July 2, 2009
STILL FLOUNDERING BETWEEN THE ROCK & THE HARD PLACE
The pundits are shocked, shocked to learn that jobs are still being lost. But there's really nothing surprising in today's jobs report for June, released this morning by the Bureau of Labor Statistics. Recessions have a habit of doing that, and for longer than the crowd expects. Disappointing and discouraging? Absolutely. Unfortunately, more of the same is probably coming.
Meantime, that doesn't change our view that the recession may be close to a technical end. But before we get into that point—again—let's look at how the latest nonfarm payrolls stack up.
As our chart below shows, last month's job loss was steeper than May's. Nonfarm payrolls were lighter in June by 467,000, quite a bit deeper than May's 322,000 decrease. The good news is that last month's decline is still a lot better than the worst monthly tumble so far in this recession—January's 741,000 slump.
But let's not mince words here: job destruction remains potent. The month-after-month declines are adding up and the economy is sure to take a heavy blow as a result. At the top of the list of likely victims: consumer spending, as we've been discussing, including here.
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July 1, 2009
THE COOL WINDS OF JUNE
The weather in June was cool and rainy in the New York region, and something similar prevailed over the capital and commodity markets last month as well.
As our table below shows, June was a month of mixed messages, ranging from a healthy rally in high-yield bonds to loss in REITs. Disappointing, perhaps, given the previous bout of good times. But the arrival of red ink is hardly unexpected. The March-to-May rally, after all, elevated all the major asset classes by dramatic levels. That couldn’t last. But what comes next?
The optimistic interpretation is that June was a month of backing and filling. The markets are reportedly digesting the recent gains and building a foundation to capitalize on the expected economic recovery. Prices got ahead of themselves in recent months, and bit of profit-taking was inevitable.
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June 29, 2009
VALUE JUDGMENTS
It's been a tough year for value stocks. Is that surprising? No, although it reminds that Mr. Market prices certain slices of the equity market differently throughout the business cycle.
For the year through June 26, the rebound in equities has been powered mostly by growth stocks, according to Russell indices. As the chart below relates, growth stocks in general have been the conspicuous leaders through the first half of 2009.
This is hardly surprising in light of the unfolding story in financial economics over the past generation. Return premiums are linked with macroeconomic risks, which means that investors are compensated over the long haul for taking certain risks. Some of those risks pay higher rates than others and if you wait long enough, you'll probably realize the higher returns. All the more so if you pay attention to the fluctuating price of risk in the short term.
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June 26, 2009
THE GREAT EXPERIMENT BEARS FRUIT...SO FAR
One day we'll look back on 2009 and wonder what all the confusion was about. All will become clear and we'll know when the recession ended, when the bull market began anew and how and why the cycle turned. Meanwhile, we're wondering if the data du jour can be trusted.
Judging by the numbers of late, clarity is upon us, or so it seems. Income and spending are up among consumers. What's not to like? If this keeps up, we'll be back to the good old days by, oh, let's say the third week of September.
As for what we know today, disposable personal income jumped 1.6% last month on a seasonally adjusted basis, the Bureau of Economic Analysis reports this morning. That's the biggest monthly gain in a year. Not bad for what we've repeatedly been told is the deepest recession since the Great Depression.
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June 22, 2009
AN EARLY SUMMER RETREAT
The Capital Spectator will be taking a few days off, returning to what passes as normal around here on Friday, June 26.
GOOD NEWS...AND SOME OTHER STUFF
Another former Fed club member weighs in today on how/when/if the Fed unwinds the massive monetary stimulus it's created over the past year. Frederic Mishkin, a former FOMC member, summarizes the problem and the potential in today's Wall Street Journal, observing that there's good news and bad news embedded in the recent rise in long-term interest rates:
"One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise."
Speaking of expectations, what's the market thinking? Based on the previous close of Fed funds futures on CBOT, traders think the central bank will begin tightening the screws ever so slightly in the second half of the year, as per the chart below. To be sure, there's still no inflation on the radar screen and it's not yet clear the economy has stopped contracting. But markets have a tendency to look forward. That doesn't make them right, but it doesn't stop them from considering the full range of possibilities and placing odds on what appears to be the most likely outcome.
June 21, 2009
IS IT EVER TOO EARLY TO WORRY ABOUT INFLATION?
Last month, Alan Blinder warned that the main risk in monetary policy was pulling away from the stimulus too soon. We responded by pointing out that there was also a danger of letting the liquidity surge roll on too long. The challenge is finding a balance between the two, we argued.
In a follow-up piece today, Blinder basically reiterates his earlier article, asserting that "inflation isn't the danger." But he hedges himself a bit this time, advising: "As long as expected inflation doesn’t rise much further, you should find something else to worry about."
We couldn't agree more. Inflation's never a problem, until it becomes one. For the moment, the market's expectation of inflation is, in fact, quite tame, as Blinder points out. But it's not today we're worried about.
Blinder says the Fed is aware of the extraordinary liquidity it's created and that the central bank will do the right thing at the right time. We all know what the right thing will be--tightening the monetary policy levers. Figuring out the right time to do so will be devilishly tricky. In fact, getting the timing exactly right is virtually impossible. The only question, then, is how do you want to err? Early or late?
June 18, 2009
SOME CALL IT PROGRESS
Nirvana for investing is getting tomorrow's news today. Impossible, of course, which leaves strategic-minded investors to search for the next best thing. That boils down to hard work.
Estimating expected return and risk is at the heart of intelligent investing. We still can't peer into the future with a high degree of certainty, but thanks to decades of inquiry in the realm of financial economics there's a modestly clearer picture of how the markets behave and what that means for asset pricing.
