Credit Spreads and Equity Volatility to Rise

(from our Tactical report of 1st November 2016) Equity volatility and credit spreads are almost perfectly correlated. In part this is because equity is a perpetual option on the solvency of a firm. When credit becomes stressed, equity volatility jumps as well. You can...

Retail Stocks to Suffer Due to Higher Inflation

Retail sales will suffer in the months ahead due to rapidly rising medical and rental CPI.  Whenever rental and medical costs have risen significantly in the past, they have led to a big decline in retail sales.  You can see from the chart below that Medical CPI plus...

Real Yields Wildly Mispriced Given Stagflation Light

The US now has the worst combination of outcomes, poor growth and rising inflation.  Bond yields are now the most negative they have been in almost forty years.  Only in the 1970s during stagflationary episodes were real yields this negative.    We don’t see a high...

Lower ISM Ahead, Weak Read for Stocks

The ISM Manufacturing Index came out at the beginning of the month and offers a dim view of the next three months for US manufacturing as well as for stocks.  The key data we focus on in the ISM is the relationship between New Orders to Inventory.  The ratio leads the...

Higher Inflation Target –> Even More Mispriced USTs

A discussion of late has been whether the Fed should raise its inflation target.  We think this would be a bad idea.  Currently, with a 2% target, the Taylor rule implies the Fed Funds rate should be closer to 2%. With a 3% inflation target, the Taylor rule would...

Bond Yields Diverge from Inflation

Bond yields are currently diverging in a very big way from economic fundamentals, and our valuation tools point to a rise in yields.  Normally, there is a very tight correlation between the change in the ISM prices paid survey and the changes in the 10 year yield. ...

Financial Conditions Ease, but Growth to Remain Weak

Two of the best global leading indicators tools we have are VP’s Business Cycle Financing Index (BCFI) – which tracks financial conditions, eg are central banks easing or hiking, credit spreads widening or tightening (first chart) –  and the global yield...

More TED Spread Widening on the Way

(from our Tactical report of 26th July) One of the early warning signs of the 2008 crisis was the widening in credit spreads such as the Ted spread and the Libor-OIS spread.  There was a run on the shadow banking system as the credit-worthiness of many financial...

USD to Continue Weakening Bias as Risk Recedes

Brexit predictably caused the USD to rally, as any global risk-off episode will do.  However, we reiterate our view that the USD will have a tendency to weaken, after the current rally dies out (which it already appears to be doing, with the DXY basically going...