Thursday, August 16, 2012

Reminder: the world is not coming to an end

These charts serve as a reminder that no matter how much angst there is out there about an imminent U.S. recession, a Eurozone collapse, or a China implosion, key financial indicators currently are trading at relatively benign levels, even as valuations (e.g. PE ratios) remain depressed. Swap spreads in the U.S. are about as low as they get, suggesting that systemic risk is also very low and the outlook for the economy is for things to improve. Eurozone swap spreads are still somewhat elevated, but they have been moving down all year long, and that also suggests that things are more likely to improve in Europe than deteriorate. The implied volatility of equity options is very close to a multi-year low, suggesting that although investors believe that corporate profits will decline (as evidenced by relatively low PE ratios), they are reasonably comfortable that nothing serious is going to happen.

In short, even though the future doesn't look bright (yet), it's very unlikely that the world we know it is about to end.


The Commodity Guy said...

I love your charts. When did you explain what "swap spreads" are? I want to know.
Also, do you have any charts about the China/EM situation? That is something that I think one can be realistically worried about.

McKibbinUSA said...

Now is the time to buy -- periods of maximum pessimism are buying opportunities -- Scott's charts depict an environment of global economic terror (!) -- get your equity bargains now while you still can -- as far as I am concerned, a Euro collapse would be the best thing for buyers -- a California collapse would be the next best thing for buyers -- and right now, I am a buyer!

brodero said...

Excellent again...

Scott Grannis said...

A short "swap spread primer" can be found here:

The Commodity Guy said...

Thanks a lot. Now, what about the "euro basis swap?"

Scott Grannis said...

Euro basis swaps reflect the difficulty or lack thereof that Eurozone banks have in obtaining short-term dollar liquidity. The decline in this series reflects a relative improvement in dollar liquidity in the Eurozone financial markets: more abundant dollars available, less onerous terms to borrow those dollars, less capital flight out of the Eurozone.

Benjamin Cole said...

With the ECB, Bank of Japan and Fed all tight on the money supply, how can anyone expect boom times?

And worse, some are calling for the Fed to have but a single mandate, that of fighting inflation.

How did that work out in Japan? Or Europe?

Investors may wish to seek options in the Far East or SE Asia. The USA may be in its twilight, or a twilight long enough to force investors look elsewhere.

By circumstance (not planning) land I bought 10 years ago in Thailand (through marriage) has tripled in value. Medium-sized towns in Thailand, in pleasant areas, are booming. Where 10 years ago people drove motorcycles, now pick-up trucks cram the roads. Where people lived in huts, they now build cinder-block houses. There is money to be made in SE Asia. A Tesco (Wal-Mart type retailer) opened up in Pak Chong (a town near me) and you cannot get your car into the parking lot on weekends.

I fear for the USA. Tight money, runaway agency spending, a vast rural welfare state, uncontrolled entitlement programs, permanent deficits---it could end up worse than Japan (they have a stronger culture than we do).

The Fed is the key. They must get serious about regime certainty and supporting growth. The structural impediments can be beat. But asphyxiation by tight money cannot, as we know from Japan.

William said...

Joe Granville

Probably most of you are too young to remember Joe Granville, of technical analysis and market letter fame. He was so respected in the 1970s that he appeared on PBS' Wall Street Week with the witty Lou Rukeyser from time to time and was very entertaining.

Granville spoke of the stock market as though it were anthropomorphic, and probably still does since he was named "2011 Timer of the Year".

He would say things like:

"In a bull market, the Market wants to shake investors out of positions and carry as few investors to the top as possible. The Market will throw scary corrections at investors, whatever it takes to drive them out of their positions."

"In a bear market, its just the opposite. The Market wants to carry as many investors down with it as it can. There will be one encouraging false rally after the other. There will be premature forecasts that the bottom has been reached. Anything to get investors to climb aboard the Bear."

Looking back over the past twelve years, it seems to be true.

Unknown said...

"Reminder: the world is not coming to an end"

I agree, and always, an excellent blog and charts. Now, can you please change your picture masthead back to a sunny Calafia beach day?

Scott Grannis said...

Re sunny day: Good idea, but premature--the prospect of another Obama win is still a dark cloud on the horizon.

Squire said...

I remember Joseph Granville with fondness. Marty Zweig too. Both are still at it. Bob Brinker is still at it too.

I make nothing out of the range of the S&P today being only 4 points. It is a Friday in August and the weather is great. I do note that the close was 1418, only 1 point shy of the recovery high close of April 2. The high for that day was 1422. The high for today didn’t reach 1419.

A lot of market pundits are saying the volume has been low for a couple of weeks. It is true but not that low. Besides, I have seen many a rally start out on low volume. Monday starts off with the Chicago Fed National Activity Index. It could be a dud and we retrace before mounting another assault and I will be up watching the futures when the report comes out.

