Asset Allocation & Rebalancing Review | 17 Sep 2014

Volatility is starting to creep back into the markets. It’s not obvious from the 30,000-foot view, but a few corners of the global markets are becoming jittery. Exhibit A: US real estate investment trusts (REITs), which tumbled sharply in recent sessions, presumably on the fear that this interest-rate sensitive asset class is vulnerable if the Fed is getting close to hiking interest rates.
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The Bumpy Road Ahead To Policy Normalization

When the dust clears from tomorrow’s Fed announcement, the crowd’s expecting that the slow but persistent pace of tapering will endure. While we’re waiting for Wednesday’s monetary statement, revised set of economic projections, and press conference, consider that the real (inflation-adjusted) year-over-year increase in the monetary base continues to decelerate. That’s not surprising at this point, but it’s a clear signal that monetary stimulus is still moving closer to normalization.
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Analyzing Performance Histories That Might Have Been

The trend in recent years of securitizing more of the world’s market betas offers investors, in theory, better odds for enhancing risk-adjusted returns. Providing access to a broader set of assets with low/negative correlations moves us closer to the ideal of building optimal portfolios. In practice, however, juicing results is messy. One challenge is the grey area of developing reasonable expectations for relatively “new” betas that come down the pike. Tapping into a previously obscure market via an ETF, for instance, can be a good thing, but sometimes it’s unclear what to expect due to limited historical data. For some folks, that’s a reason to steer clear. But playing it safe comes with its own set of risks. The question, then, is how does one develop a comfort level with new products that don’t have a long track record as investable portfolios? The short answer: carefully, methodically, and with several techniques, including a bit of statistical modeling.
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Book Bits | 13 September 2014

The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis
By Martin Wolf
Review (FiveThirtyEight.com)
For Freud, everything was about sex. For Marx, it was the struggle between capital and labor. These thinkers took their big idea and applied it relentlessly. Or, as the saying goes (sort of): They had a favorite hammer, so every problem looked like a nail.
For Martin Wolf, the chief economics commentator for the Financial Times and one of the world’s foremost writers on macroeconomics and international finance, his hammer is “global imbalances.” And many of the economic and financial problems of today are the nails.
His latest book, “The Shifts and the Shocks: What We’ve Learned — and Have Still to Learn — from the Financial Crisis,” was released Thursday in the United States. It’s a great read. The book will be unsettling to anyone who thinks the financial system is any more stable now. The financial sector in many high-income countries is still vulnerable to crises, and reforms put in place have not gone far enough, he argues.
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A Strong Rebound For August Retail Sales

Spending on retail goods and services increased 0.6% in August, matching several consensus forecasts and strengthening the case for thinking that the US economy remains on a path for moderate growth. With the exception of gasoline sales and general merchandise stores, all the major categories posted higher sales last month. Overall, the August profile is a solid report that reflects a healthy pace of consumption. As an added boost for confidence: July’s initially reported flat performance was revised up to a 0.3% gain for the headline data.
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A Discussion About Volatility At Bloomberg In New York…

I’ll be a panelist at next week’s 360 Exchange conference (Thurs, Sep 18) at the Bloomberg headquarters in New York City for the 10:20am session on volatility in macro and markets. My co-panelist is Dan Farley, chief investment officer for the investment solutions group at State Street Global Advisors. In fact, there’s a great lineup of speakers and discussions about economics and finance throughout this day-long event. For details, take a look at the agenda below or visit the conference’s web site.
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Analyzing Volatility For Timely Signals About Market Risk

It’s hard to overestimate the power of volatility for monitoring, modeling and forecasting risk in the art/science of portfolio management. The challenge is deciding what to focus on. Even the seemingly simple task of defining volatility is complicated since the signals can vary rather substantially at times when analyzing markets through, say, a prism of standard deviation of return vs. a trading range of an asset’s price. As a general description, I’m fond of Professor Ser-Huang Poon’s reference in his book A Practical Guide to Forecasting Financial Market Volatility: “the spread of all likely outcomes of an uncertain variable.” In any case, bringing order to what can be a black hole of possibilities is essential in this corner of risk management. The potential for genuine insight is considerable, but we almost never reach the promised land without a fair amount of analysis. Perhaps the first rule of extracting the maximum amount of information from the ebb and flow of market volatility is choosing objectives and then figuring out the best path for success.
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