18 September 2017: A trillion-dollar puzzle

The oldest international financial institution in the world and the principal center for international central bank cooperation, the Bank for International Settlements (BIS), published its latest quarterly review yesterday. According to the BIS, the global economic growth, in combination with continued monetary stimulus and stubbornly low inflation, forms a ‘trillion dollar’ question. Cheap borrowing of money and the strong pick-up in growth of both advanced and developing economies are driving markets to the point of exuberance. US corporate debt has now reached a level that far exceeds that of before the financial crisis. The demand for high-yield covenant-lite bonds has risen quite strongly as investors dropped the premiums for riskier lending. According to the BIS, this is potentially dangerous. A significant rise in interest rates could lead to problems, or even another crisis. The BIS calls for a gradual return to higher interest rates, but the central banks are reluctant to hike rates as long as the inflation stays low.
This reminds Claudio Borio, Head of the Monetary and Economic Department (MED) of the BIS, of Waiting for Godot, a play by Samuel Beckett, in which two characters, Vladimir and Estragon, wait for the arrival of someone named Godot who never arrives. Why is it that inflation stay so low despite economic growth, full employment and unprecedented monetary stimulus by central banks? Even the BIS is in the dark here. “This is the trillion-dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” Borio said. “Worryingly, no one really knows the answer.”
And come to think of it, this is not much reason for complacency, is it?white-chapel-logo-small

Undisturbed by North Korea’s latest missile launch, US markets continued to rise as telecommunication and bank shares rallied, and technology shares recovered after two days of losses. All three major indices finished in the green on Friday. The S&P went up 0.18% to an all-time-high, surpassing 2,500 points for the first time in its history. The Dow finished up 0.29%, posting gains for the sixth day in a row, as well as its fourth straight record close. The NASDAQ rose 0.30% for the day. All indices had a very good week: the NASDAQ booked a weekly gain of 1.4%, the S&P 500 of 1.57% and the Dow of 2.2%.
It was a week of easing volatility. The first half of the trading week was lacking direction, but during the second half volatility showed a decreasing trend. The VIX was down 2.59% at 10.17 on Friday, flirting with the single digits again during intraday trading. UVXY ETFs were down 3.55%. XIV ETNs gained 1.92%.
Danny Daredevil took another beating Friday. His RSS dropped to below 46%. Adventurous Anny keeps her money in her pocket for the time being. The RSS of her cash position remains 4%. Solid Suzy and Lazy Larry saw their RSS rise to 35%.
None of our models gave a trading signal at the end of Friday’s session.

Model  Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

45.67%

-63.86%

-66.54%

25%

Adventurous Anny Cash 6 March 2017

3.84%

3.84%

-25.11%

7%

Solid Suzy XIV 6 March 2017

34.89%

34.89%

7.37%

74%

Lazy Larry
XIV 6 March 2017

34.89%

34.89%

7.37%

74%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

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René spent all Sunday on the tennis court. With a group of twenty people consisting of his parents, uncles, aunts, cousins and nephews, he played tennis intensely during most of the day. A bit too intensely, as he painfully found out today. It was not his physical condition that bogged him down — as he is an enthusiastic mountain biker — but the fact that you use different muscle groups when playing tennis. Seeing his mirror image in a window during a walk today made him laugh: it struck him that he looked at least twenty years older.