US 10-year Treasury yield and nominal GDP: what is the interrelation?

Yields on the 10-year Treasury are up 50 basis points (bps, or 0.50%) since the U.S. presidential election on Nov. 8, 2016 and nearly 100 bps from the July lows, as bonds sold off. This marks the fastest rise since the so-called “taper tantrum” in 2013, when expectations of an increase in interest rates by the Federal Reserve triggered a bond selloff.

Whether the new administration’s policies lead to faster economic real growth (after inflation) is an open question. But they are almost certain to lead to faster nominal growth, which includes inflation. This is important because over the long term it is nominal growth that drives rates. Going back to 1962, nominal growth has explained roughly 35% of the variation in U.S. 10-year Treasury yields (see the accompanying chart). Roughly speaking, 10-year yields increase 50 bps for every one percentage point increase in nominal growth.

 

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World top 20 largest asset managers as of the end of 2015

Assets under management by the world’s 500 biggest managers totaled $76.7 trillion at the end of 2015, down by 1.7% from a year earlier. North American firms’ assets decreased by 1.1% to $44 trillion, those managed by European firms, including managers in the U.K., fell by 3.3% to $25 trillion, and assets of Asian managers and rest of the world were down by 4% to $3.6 trillion. Only Japanese managers enjoyed an increase in assets last year, up 3.1% to $4 trillion.

Willis Towers Watson conducted the research in conjunction with Pensions & Investments. According to the study, the 78.3% of total assets that were actively managed declined by 2.8% in 2015, while passively managed assets fell by 5.5%. In 2014, passive assets grew by 28.1%. Traditional asset classes, which held the lion’s share of total assets last year, decreased by 7.1%. Equity accounted for 45.4% of the total 78.2%, and fixed income 32.8%.

 

Top 20 Managers

The study showed the top 20 managers’ share of total assets increased to 41.9% in 2015 from 41.6% even as their assets fell from $32.5 trillion to $32.1 trillion. Assets of the bottom 250 managers fell to 5.8% from 6% in 2014, and stood at $4.4 trillion. Twelve U.S. managers and eight based in Europe made up the top 20 list. The highest-ranking Japanese manager was Sumitomo Mitsui Trust Holdings, in the 33rd spot. Independent asset managers held nine of the top 20 spots, followed by banks with eight and insurers with three. Developing country managers’ share of total assets fell from 3.4% in 2014 to 3.2% last year, with assets under management amounting to some $2.5 trillion.

Following are the world top 20 largest asset managers as of the end of 2015, according to the report.

 

20. Northern Trust Asset Management, U.S.: $875 billion Read more »

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All of the World’s Money and Markets in One Visualization

How much money exists in the world? Strangely enough, there are multiple answers to this question, and the amount of money that exists changes depending on how we define it. The more abstract definition of money we use, the higher the number is. In this data visualization of the world’s total money supply, we wanted to not only compare the different definitions of money, but to also show powerful context for this information. That’s why we’ve also added in recognizable benchmarks such as the wealth of the richest people in the world, the market capitalizations of the largest publicly-traded companies, the value of all stock markets, and the total of all global debt.

The end result is a hierarchy of information that ranges from some of the smallest markets (Bitcoin = $5 billion, Silver above-ground stock = $14 billion) to the world’s largest markets (Derivatives on a notional contract basis = somewhere in the range of $630 trillion to $1.2 quadrillion). In between those benchmarks is the total of the world’s money, depending on how it is defined. This includes the global supply of all coinage and banknotes ($5 trillion), the above-ground gold supply ($7.8 trillion), the narrow money supply ($28.6 trillion), and the broad money supply ($80.9 trillion). All figures are in the equivalent of US dollars.

 

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The History Of The World Population Growth

The UN calculates that there are more than 7 billion living humans on Earth, yet 200 years ago we numbered less than 1 billion. Recent estimates suggest that 6.5 percent of all people ever born are alive right now. This is the most conspicuous fact about world population growth: for thousands of years, population grew only slowly, but in recent centuries it has jumped dramatically. Between 1900 and 2000 the increase in world population was three times greater than the entire previous history of humanity– an increase from 1.5 to 6.1 billion in just 100 years.

A picture of world population in the very long-run fits the pattern of exponential growth (when a population grows exponentially the rate of growth is proportional to the size of the population). Yet an empirical observation of how growth rates have developed in the course of the last century reveals that this pattern no longer holds. The annual rate of population growth has recently been going down. A long historical period of accelerated growth has thus come to an end; the annual world population growth rate peaked in 1962, at around 2.1%, and has come down to almost half since.

Based on these observations, world history can be divided into three periods marked by distinct trends in population growth. The first period (pre-modernity) was a very long age of very slow population growth. The second period, beginning with the onset of modernity (with rising standards of living and improving health) and lasting until 1962, had an increasing rate of growth. Now that period is over, and the third part of the story has begun; the population growth rate is falling and will likely continue to fall, leading to an end of growth towards the end of this century.

