GETTING BACK TO ‘NORMAL'

Lex 2009-06-04
Ahh doctor, thank you, I feel normal. Was it all a dream? An investor, perhaps a bear, who went into hibernation before Lehman Brothers collapsed might, on waking now, feel that not much had changed. Indeed, as he rebooted his trading terminal, he would see that much was normal – as in “old normal”, instead of the “new normal” some talk about in the post-Lehman world.
There is little sign of deflation; 10-year indexed US government bonds imply future inflation of about 1.6 per cent, about their 10-year average. On interbank markets, the Libor-OIS spread – the premium over expected central bank interest rates that banks charge each other for 3-month money – is lower than in September. US equities are trading at 16 times historic earnings, their average going back to 1920. As for commodities, some are up, others down, but oil prices at $68 a barrel are at their 5-year average, about where Opec believes normal.
There is even talk of bumper bonuses for bankers, and multiyear guarantees. Apart from the fact that financial stocks account for a third less of world equity market capitalisation than they did in 2007, nothing much there has changed.
Rubbing his eyes, this bear would also see that some things, of course, are not quite normal. Market volatility, measured by the Vix index, is twice its ten-year average. The yield on BAA corporate bonds, a proxy for general corporate credit availability, is at 8 per cent, a full percentage point higher than its 10-year mean, while emerging market bond spreads are also about a point above their average. As for world trade, the Baltic Dry Index is two-thirds lower than its 2008 peak but higher than where it has generally traded over the past 10 years.
It would only be among public markets that this investor would note the big changes. Joblessness is soaring, even as interest rates have never been so low, nor government budget deficits so high, piling even more debt onto western economies. There he would at last see the abnormalities that made possible the normalities he first saw.
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