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Sunday, November 22, 2015

Corporate Bond Market Stressed, But Not Yet In Crisis

Chart: High Yield OAS

There are any number of reasons to be worried about the outlook for the global economy and risk assets. One of them are the elevated spreads in the high yield ("junk") bond market. The chart above shows the option-adjusted spread (OAS) for the Merrill Lynch/Bank of America High Yield Master II (U.S. dollar) Index. It has marched out to a relatively high spread, although it is well inside the extremes seen during previous default crises (around 2001 and 2007). However, it is hard to distinguish current events from a "healthy repricing of risk" versus an incipient crisis.

Wednesday, November 18, 2015

Negative Swap Spreads Not Necessarily A Sign Of A Crisis

Chart: 10-Year U.S. Swap Spread

Swap spreads have marched to a firmly negative value in the United States, which is historically unusual. The fact that the previous time that swap spreads were negative was during the financial crisis makes this event more interesting. Although there is no doubt that seeing signs of an imminent financial crisis makes for more exciting copy, I am not too convinced that this development is not that big a deal. Although this probably reflects some market stresses, it also tells us that regulatory reforms are actually working. This article gives what I hope is a basic introduction to this topic.

Sunday, November 15, 2015

Book Review: Why Minsky Matters (Wray)

L. Randall Wray, one of economist Hyman Minsky's students, and one of academics behind the development of Modern Monetary Theory (MMT) provides us with an introduction to Minsky's thought in "Why Minsky Matters: An Introduction to the Work of a Maverick Economist." As the title suggests, it is not an attempt to explain the details of the evolution of Minsky's theories over his career, rather it is an attempt to relate his theory to contemporary events. The book is aimed at those who are unfamiliar with his work, and "post-Keynesian" economics in general. (I am using "post-Keynesian" here as a wide term; Minsky would probably not fit within a narrower definition of "post-Keynesian".)

Wednesday, November 11, 2015

Difficulties In Measuring The Effect Of Interest Rates On The Economy

One of the more intractable controversies within monetary economics is measuring the effect of interest rates on the economy. Within mainstream economics, a strong effect is assumed, and a series of non-falsifiable models are built around that assumption (as discussed here). For those of a post-Keynesian persuasion, this is unsatisfactory, as there are a number of potential channels from interest rates to the economy, and the effects can move in opposite directions for these different channels. I would like to ignore the theoretical debate how interest rates affect the economy, rather look at the data. Unfortunately, it is not even clear what interest rate to use.

Sunday, November 8, 2015

Comments On Wage And Price Inflation

The recent article "Are Wages Useful in Forecasting Price Inflation?", by Rhys Bidder of the San Francisco Federal Reserve Bank, offers an easy to understand introduction to the econometric literature which analyses the links between wage and price inflation (such as the consumer price index). I agree with the conclusion that linkage between consumer price inflation and wage inflation has not been particularly strong in recent decades, but that there a long-term link. However, I would not reach this conclusion by using the econometric tests discussed in that article, rather it follows from what we know about the structure of the economy.

Friday, November 6, 2015

Good Labour Data Puts Fed On Track To Hike Rates In December

Given the breakdown in bond prices in recent days, it's not a particularly original observation to note that the Fed is on track for "lift off" (raising the policy rate away from 0%) in December. The latest labour market report reinforces that outlook.  I do not think a rate hike in December is particularly meaningful, even for the narrow question of the pricing of long-term bonds. (I do not spend a lot of time tracking what is happening in the front of the curve, for example eurodollar futures, where there presumably is a lot of interesting relative value stuff going on. Interesting for fixed income quants, at least.)

Wednesday, November 4, 2015

Yes, The Earth Is Not "Running Out Of" Oil And Gas

I had to shake my head at the following Telegraph headline: "The Earth is not running out of oil and gas, BP says." The article itself has highlights from BP's new Technology Outlook, which the Telegraph summarises as "... existing technology [is] capable of unlocking so much that global reserves would almost double by 2050 despite booming consumption." Although there may be some grounds for optimism embedded in the report, the complete lack of understanding what "peak oil" types are worried about is troubling. (The argument is that we would never "run out of" oil, rather extraction flows collapse once they no longer make economic sense.)