15/5/18: S&P500 Earnings Diversification: International Trading Pays

An intersting (and occasionally covered on this blog) chart via FactSet on earnings and revenue growth for S&P500 constituents based on their exposures to international markets:

As the above clearly shows, globally diversified (by source of activity) companies have stronger growth in earnings and aggregate earnings. Not surprising, in general, but given the relative strength of the U.S. growth, compared to other regions' dynamics, this shows the value of income diversification.

29/11/17: Four Omens of an Incoming Markets Blowout

Forget Bitcoin (for a second) and look at the real markets.

Per Goldman Sachs research, current markets valuation for bonds and stocks are out of touch with historical bubbles reality: https://www.bloomberg.com/news/articles/2017-11-29/goldman-warns-highest-valuations-since-1900-mean-pain-is-coming. As it says on the tin,

“A portfolio of 60 percent S&P 500 Index stocks and 40 percent 10-year U.S. Treasuries generated a 7.1 percent inflation-adjusted return since 1985, Goldman calculated -- compared with 4.8 percent over the last century. The tech-bubble implosion and global financial crisis were the two taints to the record.”

Check point 1.

Now, Check point 2: The markets are already in a complacency stage: “The exceptionally low volatility found in the stock market -- with the VIX index near the record low it reached in September -- could continue. History has featured periods when low volatility lasted more than three years. The current one began in mid-2016.”

Next, Check point 3: Valuations are not everything. In other words, levels are not the sole driver of blowouts. In fact, per Goldman, valuations explain “less than half the [markets] variation since 1900.” But, when blowouts do happen, involving 60/40 portfolios “over the past century [these] amounted to 26 percent in real terms on average, lasting 19 months. It took two years to get back to previous peaks, on average.” And the problem with this is that there might be no firepower to fight the next blowout. “Central banks “might not be able or willing to buffer growth or inflation shocks.” They also face fewer options to ease monetary policy given low rates and big balance sheets.”

So to sum the above up: levels of market valuations are screaming bubbles in both bonds and stocks; investors are fully bought into the hype of rising valuations; and there might be a shortage of dry powder in store at the Central Banks.

Goldman’s team, predictably, thinks the likeliest unwinding scenario from the above will involve, you’ve guessed it… a soft landing.

Now to Check point 4:

Source: ZeroHedge

Observe the following simple fact: the rate of the ‘balanced’ portfolio appreciation in the current cycle is sharper than in the 2002-2007 cycle. And it is sharper, in cumulative terms (both nominal and real), than any other cycle in modern (post 1970s - end of Bretton Woods and stagflationary environments) period.

So the Check point 5 adds strong bubble dynamics to bubble signals of levels of out-of-touch valuations, investors complacency and risks to the Central Banks’ commitment.

This is, put frankly, ugly. Because all four components of a major market blowout are now in place. So while the froth might still run for some weeks, months, quarters, … and may be even a year or two, the longer it runs, the worse the fallout will be. And the fallout is coming.

15/1/16: Gold Bullion as Risk Diversifier: 2015 Overview

A note of mine covering 2015 Gold market and the continued role of gold bullion & coins as risk diversifiers in current environment is now available on GoldCore page here: http://www.goldcore.com/us/gold-blog/gold-bullion-retains-key-role-of-a-major-diversifier-dr-gurdgiev/.

15/10/2014: Changing Nature of Financial Diversification

My new blog post on Learn Signal Blog covering the changing nature of diversification in financial markets: http://blog.learnsignal.com/?p=83

Certainly of use to our MSc in Finance class!

11/3/2012: Did Global Financial Integration Contribute to Global Financial Crisis Intensity?

An interesting paper (link here) from Andrew Rose titled International Financial Integration and Crisis Intensity (ADBI Working Paper 341 ).

The study looked at the causes of the 2008–2009 financial crisis "together with its manifestations", using a Multiple Indicator Multiple Cause (MIMIC) model that allows for simultaneous causality effects across a number of variables.

The analysis is conducted on a cross-section of 85 economies. The study focuses "on international financial linkages that may have both allowed the crisis to spread across economies, and/or provided insurance. The model of the cross-economy incidence of the crisis combines 2008–2009 changes in real gross domestic product (GDP), the stock market, economy credit ratings, and the exchange rate. The key domestic determinants of crisis incidence that [considered] are taken from the literature, and are measured in 2006: real GDP per capita; the degree of credit market regulation; and the current account, measured as a fraction of GDP. Above and beyond these three national sources of crisis vulnerability, [Rose added] a number of measures of both multilateral and bilateral financial linkages to investigate the effects of international financial integration on crisis incidence."

The study covers three questions:

• First, did the degree of an economy’s multilateral financial integration help explain its crisis? 
• Second, what about the strength of its bilateral financial ties with the United States and the key Asian economics of the People’s Republic of China, Japan, and the Republic of Korea? 
• Third, did the presence of a bilateral swap line with the Federal Reserve affect the intensity of an economy’s crisis? 

"I find that neither multilateral financial integration nor the existence of a Fed swap line is correlated with the cross-economy incidence of the crisis. [Pretty damming for those who argue that the crisis was caused / exacerbated by 'global' nature of the financial markets and for those who claim that 'local' finance is more stable. Also shows that the Fed did not appeared to have subsidized european and other banks, but instead acted to protect domestic (US) markets functioning.] There is mild evidence that economies with stronger bilateral financial ties to the United States (but not the large Asian economies) experienced milder crises. [This is pretty interesting since so many European leaders have gone on the record blaming the US for causing crises in European banking, while the evidence suggests that there is the evidence to the contrary. Furthermore, the above shows that we must treat with caution the argument that all geographic diversification is good and that, specifically, increasing trade & investment links with large Asian economies - most notably China - is a panacea for financial sector crisis cycles.]"

Core conclusion: "more financially integrated economies do not seem to have suffered more during the most serious macroeconomic crisis in decades. This strengthens the case for international financial integration; if the costs of international financial integration were not great during the Great Recession, when could we ever expect them to be larger?"

Here's a snapshot of top 50 countries by the crisis impact:

Quite thought provoking. One caveat - data covers periods outside Sovereign Debt crisis period of 2010-present and the study can benefit from expanded data coverage, imo.