Bulls Rampage

Increasing debt for equity swap

Sentiment bullish and prices high relative to the past.

5 responses to “Bulls Rampage

  1. John:

    For your readers: http://www.statsblogs.com/2015/09/12/why-is-this-double-y-axis-graph-not-so-bad/

    In general, double-axis graphs are horribly misleading because the scale can be changed to make the graph cross anywhere as noted in the above linked blog-post. However, it is not always the case that a double-axis graph is misleading and may not be the case with the graphs in this particular post. I just wanted to bring this to the attention of your readers so when they think about the two graphs with double-axis they can dig deeper then just the appearance of whatever relationship is indicated by the choice of axis.

  2. I totally agree and the next important part is to have both side log based. That will give you a much better indication whether it actually tells a story.

    • I would agree that when investigating proportional changes, a log scale is usually most appropriate. But that’s just one degree of freedom. There’s also the choice of what to graph in the first place!

      I think if we’re trying to get at the potential effect of debt on various asset class prices, I would suspect the ratio of debt/equity financing is probably more interesting than the absolute dollar value of debt. Better still would be a comparison of debt to the ability of corporations to service that debt. If I take on twice the debt – say, at less than half the interest rate as I would have in previous eras – but can service it as well as or better then I could service previous debts is that really a problem?

      However, I’m not a macro investor and I don’t spend a lot of time thinking about economic cycles/debt/bubbles so it would be interesting to see what John or others that do this kind of thing say.

      • Yes, you want to look at percentages not just absolute numbers. On a macro and even micro level, you should focus on the MARGINAL productivity of the debt. You borrow $1 at 10% interest and then produce $1.20 worth of goods, all is well. You pay back your loan principal and interest of $1.10 and have ($1.20 – $1.10) $0.10 as profit. The problem comes when you produce less than $1.10.

        See my next post on the marginal productivity of debt–tomorrow.

  3. Pingback: This Week's Best Investing Reads | Stock Screener - The Acquirer's Multiple®

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