January 28, 2012
Book Bits For Saturday: 1.28.2012
● The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take
By Bruce Bartlett
Review via The Financial Times
America’s tax system is a mess. It is unfair, poorly understood and riddled with loopholes. It is ill-equipped to raise the revenues needed to deal with the debt crisis, still less the future needs of an ageing population. It is now over 25 years since it last underwent much reform. An overhaul is long overdue. The case for change is presented in The Benefit and the Burden, a succinct, lucid book by Bruce Bartlett, an economist who spent many years in government working for Republican congressmen and in the administrations of Ronald Reagan and George H.W. Bush. In Mr Bartlett’s view, higher tax revenues are needed to stabilise the US’s finances; one of the goals of tax reform should be to make the higher tax burden more bearable. But it will not happen unless there is a much better public understanding of how the tax system works.
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January 27, 2012
US Economic Growth Accelerates Modestly In Fourth Quarter
Another backward-looking economic report dispatched a fresh round of hope today for thinking that a new recession isn't knocking on our collective doorstep. The U.S. economy expanded at an annual real rate of 2.8% in last year's fourth quarter, the Bureau of Economic Analysis reports. That's a respectable bit of improvement over Q3's 1.8% sluggish pace. Granted, the latest number fell short of the consensus forecast, which called for a 3.1% rise .But it's hard not to notice that the Q4 GDP still rose at the fastest rate since the second quarter of 2010. Perhaps it's fair to say we're slumping toward progress.
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December Economic Activity Improved, Chicago Fed Reports
Yesterday's news that the Chicago Fed National Activity Index (CFNAI) increased last month provides another data point to consider in the debate about recession risk. Looking backward doesn't necessarily tell us what's coming, but it's clear that December's economic momentum strengthened. January and beyond, of course, are still open to interpretation.
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January 26, 2012
Mixed Message? Jobless Claims & Durable Goods Orders Rise
Initial jobless claims increased last week, but so did new orders for durable goods in December. It's a mixed bag of news, but a closer look suggests that the economy's capacity for growth continues to bubble.
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January 25, 2012
The Long, Long Term View Of Interest Rates
Sometimes a picture really is worth a thousand words... and a couple of centuries. Graphing 222 years of U.S. long-term interest rate history isn't exactly actionable information, but it's damn interesting just the same. You want perspective? Here it is in spades. Heck, it's also a great party favor for your next financial mixer. Thanks to Barry Ritholtz at The Big Picture and the primary source, Bianco Research, for this deep dive data dig. The obvious point is that we're near all-time lows in the long bond. If that doesn't spark a few thoughts, nothing will.
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Estimating GMI's Ex Ante Risk Premium
Last week, I updated the Global Market Index’s (GMI) relative performance scorecard vs. actively managed asset allocation products. Now it’s time to look ahead.
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The IMF Downgrades Global Growth But Sees No Fallout For The US
Does the International Monetary Fund's diminished outlook for the global economy lay the groundwork for thinking that recession risk is elevated for the U.S.? Perhaps, although the IMF's latest numbers suggest otherwise. Indeed, IMF projections for US GDP remain intact.
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January 24, 2012
Will December's Economic Momentum Survive The Month's Final Updates?
The full profile of the U.S. economy for December is nearly complete, and so far the numbers continue to look mildly encouraging. It’s hardly a perfect report card, and we’re still waiting for some key numbers. But based on the data released so far, it appears that growth had the upper hand in the last month of 2011.
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Tactical ETF Review: 1.24.2012
It's been a good year so far for risky assets. Year-to-date returns don't mean much at this point, but the out-of-the-gate start keeps hope alive. Yet the crowd always finds a reason to worry and the "surprisingly tranquil" profile of runnup will do nicely. Nonetheless, U.S. stocks look quite strong on a technical basis these days as domestic equities extend the rally that began in mid-December. Foreign stocks are following suit. Or is it the other way around? But amid a rising appetite for risk, investment-grade bonds are sagging, thanks mostly to lightening up on Treasuries. It's a different story for foreign bonds, which are rising in U.S. dollar terms, in part thanks to fresh weakness in the greenback. Meantime, commodities overall look stuck in neutral, although gold is beginning to percolate again. And after a brief respite, real estate investment trusts are taking wing once more. The question is whether the revival is a sign of things to come for the year ahead? Much depends on how the economic numbers fare in the weeks ahead. We know that recession looks like a done deal in Europe, but the consensus view is more favorable for the U.S. Meantime, here's how the charts stack up for the major asset classes via our usual list of ETF proxies…
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January 23, 2012
Delicate Relations: Markets & Macro
Searching for a connection between asset prices and the business cycle is no spring chicken. The economist Irving Fisher, for example, theorized a link between short-term interest rates and economic expectations in his 1907 book The Rate of Interest
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January 21, 2012
Book Bits For Saturday: 1.21.2012
● First Principles: Five Keys to Restoring America's Prosperity
By John Taylor
Summary via publisher, W.W. Norton
Leading economist John B. Taylor's straightforward plan to rebuild America's economic future by returning to its founding principles. America's economic future is uncertain. Mired in a long crippling economic slump and hamstrung by bitter partisan debate over the growing debt and the role of government, the nation faces substantial challenges, exacerbated by a dearth of vision and common sense among its leaders. Prominent Stanford economist John B. Taylor brings his steady voice of reason to the discussion with a natural solution: start with the country's founding principles of economic and political freedom-limited government, rule of law, strong incentives, reliance on markets, a predictable policy framework-and reconstruct its economic foundation from these proven principles.
