
When does this show end?
When we're dead.
When our children's great great (X infinity) grandchildren are dead
'When does this show end?'
May not be far off at all, Hal Lindsay about 8 months ago said 'Watch out when you see markets moving 5% swings daily along with wild PM swings of around 50% within days, then you'll know the big one the endgame is only weeks away'.
I dont know what people think of Hal Lindsay, but his warnings then are certainly close to whats happening today, although laughed at back then people said no way would silver or gold swing 10% daily or take a 50% nosedive.
BTW he also said when we see these wild market swings happening, the next shoe to drop is a big war outbreak in the mid east and oil will shoot up to $150 overnite.
(Newsreader)..."midst the noisome distraction of NY city-wide protests, violence and indiscriminate looting, the Dow Jones eked out modest 6.5% gains today. The index received a boost early on, after an early morning explosion in downtown LA. Airline stocks, which immediately soared on the back of the conflagration, eased back a little after Al Queda denied involvement. However this disappointment was offset by a Haliburton ex- CEO's ruminations as to the likelihood of Iraqi weapons of mass destruction being involved. The last 30 minutes saw serious gains in the index as Wall St anticipated a post 18th green 'debt ceiling increase' address from the President. Scheduled for 4.15 pm EST, this is subject to change since said green has a bitch of a sandtrap and the Commander-in-Chief's wedge game is not all that. Regardless, hopes are high that the 300 trillion spending increase will pass congressional muster and Capitol Hill will again "pass this Bill". Back to you Jenny ...
(newsreader)...what's that Jenny?...what grassy knoll?
On a serious note, the whole drop last week was accumulated by Wall St (who knew the FOMC outcome before the announcement)...they will now continue to march this thing back to above 1220 (S&P). Then a period of distribution (mainly to momo's and squaring shorts) before another mini-crash is engineered. Of course Europe remains a wild card but the bought politicians will tow the line for another week or so to facilitate the aforementioned described plan
Equity vs. bond yield correlation -- very interesting chart; thanks!
Us sewer in NY up 500 points in two days! lol!!
Here are my growth related thoughts :
Consider where we have been on the Hubbert Curve (see curve at http://www.drmillslmu.com/peakoil.htm) for the last 50 years. During that period, there was growth in oil production and a reasonable expectation of continued stable growth for decades to come. Hence it made good business sense for banks to make 30 year loans on housing during that period (especially in the 1950 to 1990 time frame), as there was little risk that a typical loan would default. These 30 year housing loans were very solid investments for decades. However, as we neared peak oil (and surpassed the peak and got onto the downslope of the curve), housing investments and 30 year loans started getting riskier. The implications of where oil production will be in the next 30 years started to get factored into the world economic situation due to higher oil prices. Those higher oil prices caused higher prices for basic necessities and all downstream goods. A combination of higher actual prices for goods and services and a higher awareness of forward looking risks to the economy in the coming decades started triggering growing worldwide unemployment. It may very well be that the rise in oil prices to $147 a barrel triggered higher unemployment and that helped to trigger the subprime and other housing crises, which are now helping to trigger and expose the macro crises of PIIGS, Egypt, Libya, Tunisia, etc, and the food crises too. The banking powers (FED, IMF, ECB, China, etc) have tried with difficulty to address the debt burdens and debt related links to the world economy to preserve the status quo. But structural changes associated with several flavors of resource depletions (for which there are no easy substitutions available) will force changes to the status quo. These changes are first shunted by the government and corporate interests onto the general population with austerity measures and higher government debt levels. As a result there will be higher unemployment and less government services available as we are currently seeing in not only PIIGS, but in China and America too if one has been paying attention to local and regional economic affects.
Looking forward to the coming years, what are the reasonable expectations for housing and all other aspects of the world economy if oil production does decrease as projected by the Hubbert Curve? Is the banking business model of providing 30 year home loans at risk? It would seem so. I have seen reasonable projections that expect oil production to decrease by anywhere from 2 to 5 percent year after year after year (again see http://www.drmillslmu.com/peakoil.htm and scroll down some). Do 30 year home loans (or any long term loans of any type) make good business sense under a 2 percent decrease (year after year after year) in oil production which is the worlds most critical natural resource? Would they make good business sense under a 5 percent decrease (year after year after year)? I think the banks are finally starting to "get it" and so are other smart investors too, and long term credit is tightening as a result.
