Author Topic: NYSE as Negative Correlation AA  (Read 1328 times)

Blender Bender

  • Stubble
  • **
  • Posts: 139
  • Location: Vancouver, BC
NYSE as Negative Correlation AA
« on: December 16, 2021, 10:33:31 AM »
I'm a Canadian and I hold most of my stache in USD ETF e.g. VTI.
Based on some (recent?) history, this acts as a hedging.

1. When times are bad, and the global market is suffering, the value of CAD drops against USD, for 2 major reasons:
a) price of commodities e.g. oil drops on the global market, sending CAD down.
b) USD is a last resort of global currency. In panic, investors around the world tend to switch to USD.
The end result is that NYSE down, TSX even more down, but value of the holdings in CAD is better than the market drops. E.g. if NYSE drops -30%, i might see a drop -20% represented in CAD.

2. When times are good, all of the above is somewhat reversed.

Overall, it seems like the NYSE investments act as negative correlation, when seen from a Canadian perspective.
Does anyone else see the pattern? Or is that my delusion?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3669
  • Location: France
Re: NYSE as Negative Correlation AA
« Reply #1 on: December 16, 2021, 12:26:53 PM »
You're missing the fact that owning US companies doesn't equate with owning USD. It's just that US companies measure in USD.

What happens when the USD goes up? US companies have a hard time exporting. And/or multinationals that report in USD get lower income from their non-US operations.

Just go global, possibly with a little Home Country Bias.

Blender Bender

  • Stubble
  • **
  • Posts: 139
  • Location: Vancouver, BC
Re: NYSE as Negative Correlation AA
« Reply #2 on: December 16, 2021, 01:50:52 PM »
You're missing the fact that owning US companies doesn't equate with owning USD. It's just that US companies measure in USD.

What happens when the USD goes up? US companies have a hard time exporting. And/or multinationals that report in USD get lower income from their non-US operations.

Just go global, possibly with a little Home Country Bias.

Yes, there are more things at a play, as always.

To narrow the focus. US holder of VTI vs Canadian holder of VTI. The Canadian one gets the benefit here (ignoring eg the American export, applies to both cases) for the mentioned case (bad times, CAD down).

The are 4 cases in general (stock market and economy):

1. US doing good, CA doing good. This is good for everyone.

2. US doing good, CA doing bad. This is a reasonable case. For instance, fossil energy out of favor, or Biden kills the auto sector in CA (BBB). In this scenario, the CAD should be worse than USD. Benefit of the currency EX.

3. US doing bad, CA doing good. This is not a likely scenario since CA relies too much on export to the US. In this case we have a negative EX benefit, but being in CA, life should be easier to survive e.g. good CA job market and social support.

4. US bad, CA bad. No value, zero sum game.

It seems to me that this is quite unique feature between Canada and US. I would not claim that this is much applicable to US vs Europe or Asia. Just Canada is so dependant on USA, maybe would apply to Mexico too. Maybe similar patter is Germany vs its small neighbours (mute since Euro).
« Last Edit: December 16, 2021, 02:17:22 PM by ArnoldK »

daverobev

  • Magnum Stache
  • ******
  • Posts: 3669
  • Location: France
Re: NYSE as Negative Correlation AA
« Reply #3 on: December 16, 2021, 02:55:27 PM »
I reckon you'll only see a fairly short benefit before it all corrects - if it gets out of whack, if the CAD falls, the price of real goods in CAD goes up - and vice versa. Yes there is lag (potentially the length of pricing contracts, plus whatever amount the various buyers and sellers on the way will accept).

But if the CAD drops 20% vs the USD, you can bet in a reasonable timeframe a mars bar will go back to roughly the same price in both countries when factoring currency conversion.

Blender Bender

  • Stubble
  • **
  • Posts: 139
  • Location: Vancouver, BC
Re: NYSE as Negative Correlation AA
« Reply #4 on: December 16, 2021, 03:11:55 PM »
I reckon you'll only see a fairly short benefit before it all corrects - if it gets out of whack, if the CAD falls, the price of real goods in CAD goes up - and vice versa. Yes there is lag (potentially the length of pricing contracts, plus whatever amount the various buyers and sellers on the way will accept).

But if the CAD drops 20% vs the USD, you can bet in a reasonable timeframe a mars bar will go back to roughly the same price in both countries when factoring currency conversion.

Yes, this is likely not permanent EX change as we saw over decades. I'm bringing it in context of Negative Correlation.

Let's assume that bonds have NC (they don't have much, but many think about bonds this way). They could reduce the drop / panic, no-one claims that bonds win in the long term (nor I have about the EX). I claim, quite boldly, that the EX is by far more NC than  bonds. Also i'm not saying that the CA/US EX is the only NC one should consider. This is just another potential tool in the toolbox.

scottish

  • Handlebar Stache
  • *****
  • Posts: 2323
  • Location: Ottawa
Re: NYSE as Negative Correlation AA
« Reply #5 on: January 23, 2022, 05:14:37 PM »
Huh, did you calculate the historical correlation coefficient?   What is it?     

The last time I did this (not including  derivatives), all financial instruments had a positive correlation.   I suspect if you really want to hedge you'll have to, you know, buy a derivative designed as a hedge.

Mighty Eyebrows

  • Stubble
  • **
  • Posts: 203
  • Location: Vancouver Island, Canada
Re: NYSE as Negative Correlation AA
« Reply #6 on: January 27, 2022, 01:59:21 AM »
Overall, it seems like the NYSE investments act as negative correlation, when seen from a Canadian perspective.

This is part of the reason that Canadian ETFs holding US securities are generally unhedged (not compensating for currency exchange). We are one of the few countries where keeping our foreign equities unhedged works out better for us. There was a study (Vanguard?) that examined this effect for different countries. Justin Bender has done videos and blog posts about hedging, too.

Blender Bender

  • Stubble
  • **
  • Posts: 139
  • Location: Vancouver, BC
Re: NYSE as Negative Correlation AA
« Reply #7 on: February 01, 2022, 06:46:18 PM »
Overall, it seems like the NYSE investments act as negative correlation, when seen from a Canadian perspective.

This is part of the reason that Canadian ETFs holding US securities are generally unhedged (not compensating for currency exchange). We are one of the few countries where keeping our foreign equities unhedged works out better for us. There was a study (Vanguard?) that examined this effect for different countries. Justin Bender has done videos and blog posts about hedging, too.

Thanks for the info.

It is so good to be (vaccinated) Canadian :)