Variant Perception

Where Japan Rate Vol Leads, Others Follow

Variant Perception — Fri, 17 May 2013 10:28:48 +0000

Volatility in general is still falling, with both equity and commodity volatility lower than their 2005/06 trough. However, we are seeing signs of life in interest rate volatility. US rate volatility has recently pipped up, and this has been led by a sharp increase of Japanese rate volatility as a result of the easing policies of the BoJ. A rise in bond yields in Japan accompanied by a rise in bond volatility could be very damaging, especially as Japan has to refinance about 50% of GDP’s worth of debt each year.

Japanese rate volatility has already moved, but we expect other volatilities follow. The credit cycle leads volatility by about 3 years and based on this we expect to US equity volatility to go higher soon. As the top chart demonstrates, interest rate and commodity volatility should follow suit.

Structural labour market issues in the US point to looser for longer at the Fed

Variant Perception — Mon, 13 May 2013 11:56:00 +0000

Employment in the US is closely watched, especially as the Fed has marked it out as an important factor in how it will judge its stance in monetary policy. Payrolls have improved and the unemployment rate has declined, but structural issues stubbornly remain. The Fed will be alert to these issues, and thus the bar for the removal of stimulus is very high, despite repeated murmurings of ‘tapering’ and a tightening in monetary conditions.

The participation rate has fallen sharply since 2009, to a 25 year low, and the average duration of unemployment has risen to 40 weeks, series highs.

In addition, the average duration of unemployment has increased, and this has been most pronounced at the longest measured length of unemployment (27 weeks +). This is self-reinforcing: the longer a person is unemployed, the more likely they are to remain unemployed as their skills stagnate, and they become less attractive to employers.

The Fed will want to see improvement in the structural issues that riddle US employment. As these issues are by their nature self-reinforcing and difficult to rectify, this suggests that the self-imposed bar for Fed removal of easy monetary conditions remains high.

NYSE Margin Debt Going Parabolic Signals Increased Risks for Equities

Variant Perception — Tue, 07 May 2013 15:53:08 +0000

In the short run, it is difficult to see what can stop equities at this point. Low inflation, central bank support and relatively robust economic data have created a Goldilocks scenario for equities. However, perhaps as a result it is worthwhile looking at what could go wrong. One of the more important intermediate indicators on the equity market is derived from the stock of US margin debt at the NYSE.

We recently got data from March and the increase now looks decidedly parabolic. Sharp moves in margin debt like this have not usually been associated with positive equity market outcomes. This gives us cause for concern on a 3-6 month basis.

Jonathan Tepper, Chief Editor, Interview on Bloomberg News

Variant Perception — Fri, 03 May 2013 15:23:24 +0000

Follow this link to watch from the beginning of the interview, or skip to minute 34 on the video below.

Buying Time in Portugal Unlikely to Improve Fundamentals

Variant Perception — Tue, 30 Apr 2013 07:39:33 +0000

The spotlight remained on Portugal the end of last week as EU finance ministers agreed to give the country seven more years to repay its stock of existing loans. Still, despite the words of praise showered on the country the deficit containment record has been a pretty checkered one. The deficit target for 2013 is 5.5% of GDP will not come under the EU 3% level until 2015 at the earliest.

Meanwhile the debt level will continue to rise, with the EU optimistically forecasting a peak in sovereign debt at 123.7% of GDP in 2014.

Portugal’s real problem however is private debt at nearly 250% of GDP. With annual inflation now well under 1% and poor growth performance, a contraction in nominal GDP in 2013 is not unlikely, and with this will come a further and largely unanticipated surge in the debt ratios.

Finally, the basic math still does not add up. Portugal is still deeply reliant on outside aid. Even in the rosiest and most glossy future scenario there is no way that Portugal would be able to service its debt at the current market rate. If we look at the current level growth compared to the level of bond yields, the latter by far outstrips the former.

This spread needs to be positive in order to have positive debt dynamics. Currently, it is anything but, and neither higher growth nor sufficiently lower yields seem imminently possible at this point.