CREDIT markets tend to be more efficient than sharemarkets. And they move earlier. What happens in debt markets will often determine what happens in equities.
You will recall the fortuitous precision with which John Kinghorn sold RAMS to the sharemarket in mid-2007.
Just days after the float, as Kingo deposited a cool $650 million, the credit crisis hit, sharemarkets tanked, and RAMS shareholders racked up some big tax losses.
Again the next year, events in debt markets reliably foreshadowed the relentless spiral down in global sharemarkets. As credit spreads returned to normal in 2009, sharemarkets recovered, until this year.
What are credit markets telling us now? One, we are headed for a global recession. And two, if the twin deadlocks over debt in the US and Europe are not resolved – something worse.
The first thing to notice is the flight of capital continues apace, out of Europe and into the US Treasury bond market. The yield on a US 10-year Treasury bond is just 1.92 per cent. That’s low for 10-year money. But two-year paper is yielding just 0.26 per cent.
Money, in other words, is virtually free. Bear in mind that price and yield are inverse so, as buyers flood into the haven of the world’s biggest and most liquid market, bond prices rise and interest rates fall.
WE HAD some fun this week reporting the analysis of Geoff Dunsford, an actuary who roasted the health lobby for its figures on obesity and smoking. These afflictions are apparently costing society $58 billion and $31.5 billion respectively, each year! Smokers and obese people are of course doing everybody a favour by generally not sticking around too long after their working lives to be a drag on the public purse.
Dunsford struck at the heart of the fancy valuation methodology. It came down to VSL, the value of a statistical life. Multiplying the number of disability adjusted life years (DALYs) by the value of a statistical life (VSLY) accounted for $50 billion of this $58 billion in costs of obesity.
That’s right, a hypothetical price for a hypothetical person who is never going to cost anybody anything anyway.
What of the countervailing effects of smoking on obesity? Should the obese person’s VSLY of $266,843 (VSL a year) decrease by $53,267, which is the smoker’s VSLY, were the obese person to take up smoking, lose weight but then die of lung cancer?
Should we add a premium to the large smoker/drinker for the entertainment they bring others?
Obese drinking smokers usually have a superior sense of humour, hence their loss arguably imposes a greater cost on society than the loss of a dour, skinny smoking non-drinker.