I helped my company set up a company in Bangkok in 2006 & 2007 before I retired. Contrary to what Obama people said and say, they actually like Americans. Benjamin is so right in that money is to be made in SE Asia.

William said...


Weekly 08/15/2012

Equity Fund Outflows -$6.3 Bil;
Taxable Bond Fund Inflows $3 Bil
xETFs Equity Fund Outflows -$1.8 Bil;
Taxable Bond Fund Inflows $2.9 Bil

Monthly for June

Equity Fund Outflows -$870 Mil;
Taxable Bond Fund Inflows $16.1 Bil
xETFs - Equity Fund Outflows -$4 Bil;
Taxable Bond Fund Inflows $11.4 Bil

Quarterly Q2

Equity Fund Outflows -$11.5 Bil;
Taxable Bond Fund Inflows $55.4 Bil
xETFs Equity Fund Outflows -$3.7 Bil;
Taxable Bond Fund Inflows $40.6 Bil

Benjamin Cole said...

Clouds and Romney and Scott Grannis:


I voted for Bush jr. (the first time).

After eight years of GOP domination in DC (2000-2008) our financial system had collapsed; our economy was contracting at a 10 percent annual rate; we were in not one but two fantastically expensive and seemingly interminable wars; the largest federal and socialist renewable energy program had exploded in size (ethanol); and we had run eight straight years of federal deficits, getting larger. It was a debacle.

Can someone tell me in what policies Romney will differ form Bush jr.? Since their policies are identical, should we expect different results? Why?

I may vote for Ron Paul, though I find his gold nuttiness a put off.

I see no upside in Romney, although I note his economic advisers are mum on monetary policy. That may be good news. They may be planning a more growth-oriented policy than the one we have now. I sure hope so.

Scott Grannis said...

Don't overlook the fact that Paul Ryan is a member in good standing of the Tea Party, and the Tea Party has risen to prominence on a wave of disgust over the big-government policies of Bush II. If anyone in Washington can shrink government, it is Paul Ryan. He will be the policymaker of the team, while Romney will be the executor. I think they have a good chance of being successful.

Benjamin Cole said...


From your lips to G-d's ears, as they used to say in Brooklyn.

I have watched the GOP for 50 years talk about balancing the budget and smaller government.

But, the problem is, the GOP is tied to agency spending.

The largest federal agencies are deep into GOP-land, such as Defense, VA and Homeland Security. Ryan says he will not cut those agencies, which is like saying you are going to quit drinking, except for wine and hard liquor.

Yet the GOP is afraid to cut entitlements (which are financed by payroll taxes, and not income taxes) as there are so many older voters.

Well, keep your fingers crossed--only robust economic growth can help the USA.

William said...

FYI, A university, which has been doing serial polling of the same +- 10,000 US citizens, found that 60% of those who now consider themselves members of the Tea Party formerly identified themselves with the Christian Right, Moral Majority, etc.

Its the same right wing - primarly Southern based - of the Republican Party that Richard Nixon cobbled together decades ago in a new incarnation. Folks have to update their lingo from time to time.

I agree with Benjamin and David Stockman, its primarily a lot of mumbo jumbo to get the Republicans back in power again. They have no more intention of balancing the budget than Ronald Reagan did. It is just propaganda that is useful at election time.

I am as skeptical as Stockman is about Republicans in congress actually passing most of Ryan's proposals because they won't offend the special interests.

Slashing popular tax breaks for employer-provided health insurance, mortgage interest, 401(k) accounts, state and local taxes, charitable giving and the like - NOT GOING TO HAPPEN.

Bill said...

It looks like Ryan is hurting Romney. Romney has been down the last couple of days per Rasmussen, the most accurate of polls, that had Romney up all summer before he picked Ryan.

JordanRB said...

I enjoy this blog and the charts immensely.

However, the idea that Romney and Ryan change things, let alone win is a total fantasy. First, there is no chance they win. Obama connects much better with most voters and the stock market is in good shape until the election. Second, if they win they won't cut spending, they'll simply shift it around benefiting the super wealthy and creating big deficits ala Bush and Reagen. The Tea Party is a total joke that wants cuts but won't give up any of their own subsidies.

Ultimately we need much better monetary policy that emphasizes savings and we do need a smaller government. The super super rich and corporations do not pay any tax and should be counted on to pay higher taxes until this depression is over. They benefited from the past 10 years while no one else has.

Folks like Scott do not see inflation but the inflation of the past 30 years has destroyed the manufacturing base, promoted outsourcing and pushed the bottom half of this country into poverty and lower standards of living.

The left is right about the country's problems but we need libertarian solutions.