Tag: Economy

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Do economic fundamentals matter anymore?

This is a consolidated and slightly edited version of the series on economic fundamentals we ran last month.

Do economic fundamentals matter today? We look at the strange market conditions today. We are living in truly interesting times …

Stock Market Valuations

Equities globally have never been more valuable with market capitalization hitting $90 trillion.

Amazon trades at what a Price to Earnings ratio of some 200. Apple is worth some $900 billion. Even Tesla which makes no profit and is unlikely to make any profit any time soon is worth some $55 billion, more than Ford or General Motors.

Netflix is valued at $159 billion (13.6 times revenues of $11.7 billion) with 110 million paid (and 117 million total) subscribers. Netflix trades at a price to earnings ratio of 220. The company expects free cash flow of -$3 to -$4 billion in 2018 (yes, that is negative cash flow). Yet Netflix’s market cap is now greater than Disney’s and Comcast’s.

Don’t mention fundamentals …

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Something strange is happening in the global economy right now

Everyone seems to be focussing on the equity markets recently, but equity markets haven’t really moved much over the past one month. Over the past month, major equity markets have lost between 1.5% to 4%.

The real action is in bonds and commodities. And trade seems to be flourishing too.

10-year government bond yields of major economies are lower by 5% to 40% (in relative terms not absolute terms) in just the past month. 10-year German bonds are down 12 bps over the past month. That wouldn’t sound much but they are down 28% from 42 bps to 30 bps. U.K. yields are down 8%, U.S. yields down 5%, Japanese yields down 40%. Even Greek yields are down 20% over just the past month. Does the market anticipate a pause in interest rate rises? It would appear so.

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Those three U.S. recession indicators – how near or far are those from being invoked?

We wrote recently about three slightly different U.S. recession indicators that have been predictive of the past few recessions. How near or far are those from being invoked?

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four. Currently the difference is just 19 bps.

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. The 20-year yield already 3 bps higher than the 30-year yield, they have been converging for the past two weeks.

Continue reading “Those three U.S. recession indicators – how near or far are those from being invoked?”

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The machines are slowly learning but they can and will be fooled

We get over 400 distinct bots that scan our website each month, the large majority of them look at the sentiment of our posts to provide signals to trading systems (well at least they claim to do that). Is machine learning helping shape the future? Is Artificial Intelligence going to drive the financial world?

The answer to both those questions is yes and no. There are several examples where Artificial Intelligence is being used in the financial world,

1. Image processing is being using to scan and clear or cash cheques/checks in real time.
2. Car driving pattern boxes or telematic devices which track how a driver is driving are helping drive down (or up) car insurance premiums.
3. It is claimed that data from wearable devices is being used to provide better health insurance premiums. Continue reading “The machines are slowly learning but they can and will be fooled”

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Does the global economy run on fake data?

The picture below shows the distribution of an evening newspaper at London Bridge Rail station in London on a typical weekday. Every evening, thousands of copies are dropped off at the station, the paper is free for anyone to pick up and take away. And most evenings a large proportion of untouched and obviously unread papers are collected later during the evening by a recycling company.

Newspaper distribution in London
Newspaper distribution in London, how many copies are really read?

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Three slightly different US recession indicators

Here are three slightly different US recession indicators that have been predictive of the past few recessions,

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four recessions. Graph below for the past decade, the shaded areas indicate recessions,

US 30 year and 10 year yield 2008 to 2018
Source: Board of Governors of the Federal Reserve System (US)

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. Graph below, the shaded areas indicate recessions,

US 30 20 and 10 Treasury Yield
Source: Board of Governors of the Federal Reserve System (US)

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