AI and Geoeconomics

Marc Chagall - Cirque Bleu (1950-1952) Bonds-Equity correlation is positive again! The correlation between Bonds and Equity returns is moving fast these days: in a few weeks it has moved from -70% in February to +12% this week. Equity-bonds Correlation - Source: Google Finance Is this move into positive territory abnormal? What are the factors driving this change of sign? Does it mean that investors should change their Bonds-Equity allocation? Is that a warning signal for the fixed-income products? Back to the pre-2000 regime? A positive correlation between the returns of bonds prices and equity prices means a negative correlation between bonds yields and equity returns; this inverse relationship between equity prices variations and yields had been actually prevailing before 2000. As explained by Ranking & Shah Idil, in their paper “ A Century of Stocks-Bonds Correlations ”, Royal Bank of Australia, 2014 : The recent [last 14 years] period of positive co...

The graph below is automatically updated on a daily basis using Google Spreadsheet combine with Google Finance API #FinTech - Access File  here Fed Rate Hike Not Seen Til 2016, Cheap Money Fueling Stocks - April 18th, 2015 Equity-bonds correlation has move up from -70% on Feb 5th, 2015 to -17% this week. Increasing likelihood  of a rate hike by the Fed this year but also uncertainties about inflation may explain this rapid variation. #GoldmanSachs : "We do not have much confidence in the inflation outlook"  http://ow.ly/LMlUg #inflation #uncertainty High valuations represent a risk both on Equity and Bonds - April 5th, 2015 “We believe that the biggest risk is valuation risk : the risk of loss that is realized when expensive assets revert to fair value. This risk is critically important today as we believe stocks and bonds are expensive globally,” Catherine LeGraw, a member of GMO’s asset allocation team, wrote in a recent white paper . Are y...

Myron Gordon at the University of Toronto in 1982 For the last 13 years and until recently (see Bonds/Equity Positive Correlation: For How Long ?) correlation between US stock and bond returns have been negative. As presented by Hasseltoft (2009) , the correlation between US stock and bond returns has varied substantially over time (puzzle 1), reaching highly positive levels in the late 1970s and early 1980s while turning negative in the late 1990s.   US strock and bond returns correlation  Henrik Hasseltoft 2010 Several statistical models have been put forward to model the time variation but little work has been done on explaining the phenomenon within an equilibrium model. A second feature (puzzle 2) of data that has been considered puzzling is the highly positive correlation between US dividend yields and nominal interest rates , a relation often referred to as the Fed-model . From the Gordon (1962) growth formula, dividend yields are given by the real...