Chart of the Day: Credit-Equity Divergence

Helen Thomas finds this chart in a report from Bank of America:

1001.jpg

Basically, the x-axis is stock prices while the y-axis is bond spreads. The red dots are What Was: they’re weekly datapoints from June 2002 to June 2007. The grey dots are What Is: they’re the datapoings from July 2007 onwards. And the black dot is where we are right now: about as far away from normal as we’ve ever been.

Now one can niggle a little with this chart. In an ideal world, stocks are meant to rise in price over time, while spreads are meant to stay roughly constant. So comparing a stock-index level directly to a bond-spread level, as the chart does, ignores the effects of increased corporate profits over time, or something. But that’s a small point, which is overshadowed by the fact that the graph clearly shows something going on.

What I’d really like to see though would be the same chart with a line connecting all the dots in chronological order. It might be a bit harder to read, but it could also give a bit more of an impression of how exactly we got to where we are.

Update: Alea reckons this is the "dumbest graph of the day", and that "whoever wrote this report should be fired on the spot".

This entry was posted in bonds and loans, charts. Bookmark the permalink.