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Reality
  • Title: The S&P 500 charts that make bulls skittish and give bears hope
    Date/source: , FT
    Comment: This is a discussion of high PE ratios right now. As we said in class, when you see high ratios, you should ask whether something special explains it. In this case, earnings are particularly low for energy companies, but are expected to rebound. That may or may not be a big enough factor to make you feel good about where the market is now. Think about it.
  • Title: A European bad bank is needed to clean up European banks' mess
    Date/source: , FT
    Comment: This is all about the fundamentals of banking as illustrated by what happens in times of stress. From the article: It is worth restating the simple policy reason to sequester bad loans and other toxic assets from banks’ balance sheets. The value of such assets is uncertain, but plausibly much less than the accounting value. If their quantity is large enough, that means the solidity of the bank that holds them is in doubt. The possibility of lossmaking time-bombs lurking in its portfolio can both inhibit the bank itself from undertaking new risks, and may lead its own creditors to charge more for financing it. Both create pressure to retrench rather than lend more.
  • Title: The World’s Most Radical Experiment in Monetary Policy Isn’t Working
    Date/source: , WSJ
    Comment: This article is about whether Japan's recent policies to escape deflation are working. Most radical experiment? Maybe not. Many of us believe Japan has taken half steps or taken one step back with every step forward. In any case, an interesting article.
  • Title: Age of Populism Shakes Pedestal of Central Bank Independence
    Date/source: , Bloomberg
    Comment: In tough times all institutions are challenged. Central banks are no exception. Around the globe there are movements to make monetary policy bend to the populist will. We'll discuss the merit of this later, but for now I'll just note that central bank independence was created because of the dangers of populism. In other words, this moment is a regular thing in history and the question is whether the institutions created to restrain a destructive populism will hold. (This does not presume that central banks have been doing the right thing or that all popular ideas are bad. We do, however, have a long history of destructive populism to contemplate.
  • Title: Who’s Sucking Up All the World’s Safest Bonds?
    Date/source: , WSJ
    Comment: Right now possible shortages in the quantity of "safe" bonds available to the private sector is a big topic. This may be a symptom of the strange times or or new regulations or of something else.
  • Title: Sovereign-bond issuers shrug off downgrades
    Date/source: , Economist
    Comment: Sometimes downgrades of sovereign debt lead to big jumps in the yields on that debt. But not lately. Why is this? Is it related to the shortage of safe bonds?
  • Title: Surely we're behind some curve
    Date/source: , CFE
    Comment: A CFE post on monetary policy. Talking heads in the market have been worrying that the Fed is "behind the curve." While this borders on conventional wisdom in some parts, it is nonsense.