All posts by Constantin Gurdgiev

8/12/18: Back to the 1950s: Tracing Out 25 Years of the Credit Bubble


While the current cycle of declining interest rates has been running for at least 25 years, the most recent iteration of the period has been exceptionally benign. Since the end of the global financial crisis, Corporate and, to a greater extent Government, borrowing costs have run at the levels close to, or even below, those observed in the 1950s-1960s.


Since 2002-2003, FFR, on average, has been below the risk premium on lending to the Government & corporates. This has changed in 4Q 2017 when Treasuries risk premium fell below the FFR and stayed there since. In simple terms, it pays to use monetary policy to leverage the economy.
Not surprisingly, the role of debt in funding economic growth has increased.


And, as the last chart below shows, the relationship between policy rates (Federal Funds Rate) and Government and Corporate debt costs has been deteriorating since the start of the Millennium, especially for Corporate debt:


In simple terms, risk premium on Corporate debt has been negatively correlated with the Federal Funds Rate (so higher policy rates imply lower risk premium on Corporate bonds) and the positive relationship between Government debt risk premium and Fed's policy rate is now at its weakest level in history (so higher policy rates are having lower impact on risk premium for Government bonds). In part, these developments reflect accumulation of Government debt on the Fed's balancesheet. In part, the glut of liquidity in the banking and financial system (leading to mis-pricing of risks on a systemic basis). And, in part, the disconnection between Corporate debt markets and the policy rates induced by the debt-financed shares buybacks and M&As, plus yield-chasing investment strategies, all of which severely discount risk premia on Corporate debt.

8/12/18: Shares Buybacks Hit Diminishing Marginal Returns



The S&P 500 Buyback Index Total Return data tracks the performance of the top 100 stocks with the highest buyback ratios in the S&P 500 in terms of total return. As the chart below shows, the Buyback Index has generally and significantly outperformed S&P500 returns since 2008:





with three discernible periods of outperformance highlighted in the second chart:


In simple terms, since December 2015, the Buyback Index Total Return performance relative to S&P500 returns has stagnated, despite accelerating buybacks by the S&P500 corporates. In part, this is driven by the increased buybacks activity in the less active companies (not constituents of the Buyback Index), but in part the data suggests that the returns to buybacks are generally tapering out.

At the same time, correlation between S&P500 returns and Buyback Index returns has been weakening from around the same time:

All of the above indicates a breakdown in the traditional post-2008 pattern of returns, as buybacks role as the drivers for improved ROE performance for top S&P500 shares re-purchasers is starting to run into diminishing returns.

6/12/18: Are Younger Americans More Comfortable With a Multipolar World?


When it comes to challenging status quo heuristics, the younger generations usually pave the way. The same applies to the heuristics relating to geopolitical environment. While the older generations of Americans appear to be firmly stuck in the comfort-seeking status quo ante of 'Cold War'-linked hegemonic perception of the world around us - the basis for which is the alleged positive exceptionalism of the U.S. confronted by the negative exceptionalism of Russia and, increasingly, China, Americans of younger cohorts are starting to comprehend the reality of multipolar world we inhabit.

At least, according to the Pew Research data:

The gap between the tail generations (the Z-ers and the Boomers) is massive, and the spread within the generations is relatively more compressed for the Z-ers.

6/12/18: When it comes to geopolitical & socio-economic anxiety, Europe’s problem is European


Europe is a sitting duck for major geopolitical risk, but the U.S. is getting there too:



And volatility surrounding the uncertainty measure is also out of line for Europe, both in levels and trends:

Just as the Global Financial Crisis in Europe was not caused by the U.S. financial meltdown, even if the latter was a major catalyst to the former, so is the current period of extreme policy anxiety and instability is not being driven by the emergence of the Trump Administration. Europe's problem seems to be European.