As an engineer, I like to deal with equations, and it would seem to me that there are some fundamental relationships at work here. When considering the world economy as a whole, the economic relationship of certain aspects of the economy to the production of oil might be quantified by a few approximate linear equations.
I think that credible arguments could be made that the linear equations below are approximately correct and applicable. The equations imply that for any given amount of Oil (X) produced in a given year that there would be corresponding amounts of various outputs (Y) that can be economically supported as a result. From an engineering mindset, it may be more correct to rephrase this to say that "For any given amount of Oil (X) produced in a given year that there would be corresponding amounts of various outputs (Y) that can be ENERGETICALLY supported as a result.
X amount of Oil for the year = Y amount of Total Jobs for the year
X amount of Oil for the year = Y amount of Middle Class Jobs for the year
X amount of Oil for the year = Y amount of Food Produced for the year
X amount of Oil for the year = Y amount of GDP for the year
These relationships could be approximately extrapolated to other things too such as
X amount of Oil for the year = Y amount of New Clothing for the year
X amount of Oil for the year = Y amount of New Shelter for the year
Please note that money is not a part of these equations. Money is essentially a derivative that has value only due to it's acceptance as collateral for future product or services. With decreasing energy, the value of money can be expected to decrease as well, as there will be less products available. Indeed, the printing of money to support the debt burdens would tend to quicken the decrease in value of money, as when there is more money in the system and less products available, the price of the products would tend to increase.
So, if oil production does decrease by 2 % per year, do you think that might cause a decrease by 2 % per year in Total Jobs, Middle Class Jobs, Food Produced, GDP, New Clothing, and New Shelter? How would that tend to ripple through an economy? Wouldn't it in fact look a lot like Austerity measures? The evidence of wide spread high unemployment in many countries and economies does suggest that we might be there now. If there was enough energy and resources available to give the people jobs who are currently unemployed and demonstrating in the streets in many places in the world, don't you think that the powers that be would be putting those people to work so that their actions are constructive and stabilizing (and even generating profits for corporations!) instead of letting them be unemployed, protesting, and destabilizing the status quo in places? Money would not seem to be the issue as the Central Banks are creating money in vast quantities right out of thin air with their quantitative easing approach in their attempt to keep sovereign debt loading and banks stable.
On a lay man level, consider that for each typical production job in the world, something is made that must be sent somewhere else. It takes energy to ship that product somewhere, and the energy we use mostly today to do that is oil energy. If oil production is reducing by 2 % per year, wouldn't it be reasonable to expect that jobs will decrease by around 2 % a year, and hence unemployment may increase by near 2 % per year?
The militaries of the world are finally waking up to the systemic nature of the economic crises that are currently being experienced. Several credible military organizations have recently written reports documenting how there may be a need to react to civil unrest in other countries as well as their own in the near years due to oil production decreasing worldwide. Here is a link to various military reports. I would expect that the more recent reports are finally "getting it" and most credible. http://www.energybulletin.net/stories/2010-09-28/energy-security-annotated-militarysecurity-bibliography-2010-update
The economy is closely linked with the physical resources that underly it. Looking at the economic system as an engineer would, the resources are inputs to the system, and the outputs are jobs, food, services, finished goods, and a growing population. If one increases the inputs (as was done in general in the years from lets say 1900 to 2000) then one can expect an increase in the outputs and that is exactly what happened in general throughout those years. However, if one decreases the resource inputs, then it would reasonably be expected that there would be a decrease in the outputs. The governments and monetary powers that be can try to recognize this and make tradeoffs and sacrifices to preserve certain aspects of the status quo.
The problem is that humans have tended to be very short sighted and self concerned, possibly in part due to most individuals being unaware of the predicament that we would eventually face collectively on the city, county, state, nation, and world levels. It is only relatively recently that a good understanding of how the economic system truly works has come to light and only a small percentage of the people understand this. Most people are still in the dark on many of the issues, and there is an inertia in the economic system to preserve the status quo. However, it is late in the game and a decrease in the outputs such as with austerity will not be readily welcomed in Greece or elsewhere. Since we have now gotten to the point where serious structural resource issues are rippling through and affecting economies at every level, one would then expect some serious economic and social restructuring to be an output of this process. On almost every level, people will have to try to do more with less.
Let's hope that wisdom and compassion are used to guide most people in how they confront their individual situations. In many ways, a simpler life can be comfortable and maybe even happier in ways.
