Very big day today on the credit markets as fear lead to some very significant widening in major credit indices.
Itraxx Main 5 year is now around 120 basis points, up from 85 bps a month ago, but up by around 20 bps just today!
Itraxx Crossover 5 year CDS widened by 70 bps in a single day as well.
Sovereigns CDS took some additional hits:
http://www.cmavision.com/market-data
As well, all Senior Banks CDS are wider.
Banks are leveraged play on the economy as I keep repeating on this blog.
http://www.bloomberg.com/apps/news?pid=20601087&sid=awZVlrg3iAjI&pos=3
“The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered.”
What has been worrying today is that Senior CDS widened more relatively to Sub CDS. This is concerning because it highlights liquidity strain in the system (TED spread widening). Senior debt is much larger than sub in terms of issued debt.
About the TED spread:
http://en.wikipedia.org/wiki/TED_spread
Equities are also feeling the pain and bank stocks have been heavily sold.
The second phase of the crisis is being played, after the financial crisis, we are experiencing a sovereign crisis and very severe crisis of confidence in the Eurozone which is reflected by the massive sell-off of the Euro we have seen in the last few days.
Thursday, 6 May 2010
Tuesday, 4 May 2010
Remembering Angus Maddison
Sadly after my last post relating to Angus Maddison, I discovered he had passed away on the 24th of April.
How ironic?
Please find enclosed a link to The Economist review on Angus Maddison's contribution to Macro Economy.
http://www.economist.com/business-finance/economics-focus/displaystory.cfm?story_id=16004937
In my last post I mentioned at length's Angus work from his excellent book Contours of the World Economy.
I mentioned that as per Angus view, China's growth is a simple reversion to the mean as he recently highlighted as per below's quote from the Economist article.
"Ten days before his death he was cited in a speech by Robert Zoellick, president of the World Bank, declaring the end of the “third world”. Maddison’s figures show that Asia accounted for more than half of world output for 18 of the last 20 centuries. Its growing clout in the world economy is, therefore, a “restoration” not a revolution."
Macro Economy doesn't repeat itself but does rhyme...
How ironic?
Please find enclosed a link to The Economist review on Angus Maddison's contribution to Macro Economy.
http://www.economist.com/business-finance/economics-focus/displaystory.cfm?story_id=16004937
In my last post I mentioned at length's Angus work from his excellent book Contours of the World Economy.
I mentioned that as per Angus view, China's growth is a simple reversion to the mean as he recently highlighted as per below's quote from the Economist article.
"Ten days before his death he was cited in a speech by Robert Zoellick, president of the World Bank, declaring the end of the “third world”. Maddison’s figures show that Asia accounted for more than half of world output for 18 of the last 20 centuries. Its growing clout in the world economy is, therefore, a “restoration” not a revolution."
Macro Economy doesn't repeat itself but does rhyme...
Saturday, 1 May 2010
Long term Macro views - as per Angus Maddison
To begin with, I highly recommend reading Angus Maddison's book Contours of the World Economy, 1-2030 AD, Essays in Macro-Economic History.
In most of my previous posts, I have been focusing on the risks of a double dip recession and the outstanding structural issues faced by most of the developed countries.
In all that doom and gloom Marc Faber's style, there are some bright spots of development in the world and in this post I will try to highlight the incredible tectonic shift we have been witnessing in the World Economy.
I will focus on this post on looking at historical trends and I will try to highlight what to expect in the coming decades in relation to Macro Economic growth in the World.
Let's start first by reviewing the evolution of the share of World GDP from 1-2003 AD (percent of world total) as per Angus Maddison's book (page 381):
According to Angus Maddison, the share of the World GDP for Western Europe has dropped between 1973 to 2003 from 22.8 % to 16.5 %.
Between 1870 and 1913, Western Europe'share of Global GDP was around 30.5 % during the industrial revolution, although it was only 20.5% in 1820.
For the USA the peak share of World GDP was 1950 at 27.3 %. Since then their share of World GDP has dropped to 22.1 % in 1973 and to 20.6 % in 2003.
