Remember way way back in February when the world was terrified of the carry trade unraveling?This chart shows the kiwi rallying 8% against the yen since March 5, the Aussie up 4% against the Swissi (this pair is sort of a measure of investor confidence where a strong Aussie implies a lack of fear) and the US dollar up 2% against the Japanese yen.
So the currency market shows fear is diminished. This is probably 180 degrees from the oil market, depending on how you take a rising oil price; a barometer of increased demand from higher growth or an escalation of fear.
Maybe gold has the answer? In the time period charted the GLD ETF (client holding) is up 4%. Is this because of inflation fear coming from healthy growth, the expectation of a weak dollar due to US economic weakness or something else?
And just what is the yield curve trying to say?
You probably see where I am going; a particular trend in something, like any of the things mentioned, can have different meanings depending on the situation. Above, I question whether any of these things could be due to growth picking back up. Brian Wesbury from First Trust is on CNBC all the time saying we are still chugging along in a healthy fashion. While I disagree with him he could be right.
The point is that sometimes, for example, gold going up means one thing and sometimes it means something else. If you are going to try to decipher the meaning of these things you may have to look at things in a way that is counter intuitive to you.
For example I have been in the inverted curve means recession camp. If it turns out there is no recession I am going to want to try to understand why so that if something similar comes along in a future cycle I will be better prepared.
We all get things right and wrong. Learning from the wrongs is part of the job description.
5 comments:
roger, you wrote a recent post on bid ask spreads of etfs. Was this an editorial that too many of the less traded etfs have spreads too great? Bad for the consumer, bad for etf industry. If so, I hope that you do more of this. Easy to rationalize a big spread if one holds for years, but I'm an intermediate term trader. Ihave a few speciality type etfs on my list...like pho and pbw...but very few. I'm rapdily just not even considering the more innovative products. The spreads, and perception of low liquidity, I think will keep volume quite low. Trust is a real issue. Market specialist and crook are one and the same, undoubtedly an unfair generalization. But, that's the perception. If a new etf five years later only has assets worth 12 million, or whatever, will it disappear? Is there a bottom line for these products?
there have been ETFs that have closed the O-strip recently and iShares closed a couple in 2001 or 2002 I believe. So I would expect that other funds will close in the future but I don't know at what point a company throws in the towel.
As for the spread; that does not tell the whole story. If the spread is a dime but all the volume occurs in the middle (this can be found on a Bloomberg terminal with the TSM function) you could be OK. This varies from fund to fund.
If you use the limit you want and it gets filled does the spread matter? If you use a limit and it does not get filled you don't buy it.
You say you are intermediate term. That is subjective, you may mean a month or a year. For whatever you do does an extra penny matter? what about two pennies. You know what you can or cannot give up in slippage and you should not waiver. some ETFs will work, regardless of the spread and some will not.
hope that helps
I make up for the "why doesn't this work anymore" question by accepting that when everyone knows something, (inverted yield curve), then it can't work anymore, cause then we'd ALL be right, All the time. In 1980, when the curve was 18% short and 12% long, people still had a hard time believing that it was all over. The 5-6% stuff now is minimal in comparison.
i like your logic but i have to concede that it seemed to me that more people were saying the yield curve meant less this time including Cranky Bernanke.
It seems like these market axioms change over time. During gold's initial big run-up, lots of writers were saying a big recession was a given within a year. 'Cause that's what a gold run-up means. Of course it hasn't happened. If it happens in Q4 2007 or in 2009, I guess they'll still point to it and say "See, gold told the story."
I'd bet the "everyone knows something" issue is involved. Time frames change (what might have taken 2 quarters 30 years ago now takes 2 years) and of course people like the Fed chairman know these axioms and plan to counteract them.
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