Kamis, 16 Agustus 2012

Reminder: the world is not coming to an end

These charts serve as a reminder that no matter how much angst there is out there about an imminent U.S. recession, a Eurozone collapse, or a China implosion, key financial indicators currently are trading at relatively benign levels, even as valuations (e.g. PE ratios) remain depressed. Swap spreads in the U.S. are about as low as they get, suggesting that systemic risk is also very low and the outlook for the economy is for things to improve. Eurozone swap spreads are still somewhat elevated, but they have been moving down all year long, and that also suggests that things are more likely to improve in Europe than deteriorate. The implied volatility of equity options is very close to a multi-year low, suggesting that although investors believe that corporate profits will decline (as evidenced by relatively low PE ratios), they are reasonably comfortable that nothing serious is going to happen.

In short, even though the future doesn't look bright (yet), it's very unlikely that the world we know it is about to end.

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