Please consider that an attempt to convert over to manual labor to replace the loss of oil energy would still result in less of everything even though in theory there would be full employment. At approximately 23,000 man hours of equivalent work being producible from one barrel of oil, just the loss of roughly one percent of world oil production (roughly 900,000 barrels per day) would result in a loss of (900,000 x 23,000) around 20 billion man hours of equivalent work per day. With an 8 hour work day, it would take around 2.5 billion people to do an equivalent amount of work just to make up for a one percent decrease in oil production. If production decreases by 2 percent a year, then in just 2 or 3 years, the amount of work potential missing from the decrease in oil production would overtake the work potentially gained if everyone alive today (including the the old and young) were able to contribute an extra 8 hours of day of labor. It is interesting to note that even if employment levels were to increase to approach full world wide employment, there could still be less food, less new clothing, less new shelter, and less real GDP if oil can not continue to do the heavy lifting for us as it has in prior decades with all the extra man hours of equivalent work that it has been providing for us.
The farther we go on the downslope of the Hubbert Curve the more obvious the effects will be. In general what we are experiencing now is a situation where the energy that was expected to be there for growth is not available to us and hence there is high youth unemployment and in general high unemployment in most places. And after some time the energy that was expected to be there for sustaining operations and for repair and maintenance of infrastructure will no longer be available either. As oil production is decreasing, the system will have to figure out ways to keep operating in a degraded mode, always trying to find ways to do more with less. Hopefully, we will not slide all the way back to a mostly agrarian society which was the relatively stable and sustaining business as usual model for thousands of years. The pace of life will slow, and the world will become a much larger place again. But our knowledge of math and science should preserve some things for us. In the long run, maybe we will all end up in a more advanced version of the Swiss Family Robinsons.
I do think that it is very possible that most economies will be transitioning at some point in the future to some flavor of what is called a "command economy". When the current business models no longer work, governments and militaries will likely try to adjust to keep stability and there are aspects of a command economy that do provide more stability in ways. I would think that places like Egypt, Greece, and a few other countries are getting close to the need for command economies. Here is a definition of command economy. http://www.investorwords.com/951/command_economy.html
Many economists seem to be differing on whether the economic system will head towards inflation or deflation. My insight reasons that both inflation and deflation will be occurring but they will happen in differing areas of the economy. Assets that require longer term loans to purchase where there is a forward looking expectation that the debts incurred in today's transactions will be able to be repaid in future years will suffer deflation and falling prices and asset valuations. The reasoning for this is as follows : The Hubbert Curve strongly implies that future real economic activity will be decreasing since there will be less energy available in each successive year, so less will get done in each successive year, which implies that there will be less jobs in each successive year. With less jobs available, and more unemployed people competing for any job openings that do become available, the wages for jobs will be dropping too, as there will be more competition between the unemployed to get any given job. Employers will be able to do price discovery for wages where supply and demand work somewhat in reverse (but not counterintuitively). With a high demand for jobs, and a small supply of jobs, the price (or wage) of jobs goes down! So, with less jobs in the system, and a tendency for there to be less wages paid for existing jobs, we can expect the funds that will be available in future years to repay long term credit to be decreasing. This is a fundamental change for the long term credit business model used in prior years. Prior to peak oil/debt/GDP/etc, the trends and expectations were that there would be more funds available in future years, and 7 yr. loans for CRE, and 15 and 30 yr. loans for housing made good business sense. Now that we are post peak the long term credit business model is structurally challenged with higher risks of defaults due to an expectation of less wages being available to repay loans.
Inflation can be expected in the price of real/hard assets and commodities that don't require long term credit, especially where basic necessities (BN) are concerned. Discretionary spending will obviously decrease, but BN purchases will be made first. With money printing increasing the funds available, more money will be competing for BN and for real assets where there is immediate value and need. And the Hubbert Curve implies that there will eventually be less supply of BN and real/hard assets, so supply and demand will tend to drive prices up in these areas and cause inflation in them.
One might consider that even if there is a level plateau on the Hubbert Curve that population is still trying to increase and as a result the competition for BN and real/hard assets (for which production has now leveled) increases and that could drive prices up too.
Let's consider the affect that austerity measures and weak economies have had in Egypt, Greece, and Libya in recent years, and what the Hubbert Curve implies about the future. People have gotten out into the streets seeking change, and some change has occurred but it was difficult to obtain. In Egypt and Greece the change was mostly non-violent. A show of force and collective action by the poor and economically disadvantaged has resulted in changes in the leadership for Egypt and for public and world awareness of the push back to austerity in the Greece case. In Libya violence and disruption resulted.
