Thought Bubbles from the Deep

Quick trip through recent history.

Stress spikes vs SP500 index levels.

These recent ructions have something in common with the 2010 spike. At that time, there really was nothing specific which spooked the market. Lists of concerns at the time:
+ China property hard landing;
+ US recovery not particularly strong;
+ Germany bans short selling...

EPS forward looking revisions have not moved very much in recent times. Approx 1% downward for next 12 months in ASX, Europe and pretty flat in the US.



Credit markets are not generally as rattled as they were in 2011 although Emerging markets CDS spreads are elevated.

Yet another China wobble leading to poor sentiment? Yet China estimates are still fairly flat:



Tentative conclusions? Buying opportunity? Or China is toppling....bringing commodities down...bringing EM down...bringing world growth down....

DeepState said:

At that time, there really was nothing specific which spooked the market

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Aside from the end of massive balance sheet expansion in the Government sector?

Tentative conclusions? Buying opportunity?

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Valuations remain obscene and market action proxying investor risk preferences is not showing any signs of improvement. In this kind of regime, return of capital is much more important than return on capital. We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.

Personally I'm very interested in buying the US market (very soon) if there is further irrational selling now or in early Oct. I want to be significantly invested in the US for their seasonally strong period Nov - Apr. I'd prefer to invest in the ASX but don't anticipate BHP RIO going higher any time soon. The banks will lag industrials also imo (XNJ, XEC looking better than XFJ). If I'm correct then the XAO, XJO will have a hard time going up and I anticipate the US market will outperform our ASX over the next six months.

There are a few US ETFs (geared/non geared, currency hedged/unhedged) available in the ASX (VTS, GGUS, IRU, IVV to mention a few). I may not buy the bottom, but I've an eight month outlook.

I should be able to construct an acceptable eight month bullish SPY option play which will use less capital than equities. We'll be able to review this opinion in six - eight months.

DeepState said:

Pretty straight forward. Sell ASX 200 Dec 2015 4500 puts. Collect premium of about $1,120 per contract whose face value is $49,105. Sell a lot of them. If the support really is support and the index closes above 4500 at 15 Dec, you'll keep the lot.

If the index closes at 4388, you get nothing. If it closes below that [SUB]you may lose more than you have to your name.[/SUB]

Simple.

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Thanks for the info deepstate...Are these the type of positions you take yourself..?? if so I am impressed..

The amount of contracts above are outside my risk and trading plan requirements at the moment ,if I knew more about this type of trading I could take 8 contracts..something to look at in the future...

sinner said:

Aside from the end of massive balance sheet expansion in the Government sector?

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Yields in major economies were falling/static at the time. If solvency were a concern, they would have moved higher. Of course gold was rising at the time. However, the rate of rise was in line with trend for the US QE period prior to taper discussions.

Distress would also have been visible in corporate bond spreads, particularly financials, if sovereign default were on the cards. Although yields roughly remained static for a little while as sovereign yields fell, the spreads retraced to prior levels.

There was lots of fear about the dissolution of the EZ at the time. The term PIGS was everywhere. There was a spike in the spread and in absolute levels at the time, but it appears coincident with the fear spike.





It looks to me that there were lots of background issues at the time. These are of the type which are present today. China, financial stability, US growth.... These risks are always present. For some reason, the markets seemed to decide to be worried about it and then decided to stop worrying after some CBT and Mindfulness.

To me, the current situation seems to be more like this (as opposed to exactly like this) than for the other major fear spikes of the last decade. If so, there is no wholesale earnings destruction going on. Fear will recede and this can be seen as a buying opportunity. Maybe. It's just a thought.

sinner said:

Valuations remain obscene and market action proxying investor risk preferences is not showing any signs of improvement. In this kind of regime, return of capital is much more important than return on capital. We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.

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Developed market valuations outside of the US are not particularly extreme in absolute terms. If we are looking at equity risk premia vs long bonds, it is arguable they might be cheap...although I believe these should be offset by what seems to be lower potential growth nowadays, however this is determined.

I've had a look at how predictive VIX and vol estimates are. From what I can tell, they are coincident indicators rather than predictive. In other words, by the time we figure out that risk is not there anymore, the market has already figured that out.

Triathlete said:

1. Thanks for the info deepstate...Are these the type of positions you take yourself..?? if so I am impressed..

2. The amount of contracts above are outside my risk and trading plan requirements at the moment ,if I knew more about this type of trading I could take 8 contracts..something to look at in the future...