In order to study how the world population changes over time it is useful to focus on the rate of change (rather than just levels). The following visualization presents the annual population growth rate, superimposed on the total world population, for the period 1750-2010 (plus projections up to 2100). This is the period in history when population growth changed most drastically. Before 1800 the world population growth rate never exceeded 0.5%, while in the course of the first fifty years of the 20th century it went from 0.8% to 2.1% – the highest annual growth rate in history, recorded in 1962. After this point, it has been systematically going down with projections estimating an annual rate of growth of 0.06% for 2100. Since the rate of growth corresponds to the slope of the line tracing the total world population over time, this means that under these projections we should expect an inflection in growth around the year 2100. In other words, under the assumption that the population growth rate will continue falling more or less at the current pace, population will stop growing before the end of this century.

 

 

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Trading Is Hazardous to Your Wealth

“Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.

 

 

The white bar represents the net annualized geometric mean return for February 1991 through January 1997 for individual investor quintiles based on monthly turnover, the average individual investor, and the S&P 500. Read more »

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The Changes in SDR Weights After China’s Yuan Joined IMF Currency Basket

September 30, 2016

In the most recently concluded review (November 2015), the Executive Board decided that the Chinese renminbi (RMB) met the existing criteria for SDR basket inclusion and therefore, effective October 1, 2016, would join the SDR basket, along with the U.S. dollar, euro, Japanese yen, and pound sterling.

The weights of the five currencies in the new SDR basket based on the new formula are listed below:

  • U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
  • Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
  • Chinese renminbi 10.92 percent
  • Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
  • Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

The Chinese RMB met all conditions and operational requirements for being determined freely usable and to be added in the SDR basket at the time of the Executive Board’s decision on November 30, 2015. It was decided to make the new basket effective October 1, 2016 to allow the Fund and its member’s prepare for operations using the RMB.

The next review of the method of valuation of the SDR will take place by September 30, 2021, unless an earlier review is warranted by developments in the interim.

The Review of the Method of Valuation of the Special Drawing Right (SDR) basket is conducted every five years by the IMF’s Executive Board, or earlier if warranted by developments. The purpose of the review is to ensure that the SDR basket reflects the relative importance of major currencies in the world’s trading and financial systems, with a view to enhancing the SDR’s attractiveness as an international reserve asset. The latest review was completed on November 30, 2015.

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Harvard Management Company: Annual Endowment Report, Sep. 2016

“For the fiscal year ended June 30, 2016, the return on the Harvard endowment was (2.0)%, resulting in a relative return to its benchmark of (300) basis points. The value of the endowment on June 30, 2016, was $35.7 billion. The low interest rate environment and market volatility of the past fiscal year presented a number of challenges to generating returns. However, we recognize that execution was also a key factor in this year’s disappointing results.

 

 

The last ten years, inclusive of the global financial crisis, have been challenging for the Harvard endowment. However, over the last twenty years the endowment has returned 10.4% annualized, exceeding the average annual return on the benchmark portfolio of 7.7%. The value of $1,000 invested in the Harvard endowment has significantly outpaced both a traditional US and Global 60/40 mix of stock and bonds over the same time period. Read more »

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Capitalization Ratios for Global Systemically Important Banks (GSIBs)

Source: Federal Reserve Y-9C Reports, Securities and Exchange Commission Form 10-K, SNL Financial (Data update as of September 12, 2016).

 

Tier 1 Capital is a measure of bank’s financial strength, and assigns different weightings to less risky assets. It also includes other instruments that can absorb losses, rather than just focusing on the value of the bank’s equity capital. US regulators have traditionally focused on the leverage ratio, while European regulators have focused on Tier 1 Capital.

The leverage ratio is a measure of a bank’s financial sustainability, and shows how much equity capital a lender has against assets such as loans. Regulators like the leverage ratio because it’s a fairly simple measure of how active a bank is compared to its equity capital and is difficult for a lender to manipulate. The US calculation includes the amount of derivatives banks have on their books. A higher percentage suggests a bank is in a better position to weather losses and defaults.

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The Big Mac Index and The Purchasing-Power Parity

Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in July 2016 was $5.04; in China it was only $2.79 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 45% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index. Below there are the data as of July 2016.

 

Raw index

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Mapping the World’s Jewish Population and Migration Patterns

The map and chart below show where the biggest Jewish populations live and how this has changed over the past century. In 1939, Jews numbered 16.5m people, up from 10.6m in 1900. By the end of the second world war, the Nazis had wiped out one-third of them, sweeping away a thousand years of Jewish civilisation in central and eastern Europe. The death toll might have been even higher, but a flurry of pogroms that started 60 years earlier across the then-tsarist empire had sent waves of Jewish emigrants westward. By the time Hitler struck, some 6m Jews were safe in North and South America and in Britain, with 3m more living in the Soviet Union. From 1948, most of the Jews of north Africa and the Levant emigrated. The break-up of the Soviet Union brought the latest big wave of Jewish migration to Israel in the early 1990s.

 

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