Thursday, October 27, 2011

Making some progress in Europe

I'm traveling today so blogging will be brief and delayed.

First thoughts: the news from Europe is good, but the crisis is far from over. It's good that Greek debt will be written down, but the haircut still seems timid, and we still need to see some austerity measures. But at least something is being done to address the problem, and that means the likelihood of catastrophe has diminished greatly. That is the key point: what we are seeing is much better than the market had been priced for.


This chart of the ratio of the Vix Index to the 10-yr Treasury says it all. The outlook is now much better than it was just a few days ago. Stocks are up big, yields are up big, and the Vix is down big. The future is far from rosy, but it now looks like a catastrophic global meltdown is no longer very likely.

10 comments:

Benjamin said...

I wonder if there is a positive out there. After Argentina defaulted, it enjoyed excellent GDP grwoth.

Greece is hampered by its attachment to the euro (it cannot get a lower exchange rate)----nevertheless, could we see growth in Greece after a partial default?

Benjamin said...

Huzzah, huzzah: Dow over 12k.

William said...

As predicted by Scott Grannis (and me ;~) ), the 10 years US Treasury Bond is taking a shellacking once the European "panic" factor has lessened. From an all time low yield of about 1.7% a month ago, the yield has risen to 2.39%.

Personally, I think that the bond vigilantes will soon be free to pummel US Treasuries - especially if the special committee doesn't come up with a decent debt reduction plan. I would much rather own dividend paying equities with a weighting toward internationals of about 60%. That's my bet!

John said...

William...I predict it will be a good one.

qwe said...

Part of rally is due to a GS research on a FED GDP targeted policy proposal as a new mandate, they estimate QE3 of 1 trn USD to close the output gap.
So story is simple, buy commodities/mining sell save heaven.

http://ineteconomics.org/blog/money-view/NGDP-target-practice

Benjamin said...

QWE--That is called Market Monetarism, or nominal GDP targeting.

If the Fed chooses this path, we could have a sustained rally for years and years.

Real estate and equities will blow through the roof.

But the Fed may also chose the Japan route. In which case you want out of equities and property and even bonds, and into stocks that pay increasing dividends or real small businesses, like taking a stake in a bar or something.

William said...

Thank you, John. I value your opinion. I hope that we are correct.

Scott Grannis said...

William: while I agree that the bond vigilantes are in the ascendancy, I disagree that a lack of budget discipline would be bad for bonds. If the special committee fails to enforce some meaningful fiscal discipline (primarily on the spending side), then I think the bond market will once again decide that U.S. growth is going to be miserable, smothered by too much spending, and that will lead to lower interest rates. Bond yield are going to rise only if the outlook for the economy improves, and fiscal restraint is an essential part of that, in my opinion.

William said...

That's an interesting take, Scott, and counter-intuitive for me. I would have thought that the bond vigilantes would treat the US debt similarly to Italian debt because we are accumulating additional debt at a rate of $1.3 Trillion each year.

Wouldn't supply overwhelm demand at some point? Plus there is the inflation factor making real bond returns negative.

Scott Grannis said...

William: Japan is the proof that yields can remain very low even as debt/GDP ratios soar. One key difference between US/Japan and Greece explains it: the US and Japan have their own currency, but Greece does not. Greece therefore has default risk which the US and Japan do not.