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1. Kinda sorta. I don't do this exact thing. I don't believe in firm limits of support etc. at least on time frames exceeding a day.

2. 8 Contracts would bring you max revenue of about $9k. If would bring with it a max loss of about $500k. With this stuff, you are not buying something worth $9k hoping to get appreciation. You are receiving it and hoping that you won't be blown apart for the benefit.

sinner said:

We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.

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This just in...

Property. Australia.

The forum doesn't seem to have referred to an IMF special report into the matter that came out with the recent Article IV.

http://www.imf.org/external/pubs/ft/scr/2015/cr15275.pdf

As might be expected, the IMF looked at it from a stack of different perspectives. I believe the economic fundamentals based approach is the most sound of the methods they utilised. As at end 2014, this analysis suggested that housing was 17% overvalued.

However, this model doesn't take into account changes in the demand arising from offshore purchasing. Hence, it could be theoretically argued that property is still cheap...because the new foreign entrants to the market who do not form part of the population and do not directly contribute to national income are simply prepared to pay that price and it is fair for them. Or, it could be that they are stupid to pay that price.

As to Yuan valuations. Right now, there is reserve drain going on. In other words, without FX intervention, the Yuan would be lower. More money would flow out from China were it not for the capital constraints in place. Property prices in various favourite destinations are being pumped by Chinese demand already...when much of this money is leaving China in shady ways including via Packer casinos in Macao.



I think the swing factor might well be whether the ownership rules for non-residents are truly enforced here in Aust. Kind of stop-the-boats, property style.

MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):



Mexico: 2226
US: 1790
Japan: 1745
Australia: 1728

I suspect the data might need more careful scrutiny.

DeepState said:

MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):

View attachment 64758

Mexico: 2226
US: 1790
Japan: 1745
Australia: 1728

I suspect the data might need more careful scrutiny.

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Actually, for the Greek private sector, I would not be surprised: with the high level of unemployment and the low dole benefits, I am sure everyone who has a job gives his/her best to keep it!!!

qldfrog said:

Actually, for the Greek private sector, I would not be surprised: with the high level of unemployment and the low dole benefits, I am sure everyone who has a job gives his/her best to keep it!!!

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Interesting theory. Checked the data. Greece hours worked has declined as the crisis wore on and fell further as the restructuring and austerity took hold.



Source OECD

DeepState said:

Interesting theory. Checked the data. Greece hours worked has declined as the crisis wore on and fell further as the restructuring and austerity took hold.

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Source OECD

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do you know the "meaning" of hour worked?
with more unemployed and probably a lot of full time moved to part time , that might influence..
Hard to tell; it is a shame that we reach a stage where redefinition of terms as simple as unemployed are tweaked to increase government figures/results to a point where you are not unemployed if you work 1h a week;
I have read that if we were to use definition from the 1930s, the US unemployment rate would be in the 20% range and i would not be surprised;
then there is work and work: I found that in Japan, corporate employees are highly unefficientbut live sleep drink and eat at their office (I push a bit but not much), and sadly i see the same trend in Oz.How unnoying to be in a corporate lift and hearsay the " too busy, so much work" talk.Coming from a german minded culture, my corporate experience here has been of sharing the workplace with a majority of unefficient, unorganised and unable to plan co-workers whose aim is to make sure they do not leave the office before their boss..quite pathetic overall...
So how do you define "hours worked and productivity out of that?
I think productivity should be:
overall material production divided by population.
Services and intellectual prop being after all supportive or side effect of the material production if of value;
I somehow find it hard to accept that delivering a coffee twice as fast to someone reading a paper actually increases the productivity of a nation.
Is any index even remotely linked to this idea; my feeling is that productivity in Australia is collapsing due to H%S regulation, governance, red tape, but these still increase the official figures.
In the same way as a terminally ill cancer patient is the best thing to happen to a country GDP figure, I believe current productivity figures are now meaningless...open to discussion .

qldfrog said:

I think productivity should be:
overall material production divided by population.
Services and intellectual prop being after all supportive or side effect of the material production if of value;
I somehow find it hard to accept that delivering a coffee twice as fast to someone reading a paper actually increases the productivity of a nation.

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Hehe....an engineer's perspective! Nothing is of value unless concrete.