The interesting part is relating to the share of World GDP for China, the peak was around 1820 at 32.9% according to Angus Maddison. It dropped to 17.9% in 1870 which is explained by the industrial revolution experienced by Western Europe at the same time. In 1950 and 1973, China's share of World GDP was 4.6 %. In 2003, China's share of World GDP came back close to 1870's level at around 15.1 % of World GDP.
This it where it is becoming interesting, according to Angus Maddison's projection for 2030(page 340 in his book), you can expect the following:
Western Europe share of GDP will drop to 13% in 2030 from 19.2% in 2003.
Asia (including Japan) shares of World GDP will power ahead from 40.5 % in 2003 to 53.3% in 2030.
In 1820 Asia's share was 59.4 % with a low point of 18.6 % in 1950.
Asia will therefore become the largest driving force in world trade. China will again become the world's biggest economy by 2018 according to Angus Maddison, with USA at number two and India at number three!
.png)
Western European countries faces the following massive headwinds:
Ageing population for a start.
Very high debt to GDP ratios which will weight very severly on maximum GDP growth attainable. Given current budget deficits, private growth will be hindered by higher taxation and larger weight of the public sector on the GDP.
When the average debt to GDP in percentage will be around 100% in 2014 in Europe, Emerging markets average debt to GDP will be in the region of 35 % in 2014.
This graph comes from the following interesting research document published by Deutsche Bank which can be obtained using the link provided below:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000255134.pdf
The authors of this very good research document conclude with the following statement:
"Should consolidation fail, policymakers in DMs and some EMs may be tempted to look for other ways to fix the fiscal damage. Either they could tolerate a substantial acceleration in CPI inflation to inflate public debt and/or they risk severe adjustments in the real effective exchange rate. Such adverse scenarios should not be
disregarded. The assumption that major macro issues cannot go wrong in the DM world (including EMU) has to be scrapped in the aftermath of the global crisis while this time EM, not DM, economies are the ones in the lead to keep public indebtedness sustainable.
Welcome to a new world!"
Emerging markets Debt is therefore the new investment grade and Western Europe Debt looks more and more like the new High Yield (or junk already for some countries...).
While most of western developed countries are busy trying to debase their currencies to generate inflation, Asian currencies will continue to outperform due to the very good situation of their economy, enjoying both trade balance surpluses and manageable debt to GDP levels.
http://www.marketwatch.com/story/asia-currencies-outperforming-stocks-on-fund-flows-2010-04-30?reflink=MW_news_stmp
In relation to Commodities and Gold in particular, I expect them to continue to rise in the near future. As I mentioned previously in this blog, this is the reason why so many hedge fund managers are heavily exposed to Gold (Paulson, Moore, Soros, etc). This is part of their macro strategy following the ongoing rebalancing of the World Economy we are experiencing. They are simply betting that our politicians will try to inflate their way out of the debt problem we are facing.
In terms of macro investments, Asian currencies will rise against the Euro, USD and GBP. Fixed Income Emerging Markets funds will do very well in this new environment given their lower probability of defaults depending on the country they are exposed to (South Korea, Singapore, Taiwan, Maylasia, Indonesia are attractive).
According to the Deutsche Bank research, we are in a new world, I will conclude this post, that it is more a return to the mean, as Angus Maddison is clearly illustrating in his research. Asian countries are returning to the level of world GDP shares they had 200 years ago and before.
Like Mark Twain said "History doesn't repeat itself, but it does rhyme."
Same apply to Macro Economy, it doesn't repeat itself but it eventually does rhyme.
In most of my previous posts, I have been focusing on the risks of a double dip recession and the outstanding structural issues faced by most of the developed countries.
In all that doom and gloom Marc Faber's style, there are some bright spots of development in the world and in this post I will try to highlight the incredible tectonic shift we have been witnessing in the World Economy.
I will focus on this post on looking at historical trends and I will try to highlight what to expect in the coming decades in relation to Macro Economic growth in the World.
