A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
BNN Bloomberg picked up on the Financial Times story I led with yesterday, the short position on Canadian bank stocks held by U.S. fund manager Steve Eisman. I’m linking to it today as an excuse to mention what I should have brought up Thursday, namely that it is very unlikely that this is a naked short position.
High dividend yields on bank stocks make them very expensive to short (when short position are covered, this includes the dividends paid while it was held). Mr. Eisman likely bought a long position with the proceeds from the short. The logical candidates for the long are U.S. bank stocks that are attractively valued relative to history and also pay dividends to offset the shorting costs. The manager probably hedged the currency also in some way to sidestep potential volatility in the loonie.
If Mr. Eisman’s bet against Canadian banks is indeed part of a pair trade, all he needs is for the U.S. bank stocks he bought to outperform the domestic banks he shorted to make a profit.
“Big Short's Steve Eisman is now targeting Canadian banks” – BNN Bloomberg
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George Mason University economics professor Tyler Cowen details an academic study calculating the relative success of equity versus real estate investing over the extreme long term,
“Returns to real estate are harder to measure, both over time and across countries. One difficulty is measuring the ‘imputed rent’ return – that is, if you buy a house you also get the pleasure of living there and don’t have to pay rent elsewhere… In their full sample, equities average a 6.7 per cent return per annum, and housing 6.9 per cent. For the U.S. alone, equities return 8.5 per cent and housing 6.1 per cent, the latter figure being lower but still quite respectable. The standard deviation of housing returns, one measure of risk, is less than half of that for equities.”
The original study uses global data available since 1890. It should probably not be applied to short-term financial planning decisions with the domestic housing market likely close to the end of a profitable cycle.
“Scared of Stocks? Buy a House Instead” – Cowen, Bloomberg
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Morgan Stanley economist Ellen Zentner asks an interesting question – why aren’t U.S. GDP growth estimates going up now that the Fed has backed off on rate hike expectations?,
“A path that now delivers only one hike through the end of 2021 should boost economic growth forecasts, all else equal. Using the Fed’s own macro model, FRBUS, our simulations indicate that between 2019 and 2021, the lower fed funds path embedded in the March SEP [Summary of Economic Projections] should have lifted growth expectations by 15-30 basis points in each year. Instead, they were lowered by 10-20 basis points in 2019 and 2020. In addition, going into the March FOMC meeting, financial conditions were the easiest they’ve been since September last year … Is the Fed telling us that we’re not getting any bang for our buck out of this 'patient’ period for monetary policy and subsequent easing of financial conditions?”
“@SBarlow_ROB MS: "Is the Fed telling us that we're not getting any bang for our buck out of this "patient" period for monetary policy and subsequent easing of financial conditions?" – (research excerpt) Twitter
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The Bank of International Settlements white paper “Can an aging workforce explain low inflation?” will be part of my weekend reading,
“Findings: We find that, over the last 20 years, the aging of the workforce has reduced wage inflation. This result holds true across all the economies we tested, from the G7 advanced economies to small European regions. But the effects are small, perhaps because we estimate the net effects of two channels that work in opposite directions. We also find that unemployment has a large impact on wage inflation.”
“Can an aging workforce explain low inflation?” – BIS
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Tweet of the day: “ @IvanTheK Please stop propagating the notion that a recession is imminent because of supply-demand imbalances in the bond market.” – Twitter
Diversion: “March Madness shows just how little we understand probabilities” – RCM Alternatives
Column: “Here’s what is driving this supercharged stock market rally in the face of slowing economic and earnings growth” – Barlow, Inside the Market
Newsletter : “There are no ‘hacks’ in investing” – Globe Investor
Scott Barlow