Delivering coffee twice as fast means that you will need half the people you used to have delivering it. The labour released can be deployed to other productive purposes. These can include valuable non manufacturing/industrial services like hairdressing or teaching or coding a game or administering an ASF website or trading stock or flying a plane or finishing their medical degree and saving lives. In this way, the productive capacity of the nation is increased by speeding up coffee delivery per capita. If it is deployed, this will increase the realised productivity.

DeepState said:

Hehe....an engineer's perspective! Nothing is of value unless concrete..

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Indeed and I stick to this view
I am in IT so none of my produced work is concrete, but unless it actually , somewhere along the chain , improves a physical good delivery, it is from a society/economy point of view worthless;
What is the value of a game coder in an economy?
there is a bit of side effects like:
if my product is sold O/S then this strenghtens the AUD and so allow more real goods such as oil, corn and fruits/crap from China to be purchased but overall, I feel there is a huge % if not a majority of our services which are just recycling money, and that does not create wealth in any way.
It creates jobs, some individuals wealth but unless you produce goods (and money can qualify for a trader or a venture capitalist f.e.) for the country economy it is a zero game, probably less than 0 as the state will tax it and add some inneficiency, will build pork barrelling infrastructure with a negative effect
As pointed above, if you can sell services O/S (aka our uni-education cashcow system) that is a different matter.
But I saw far far too much waste of resources money and potential in the corporate world associated to H&S, gouvernance and similar services;
They have a place but it should always be as an extention of production

qldfrog said:

What is the value of a game coder in an economy?

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It brings happiness to some. More so than the fifteenth pillow on their bed or the third ton of iron ore in their front yard. The media and entertainment market generates nearly USD 2tr in revenue per annum at present. That's rather a lot more than the revenue from global sales of iron ore. Clearly at least some people out there need less iron ore and more movies in their lives.

The purpose of an economy is to deploy available resources to meet some sort of objective. In the democratic / capitalist set-up it's roughly to make nearly everyone somewhat happy (compared to the Dark Ages anyway) and a few extremely happy. It's hard to be happy without shelter or food, but once you have enough of this and other such concrete things, other things take over in relative importance. Even the cave men had art and made musical instruments. They made these because food and shelter provided only so much satisfaction in their lives.

You clearly prefer to focus only on concrete production as a preferred measure of societal production. However I suggest it would be difficult to gather too many others who will come to the view that a society which eliminated non physical production items like gaming, ASF, haircuts, artists, poets, yoga classes, gardeners, shoe repairers, tennis coaches, French chefs, symphony orchestras, James Bond... but otherwise kept production of all natural resources and industrial production in place was as good. It would be heavily felt and people would feel that their lives had taken a pretty negative step. The people in these value chains produce something we want. They exist because we like other things besides steel. We like them and thus they are produced. This is production of a kind at it is thus included in the GDP stats. Whilst policy makers do care about physical production, they are more concerned for the balance of consumption and investment and the overall quantity of production.

The supply of physical stock to an economy allows it to flourish. In flourishing, society does not seek to increase the steel intensity of GDP. It grows its services and is generally seen as successful if this is achieved.

As with overinvestment into property, plant or equipment, there is the potential with creating services which may hinder the achievement of wider societal aims despite good intention. Possibly, some H&S may fall into this bucket.

The GDP stats do not allow for lots of other things that matter to a human being. They are not the measure of total societal welfare. However, they are a pretty decent measure of production of all sorts of things that we can create from raw materials or out of thin air.

DeepState said:

The GDP stats do not allow for lots of other things that matter to a human being. They are not the measure of total societal welfare. However, they are a pretty decent measure of production of all sorts of things that we can create from raw materials or out of thin air.

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I do not see otherwise aka need for music entertainment etc but I see these as a zero game economically, a recycling of money, not creation of wealth, and so outside of productivity on an economic point of view.
I have to rush will extend tonight

DeepState said:

MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):

View attachment 64758

Mexico: 2226
US: 1790
Japan: 1745
Australia: 1728

I suspect the data might need more careful scrutiny.

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Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.

And, just for fun...

McLovin said:

And, just for fun...

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With a partner who is Greek with a big Greek family, I must say...this is

McLovin said:

Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.

And, just for fun...

View attachment 64795

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Lol. I wonder if the survey result might change after the VW scandal.

McLovin said:

1. Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.

2. And, just for fun...

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1. In all fairness, the OECD source says in footnotes that the hours measured by a country should not be compared to that reported by another (even though the MSN article did). They reckon it is useful for the purposes of examining trends within countries only.

2. Awesome.