Chart of the Day: Credit-Equity Divergence

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


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".

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