Let's start first by reviewing the evolution of the share of World GDP from 1-2003 AD (percent of world total) as per Angus Maddison's book (page 381):
According to Angus Maddison, the share of the World GDP for Western Europe has dropped between 1973 to 2003 from 22.8 % to 16.5 %.
Between 1870 and 1913, Western Europe'share of Global GDP was around 30.5 % during the industrial revolution, although it was only 20.5% in 1820.
For the USA the peak share of World GDP was 1950 at 27.3 %. Since then their share of World GDP has dropped to 22.1 % in 1973 and to 20.6 % in 2003.
The interesting part is relating to the share of World GDP for China, the peak was around 1820 at 32.9% according to Angus Maddison. It dropped to 17.9% in 1870 which is explained by the industrial revolution experienced by Western Europe at the same time. In 1950 and 1973, China's share of World GDP was 4.6 %. In 2003, China's share of World GDP came back close to 1870's level at around 15.1 % of World GDP.
This it where it is becoming interesting, according to Angus Maddison's projection for 2030(page 340 in his book), you can expect the following:
Western Europe share of GDP will drop to 13% in 2030 from 19.2% in 2003.
Asia (including Japan) shares of World GDP will power ahead from 40.5 % in 2003 to 53.3% in 2030.
In 1820 Asia's share was 59.4 % with a low point of 18.6 % in 1950.
Asia will therefore become the largest driving force in world trade. China will again become the world's biggest economy by 2018 according to Angus Maddison, with USA at number two and India at number three!
.png)
Western European countries faces the following massive headwinds:
Ageing population for a start.
Very high debt to GDP ratios which will weight very severly on maximum GDP growth attainable. Given current budget deficits, private growth will be hindered by higher taxation and larger weight of the public sector on the GDP.
When the average debt to GDP in percentage will be around 100% in 2014 in Europe, Emerging markets average debt to GDP will be in the region of 35 % in 2014.
This graph comes from the following interesting research document published by Deutsche Bank which can be obtained using the link provided below:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000255134.pdf
The authors of this very good research document conclude with the following statement:
"Should consolidation fail, policymakers in DMs and some EMs may be tempted to look for other ways to fix the fiscal damage. Either they could tolerate a substantial acceleration in CPI inflation to inflate public debt and/or they risk severe adjustments in the real effective exchange rate. Such adverse scenarios should not be
disregarded. The assumption that major macro issues cannot go wrong in the DM world (including EMU) has to be scrapped in the aftermath of the global crisis while this time EM, not DM, economies are the ones in the lead to keep public indebtedness sustainable.
Welcome to a new world!"
Emerging markets Debt is therefore the new investment grade and Western Europe Debt looks more and more like the new High Yield (or junk already for some countries...).
While most of western developed countries are busy trying to debase their currencies to generate inflation, Asian currencies will continue to outperform due to the very good situation of their economy, enjoying both trade balance surpluses and manageable debt to GDP levels.
http://www.marketwatch.com/story/asia-currencies-outperforming-stocks-on-fund-flows-2010-04-30?reflink=MW_news_stmp
In relation to Commodities and Gold in particular, I expect them to continue to rise in the near future. As I mentioned previously in this blog, this is the reason why so many hedge fund managers are heavily exposed to Gold (Paulson, Moore, Soros, etc). This is part of their macro strategy following the ongoing rebalancing of the World Economy we are experiencing. They are simply betting that our politicians will try to inflate their way out of the debt problem we are facing.
In terms of macro investments, Asian currencies will rise against the Euro, USD and GBP. Fixed Income Emerging Markets funds will do very well in this new environment given their lower probability of defaults depending on the country they are exposed to (South Korea, Singapore, Taiwan, Maylasia, Indonesia are attractive).
According to the Deutsche Bank research, we are in a new world, I will conclude this post, that it is more a return to the mean, as Angus Maddison is clearly illustrating in his research. Asian countries are returning to the level of world GDP shares they had 200 years ago and before.
Like Mark Twain said "History doesn't repeat itself, but it does rhyme."
Same apply to Macro Economy, it doesn't repeat itself but it eventually does rhyme.
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