Bonds and Stocks

When I read the headline, I thought the article would be about the difficulty of finding a return in the current low yield environment. It turns out its on something completely different (excerpt):

In search of higher yields

THE correlation between yields and stock markets are clear to see. When yields are high, stock markets are down. When yields are down, money pours into the stock market, and hence it goes up (see chart).

From the chart, it is obvious that since the Fed launched quantitative easing in 2009, rates have sunk to all time lows – close to zero. Meanwhile stock markets start rising when money is in search of yield and growth. Thus when yields are low, the stock market moves up. 

An interesting observation from the chart is the huge gap between rates and the stock market from 1985 to 1993. 

In 1985, the US Treasury 5-year notes were offering yields of above 10%. Not surprisingly, investors would gladly take their money out of the markets and put it in treasury notes or bonds, which are almost risk free. 

Now, as the yields started to drop, notice how the stock market starts inching up. This is because investors start to realise that bonds can no longer give them the best yields, and thus they shift their money into the stock market. 

From 1993 to 2006, yields on the 5-year note and the stock market moved almost in tandem. 

Over that period, the yields moved in a band of between 4% to 6%. At this level, bond yields and stock market returns are about equal. So investors are interchanging; when yields go closer to 4%, they shift their assets into the stock market. Then when yields move up again, they shift back out of equity markets and into treasury notes….

Malaysia's National Savings

As a follow up to yesterday’s post, here’s some graphs showing some of the other interesting data from the distribution of income accounts.

First, gross savings across all institutional sectors (RM billions):

Note that the bulk of national savings actually comes from corporations (the first two sectors). Household savings is by comparison pretty small.

Malaysia’s Household Savings Rate

The question of the household savings rate has come up a few times in the last few weeks, so I thought I might as well set out the data and evidence for it.

At this stage, I have a confession to make. I was under the impression that gross savings excluded net changes in pension assets (contributions less withdrawals from EPF, KWAP, LTAT and the like), but a closer reading of the accounts and the SNA2008 manual showed that this is already captured under the income accounts. For that I have to apologise to everyone whom I told that the household savings rate would be substantially higher if the net pension contributions were taken into account. In fact, the opposite is true and the difference is quite significant, as I’ll demonstrate in a bit.

Seeing The Forest Through The Trees

Of all the mind-boggling things to suggest (excerpt):

Forex broker proposes raising Malaysia's interest rates

KUALA LUMPUR: Cutting interest rates is not an option for Bank Negara to prevent further weakness in the ringgit, said international forex broker FXTM.

A better option for the central bank would be to raise interest rates, said its chief market analyst Jameel Ahmad….

…He added that interest rates in Malaysia were relatively low, at 3.25%, compared to Indonesia at 7.5%.

“If you cut interest rates, people are not going to be encouraged to keep their capital in Malaysia.

“So, any reduced interest rates will not help the ringgit at all,” he said.

The Natural Resource Curse is Alive and Well

From the latest round of IMF working papers (abstract):

Natural Resource Booms in the Modern Era : Is the curse still alive?
Andrew M. Warner

The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened. To properly address this question the empirical strategy must look behind the veil of the booming sector because that, by definition, will boom in a boom. So the paper considers new data on GDP per person outside of the resource sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, prooving [sic} insufficient to spur lasting development outside resource intensive sectors.

Graeber on Sectoral Balances

I touched on this a few times before, but here’s David Graeber on sectoral balances and flows (excerpt):

Britain is heading for another 2008 crash: here’s why
David Graeber

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics. You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public. It’s a real problem. Because of these taboos, it’s impossible to talk about the real reasons for the 2008 crash, and this makes it almost certain something like it will happen again.

I’d like to talk today about the greatest taboo of all. Let’s call it the Peter-Paul principle: the less the government is in debt, the more everybody else is. I call it this because it’s based on very simple mathematics. Say there are 40 poker chips. Peter holds half, Paul the other. Obviously if Peter gets 10 more, Paul has 10 less. Now look at this: it’s a diagram of the balance between the public and private sectors in our economy: