Tuesday, December 6, 2011

World Since June 2008

For a client meeting, I struggled with how best to illustrate world markets since June 2008.  I used R to produce this (I amended this post to reflect a prettier forked version as discussed in the comments), but I’m still not completely satisfied. Anyone have suggestions to improve?

From TimelyPortfolio

What I thought was interesting was US equity outperformance and the US 10y yield move through the financial collapse low 2.15% seen in December 2008 and significantly lower than the 2.87% at the S&P low March 2009.  I think both can be explained by an illusion of control assigned to the US.  This illusion begins to unravel if the political process fails and monetary policy has reached its limits.

R code from Gist:


  1. Nice work. The graphs might have made the clients feel a lot better if you had used total return instead of prices. You can do this via the appropriate ETFs and AdjClose. Of course maybe you didn't want that. It's interesting how much money one has made on various bonds since 2007, even junk.

  2. You're trying to explain the finance world with data. Never works all that well, since the finance world runs on political events and a tad of corruption now and then.

    The explanation rests on some events:
    - Greenspan drives interest rates to the floor.
    - the 1%-ers want more than the paltry return which resulted
    - mortgage companies (CountryWide most famously) invent high-yield mortgages
    - the banks and 1%-ers suck them up like sugar water
    - in the collapse, the banks get $1 trillion in free money, which they trade
    - the banks continue to get (essentially) free money from the Fed, which they trade; without that cash injection, Mr. Market is still selling pencils on the sidewalk.
    - the March, 2009 rebound is a market wide short squeeze

    The disconnect between the quality of the real economies in the West and the financial institutions is seen in the inflation of asset prices. In other words, all that rescue money has been dumped into the fiduciary economy, not the real economy. Just as there is localized inflation in major cities, there is localized inflation in economic sectors. Banksters tend to believe, more than others, that their winnings are due to brilliance rather than luck or non-competitive advantage.

    It could all have been avoided, and some (including humble self) understood, if the powers that be noticed that the prime ratio, median house / median income, had become viciously unstuck. That's all you had to know.

    As to monetary policy, it's a feeble instrument in the best of times; kind of like using a nuclear bomb to get rid of rats in the cellar, lots of collateral damage. The Euro doesn't work because it is *only* Dr. Friedman with no Dr. Keynes to keep him from going crazy. Note that when the Euro coughs all that high wealth money flees for the Dollar. And, for those who mis-remember, specie currency (take the 19th century) economies are inherently deflationary and very sub-optimal.

  3. Very nice. I forked your gist and made a few changes.

  4. thanks Joshua, Robert, and Burt so much for the excellent comments.

    Joshua, I love the forked version, so I will amend the post to reflect.

    Robert, agree almost entirely and appreciate the lucid comments.

    Burt, usually use price only since I can obtain a lot more history, but in this case I do not need the additional data. I have the total return indexes but I hesitate to use since not everyone has this luxury, and I do not want the IP lawyers to attack.