Increasing debt for equity swap
Sentiment bullish and prices high relative to the past.
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.
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.
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