Credit Default Swaps (CDS’s) are an over the counter (not bought or sold through an exchange) product which gives the buyer insurance in the case of a credit event (default) of the underlying (reference entity: often a bond). Effectively this brings together a long and short. The video below does a good job of explaining much of this, well worth watching.
There is a growing body of work suggesting that many developed countries will cease to roar ahead at 3%+ growth rates in the future, that instead we are likely to see a growth rate of about 2% p.a. leading to a ‘steady state’ economy.
If you look at the USA the inflation rate was only 1.9% over the decade from 2000-2010. If you strip out the 2008 recession effect it still only comes out at 2.6%. This could mean that Bernanke’s approach of effectively putting a floor on stock prices could lead to a revision irrespective of intentions.
Take a look at the picture below.
This could mean that in the future the standard P/E expectations could drop and a corresponding dividend yield increase become the natural premium or expectation of stock market investment, strangely; this will be getting back to the original reason people invested in stocks prior to the 20yr secular bull of the 80’s-late 90’s.
We have been shaken, and the markets are stirred. Why not have fun in our final days? When asked what I’d do if I was on a plane that was going to crash, my simple answer is ask somebody for a shag and drink champagne until it all goes bang, what a pity that during the bond market equivalent of this all we can do is shake in our boots, I say crack open the bubbly.
O.k. So we can’t afford to drink champagne, and with any flight/sex innuendo I’ll become the blog version of Prenderville so we’ll leave that alone too.
What could we do with our bond market to sort out this mess? The issue we currently have is that there is capital depreciation on our bonds leading to higher yields, when you hear that our yields hit 8% it doesn’t mean that we are paying more, it means people are selling at a loss and new buyers get a higher yield on the indexed mix of bonds (Read More →
From a credit perspective that is. The picture below is a snapshot of Credit Default Swap prices and the Cumulative Probability of Default (CPD) by CMA Vision.
Europe is making a comeback in the ‘basket-case economies’ league tables, Ireland is playing third fiddle to Venezuela and Greece, unthinkable yet real.
Credit Default Swaps hit a record high yesterday for Irish Sovereign Debt. CNBC spoke to Brian Cowen on this topic yesterday, our Student Protests got a mention at the very start, Mr. Cowen believes this is short term sentiment, and while you can use a cyclical argument against Ireland, there is a secular argument about our debt: that it will be more expensive in the future (forever).
Using credit default swaps we are placing ahead (as in more risky) than Pakistan, Argentina and Iraq! Behind only Venezuela and Greece, interesting times….
We hear about Debt/GDP all the time (national debt/Gross Domestic Product; total output of the economy) and the standard argument is that we should be looking at Debt/GNP (national debt/Gross National Product; GNP strips out non-Irish domiciled output – what remains here).
The question should perhaps not be ‘which is better Debt/GDP or Debt/GNP’ it should be is ‘Debt/G-anything’ the relevant metric? There are a few reason for why GNP and GDP are both lacking, in fact it distorts a true view of our Deficit
1. It’s a thing of the past – both examples are historical by nature, they change and that is why any conversation on GDP and GNP is a constantly movable feast. Imagine if I asked you to drive across the country and describe the scenery to me, but you could only do so by telling me what you saw in the rear-view mirror? That is what GDP & GNP are about. Debt/GDP levels in Europe soared after …
There was a post on Geckko’s World about Negative Equity Loans – and he rightly pointed out that there had been an instant and widespread denouncement of them, then going on to point out that if a person was to try to reduce their debt that it could in fact be a very good concept. My opinion is that the focus will not be as a facility to reduce a persons debt but rather to increase, however, Geckko makes some very interesting and valid points which show that the first reaction was perhaps not totally balanced, as well as giving some smart operational guidelines (it’s worth leaving here for a while to check out the post).
However, there are some distinct advantages for the lender in this process as well which I have not seen any commentary on (if you have please post links in the comment section!).
1: Reduced borrower risk: Surely a higher LTV makes it riskier right? …
In this video Paddy Hirsch talks about Bonds, Notes and Bills helping to break down how debt is described based on its tenure and also a little about how they work. This is worth watching twice if you have heard ‘Government Bonds’ mentioned in the past but didn’t really get what they were talking about.
This is a fascinating clip about a concept I am a fan of – that of the emotions of investing, and how we make decisions – only did a post on it yesterday! The full video is available here if you want to check it out (c. 1hr long).
Bill Gross talks about the US jobless figures for June, while there is the need to realise that bad news makes bond prices rise, Mr. Gross of PIMCO (the worlds largest bond fund) make some excellent points.
Anaemic wage growth, a savings rate jumping from 0% towards 8%, the people with jobs are not getting raises, he picture he paints is grim, he says there will be suppressed demand and spending for a generation. The contents of his takes on the market can be found on the Pimco website here.