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January 20, 2012
The Enduring Power Of Passive Asset Allocation
The dominant theme in the financial economics literature is that most relationships are dynamic
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January 19, 2012
New Jobless Claims Drop Sharply
The folks expecting a new recession have a new statistical challenge today. Initial jobless claims fell sharply last week, dropping 50,000 to a seasonally adjusted 352,000. The last time new filings for unemployment benefits were this low was nearly four years ago—April 2008. Last week’s large 50,000 tumble is impressive as well relative to history. Indeed, we just saw the largest weekly drop in more than three years.
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Golden Stump Speeches
Is Newt Gingrich now running on a hard money platform? During campaigning in South Carolina earlier this week for the state's Republican primary on Saturday, January 21, the candidate recommended a "commission on gold to look at the whole concept of how do we get back to hard money," CNNMoney reports. "We need to say to the Federal Reserve: Your only job is to maintain the stability of the dollar because we want a dollar to be worth thirty years from now what it is worth now," he asserted. "Hard money is a discipline. It means you can't inflate away your difficulties."
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January 18, 2012
Data Check: The Small-Cap & Value Factors
The academic case for using a multi-factor model to maximize the realized equity risk premium is old news, but documenting the empirical evidence is forever new. It's been known since the 1970s that the single-factor model of CAPM doesn't fully explain the risk-return relationship for stocks. The limitation of the one-beta model has inspired a range of nuanced approaches for modeling returns and looking for Mr. Market's silver lining. The most popular framework is still the Fama-French 3-factor model that taps the broad market beta along with the small-cap and value factors. It's useful every once in a while to ask: How's the 3-factor recipe working out for 'ya. As it turns out, quite well, or so recent history suggests.
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January 17, 2012
An Optimist's Optimist On The Economy
If you’re looking for a cheerleader on the outlook for the U.S. economy, Ed Yardeni’s your man. "The US economy may be on the verge of a big comeback," this economist and founder of Yardeni Research predicts. "It could experience an unusual second recovery over the next three years following the weak initial recovery of the past three years. In the past, recessions were followed by one broad-based recovery in economic activity. The Naysayers have been predicting a 'double dip' recession for the US economy since it started to recover in 2009. I’m suggesting that a more likely scenario might be a double back-to-back recovery."
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Strategic Briefing | 12.17.2012 | Iran & The Proposed Oil Embargo
Oil Rises to Three-Day High as Saudi Arabia Is Seen Targeting $100 Crude
Bloomberg | Jan 17
Oil rose to the highest level in three days on speculation that China will intensify monetary stimulus, supporting fuel demand, and as France pushed for a ban on Iranian imports. France wants a European Union embargo delayed by no more than three months as members seek alternative supplies, an official with knowledge of the matter said yesterday. China’s economy expanded at the slowest pace in 10 quarters, sustaining pressure on Premier Wen Jiabao to ease monetary policy. Saudi Arabia aims to stabilize the average of crude prices worldwide at $100 a barrel in 2012, Oil Minister Ali al-Naimi said in an interview with CNN yesterday. “Everything is rising because of China,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “It’s general market sentiment.”
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January 16, 2012
Is The Yield Curve Still A Reliable Signal Of Recession Risk?
In the current debate about recession risk, some commentators have rolled out the yield curve argument or variations thereof. On first glance, this line of analysis looks like a slam-dunk refutation of the forecast by some that another economic contraction is now fate. But such arguments based heavily (or exclusively) on the yield curve risk overplaying their hand. It’s true that the yield curve has been a reliable predictor of recessions for half a century, as many studies assert. Indeed, the literature on this topic is now quite extensive and persuasive. But in the dark art of developing macro forecasts, one can never assume that a predictor’s track record—even one as strong as the yield curve’s—seals its fate for repeat performances. It'd be wonderful if we could point to one indicator as a dependable predictor, but macro's just not that simple.
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January 14, 2012
Book Bits For Saturday: 1.14.2012
● Broke: How Debt Bankrupts the Middle Class
Edited by Katherine Porter
Summary via publisher, Stanford University Press
While the recession that began in mid-2007 has widened the scope of the financial pain caused by over-indebtedness, the problem predated that large-scale economic meltdown. And by all indicators, consumer debt will be a defining feature of middle-class families for years to come. The staples of middle-class life—going to college, buying a house, starting a small business—carry with them more financial risk than ever before, requiring more borrowing and new riskier forms of borrowing. This book reveals the people behind the statistics, looking closely at how people get to the point of serious financial distress, the hardships of dealing with overwhelming debt, and the difficulty of righting one's financial life. In telling the stories of financial failures, this book exposes an all-too-real part of middle-class life that is often lost in the success stories that dominate the American economic narrative. Authored by experts in several disciplines, including economics, law, political science, psychology, and sociology, Broke presents analyses from an original, proprietary data set of unprecedented scope and detail, the 2007 Consumer Bankruptcy Project. Topics include class status, home ownership, educational attainment, impacts of self-employment, gender differences, economic security, and the emotional costs of bankruptcy. The book makes judicious use of illustrations to present key findings and concludes with a discussion of the implications of the data for contemporary policy debates.
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January 13, 2012
The Fed's Undistinguished Macro Discussions Circa Jan 2006
Anticipating recessions is hard, especially the ones in the future. Just ask the Fed officials who attended the January 2006 FOMC meeting to discuss the outlook for the economy. The newly released transcripts from this meeting have attracted attention far and wide about Fed's ability, or lack thereof, to see macro changes. Unfortunately for the central bank, the reviews are in and most pundits aren’t impressed (see news reports here and here, for example.) The Atlantic's Derek Thompson finds the transcript "damning" in light of the "blithe ignorance in the face of impending doom."
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