segunda-feira, 6 de março de 2017


Commodity prices in general have been soaring for almost one year and based on year over year returns are now at levels only seen a few times. Though very often prices, specially for assets wide traded, usually front run the real economy, with some time in our favor it is possible to at least question those price actions. Possibly could be too early to question that but its getting intriguing in my humble opinion.

Some charts and thoughts below:

Commodities (equal weighted index) YoY + 2 standard deviation.

In the meantime global trade volume (CPB data) have improved somewhat but hardly to the same extend as commodity prices. Last time we have seem those price levels trade volume were running at 5 to 10% against 3% now on YoY. (trade volume LHS)

  using the two Y axes:

by the way, its also interesting how trade volume is weak and lagging behind some other economic measures that it used to have some correlation like the US ISM PMI.

Built this easy model to figure out at least to some extend if prices have been running too wild.
Used DXY, real USD yield, global trade and VIX to model it. (R2=0.60). Not perfect but can give some idea. Data up to December (because of CPB global trade).

Finally, another point made by some people is the level of inventory of some commodities, specially iron ore. I have no data to work here on my own so just relying on others. But they seems to point on the same direction. Commodities could be going a bit ahead of itself. 

                                    (can't remember now the source of the chart above)

quinta-feira, 8 de setembro de 2016


BRL and other brazilian assets have run quite a wild path last 4 years. From the “country of the future” to most hated EM and now to some “OK back to business”. No intention to tell the whole story again now once most know it very well. What calls my attention now is that perhaps once the excesses of the downside relative to other currencies has worked out it seems now for me that the optimism has also run its course in relative value to other EM's. Important to notice the “relative” because I still believe commodities has a way to go up so BRL will still benefit from it but Im concerned the “very cheap” is behind, both in relative value and also in fundamental terms.

Currency is probably one of the worst markets to predict. Besides many factors acting at the the same time they also change in importance during the time. Not to say that sometimes it seems no fundamental factor works at all. But sure tones of models can be made and at least we are not in the middle of nowhere without a compass.

Built this simple one below using only commodities and CDS. Chart is YoY % 

Not only not cheap but also a bit expensive.

On relative value against an equal weighted EM basket it also doesn't look very cheap anymore. 

Again, because I believe commodities still has a way up BRL should benefit, but the main point here its not a bargain it used to be at the beginning of the year, specially compared to other EM currencies.

segunda-feira, 1 de agosto de 2016

Yield curve flattening and the recession

A lot attention has been paid to the yield curve recently, specially the 10 years minus 2 years US treasure spread (spread). In fact many papers have been written on the subject and the important prediction function that the spread has on US economic cycles and recession. However since the introduction of the ZIRP the nature of the spread seems to have changed. Looking through the data since 1978 until ZIRP its possible to notice that the most important driver of the spread has been the short term interest rate, more specifically the Fed funds, and not the long tail. But after ZIRP things changed and because the short term is anchored by the Fed funds the spread has been driven by the long tail. So, looking for the spread nowadays could be misleading in terms of recession prediction. Sure a recession is always possible but this time it wont be caused by the usual driver of the spread, what reduces its importance in my view.

Fed Funds, curve flattening and recessions:



the flattening of the curve and FED funds hiking cycle is very similar. But to measure better the effect of Fed Funds and the 10 Years UST on the spread I ran a couple o simple regressions below.

First the impact of FED Funds on the spread since 1978:


and from 1978 until 2007 just before the crisis...


things are pretty much different for the UST 10Y: 


However, since 2010 things changed and UST is the main driver of the spread now, not surprisingly once the 2Y has been anchored by the Fed funds.

What can be seen here also...


If the the spread is important because most of it is driven by the short term rates it must be important to question its meaning now that the driver has changed. NBER has a paper that through a much deeper analyzes also finds more prediction power on the short term rates instead (