Saturday, 21 March 2009
Following on from the previous chart, the unusually high correlation between the movements in the yield on US Treasury Notes and the Nikkei is illustrated even more strikingly by inserting another key asset class into the mix - US Banking stocks, as represented by the KBW Banking Index (BKX).
This chart should be a course requirement for MBA students who are presented with the Efficient Market Hypothesis and all of the dogma about rational economic agents.
Look again to the right hand side and the terminal percentage position is again quite extraordinary. A different base period was selected because the Banking Index did not exist in the early 90's and the base selected of mid 1997 corresponds to the Asian banking crisis which many feel marked a key turning point in the development of a more sophisticated and accident prone financial economy.
One could make the case that the entire bubble that is seen in the KBW during the ten year period from 1997 to 2007 - based on leveraged Anglo-American financial engineering techniques - has effectively now been deflated and the current position of the banks in relation to the Nikkei and the ten year yields reflects the sober assessment that the balance sheets of the US banking sector have effectively been brought back down to earth after a period of mass delusion as to the value of the assets (primarily real estate) that persisted from the dot com era and through the Greenspan easy money era.
The take away from this chart could be somewhat reassuring in the sense that the worst may now be fully priced in to US banks. There are other indications that the sector is grasping for a bottom and the coincidental terminal point with the other two key variables lends some credence to this notion. However the key variable in the equation - the yields on the 10 year Treasury - could still bring all three variables depicted down to even lower levels.