For the people seeking change, typically they want more of everything, they want stronger economies, and they want jobs. Most of the people in those countries only see the deceptive causality of money, as more money typically means more goods and services. The poor and middle class might think that by leveling the playing field between rich and poor, that things will improve. But the Hubbert Curve implies that there will be by definition less goods and services available. Hence, the change that the people in those countries are looking for will be very hard to get. Even in leveling the playing field, with the Hubbert Curve forcing a decrease in goods and services, the people in the streets might not get the change that they seek. They may be better off than they would have been under other conditions, but they may not even recognize that relativity and so they will keep seeking more change. Indeed, I just saw news articles that the people of Egypt are back in the streets as many aren't happy in the changes that have been made so far. But at least Egypt and Greece hasn't been losing infrastructure, as is the case in Libya with the violence and destruction.
As austerity measures kick in around the world, the importance of preserving the infrastructure is paramount. With less energy available, and less goods and services available to do maintenance and repair, losing infrastructure will only exacerbate weak economies.
Many sources posit the timeline for events to be in the "coming decades", and the media likes to project various trends in the 2030 or 2050 timeframes. But if we are past peak, we could already be on a decline rate of 2% year over year. Consider that when we get out onto the part of the Hubbert Curve where the decline in oil production might be at a rate of 2 to 5 percent a year, I think most people don't realize how quickly that becomes troublesome. If there is a corresponding drop in employment and wages of the same percentages, then in 5 short years we could be adding between 10 and 25 percent more unemployment worldwide. What would the countries of America, China, Greece, Egypt, Spain, etc. look like with even just a 10 percent increase in unemployment from the already high unemployment levels everybody already has? It will quickly be impossible to pay back the debts on the book now with decreasing wages underfunding every level (city, county, state, national, international) of funding available to make debt paybacks.
The media and TPTB do make it hard for the general public to assess exactly where we are at. The fact that military studies are signaling possible near term affects in the 2012 to 2015 timeframe that they may have to respond to suggests that they have better information than most, and their outlook is pessimistic. Systemic factors like the struggle in Libya can quickly take 1 to 2 percent of production offline unexpectedly and this could cause a steeper downslope in oil production than even natural depletion.
The economic discussion in the media and various blogs and such often makes reference to "slowing growth" or "soft patches" as either a symptom or part of the problem in national and world economics. But the Hubbert like Curves for oil and other resources will be structurally enforcing contraction (and not growth), year after year after year. "Slowing growth" is a phrase that we try to fool ourselves collectively with to keep hope. Many can't mentally or emotionally handle the type of change to be expected when a comprehensive forward looking economic analysis and risk assessment is done under the constraints of the declining inputs. There may have been some benefit from spin using that deceptive phrasing. In ways for some, it is better to be hopeful than worried and concerned. Fooling ourselves collectively in some ways worked as the various economic crises were not anticipated by the general public and the status quo was mostly preserved for years. Stability is a good thing from most points of view. Only now, when the contraction and austerity affects are being forced by the declining inputs and affecting significant percentages of the world population it cannot be ignored any longer by the masses. Serious changes to the status quo are looming and possible in many places. However, change is dangerous, just like a box of chocolates. "You never know what you are going to get" as Forrest would say.
That's my humble take on things. Thanks for reading.
you lost me at peakoil.htm
It is NOT! Peak Oil!! there is a LOT! of Oil ALL AROUND THE WORLD!!
what we have hit "IS" Peak Affordable Oil.
You can have all the $300 dollar a barrel oil you want..
What you can NOT have is $60 dollar a barrel Lite Sweet Crude.
http://www.youtube.com/watch?v=wYuLjGQQ-jg <---- watch this...
and when you say that our oil is cheaper in America that in Europe or other places in the world and that is proof of the idea being wrong..
http://english.aljazeera.net/news/middleeast/2010/10/20101020173353178622.html
now if you are not smart enough to put 2 + 2 together..
the exit back to Huffington Post and fox news is up at the top right corner of your web page.
wake up or get out.
http://www.youtube.com/watch?v=wYuLjGQQ-jg <--- short version
this was posted here a long time ago.. but it should help you shorten the arguement that you are making so that the readers digest mentalities will be able to stomach the truth in a shorter version.
keep spreading the truth!
every lil bit helps.. or every long winded attempt helps.
http://www.youtube.com/watch?v=CUD4tvTImxU <---- Long version.