Vogonomics

21 is lucky; it is the number of dots on a dice; it is the winning hand in Pontoon; the final act in a famous university drinking game and the traditional age of majority. 2021 is going to be lucky; the return to normality and remembered as the end of the coronavirus pandemic, at least as an economic event for the major industrialised economies.  The health crisis will not be over; restrictions will continue, but the major industrialised economies will move on encouraged by the hope of immunity and faith in their exceptionalism. The rebound after the first lockdown demonstrated that the bigger the fall, the bigger the bounce. The free world will once again ignore mortality and focus on the base levels of Maslow's Hierarchy. The demands of publishing schedules ensured that most 2021 outlooks were written and published in late October and early November before the outcomes of three crucial known unknowns were revealed. These were the Presidential elections and the special Senate elec...

QE by the Bank Of England in Q2 was enormous ! They bought a staggering £235m / bp. The graph below shows qtr by qtr DV01 bought by the BoE over the last 10 years. (forward curve risk buckets are shown by colour, data BoE, analysis CRZ ). That means that for every 0.01% move in yields the value of Gilts bought from the market in Q2 changes by £235m. Notwithstanding, that something needed to be done to restore a functioning market mid-March,  we should maybe question (as Paul Tucker does here ) if this scale was truly justified by the economics. Is it a surprise that the curve is locked at rock bottom [flat] and not [yet?] responding to the deteriorating fiscal position? However, as the OBR points out, “... higher public debt also increases the sensitivity of the public finances to higher interest rates, increasing the risks from pursuing a fiscal strategy that assumes that financing conditions will remain favourable over the longer term”. The graph below shows the historical re...

High yield indexes yield more than the Treasury + equity put hedge. The above chart is a toy spreadsheet model of the concept outlined in the papers below using put strike levels that gave the same daily volatility and range over the data period.  The Empirical Merton Model and Option-Based Credit Spreads  by Christopher L. Culp are worth a read. There is definitely a conceptual elegance to viewing credit in aggregate as Treasurys­ (risk-free rates) plus puts (at various strikes) on broad equity indexes. and it encapsulates perfectly the notion that by owning a corporate bond, you are long the risk-free rate and short tail risk. .

Real GDP forecast using labor force participation as an indicator variable  This is a follow up from the St. Louis Fed blog post last year, suggesting that GDP / labour force participant had continued on trend post-crisis, this was their chart: Data from  FRED and forecast from Indicio , suggesting 2.2 to 2.4% growth is a reasonable estimate for trend growth over the next couple of years. This is before adjusting for known demographics (i.e., assuming the recent trends in labor force participation. No atrophy post-crisis to be seen here.

With knowledge or expertise on the x-axis and skill on the vertical axis; we're going to postulate that "conviction" seems to be an S-shaped curve, rising slowly at first and then zooming to unrealistic levels. Realised skill, on the other hand, is far more likely to grow at a decreasing return to effort in a much smoother way, topping out at the limit. Background reading on the weak correlation between self-assessment and performance in this article .