September 13, 2007
THE TROUBLE WITH TOMORROW
With all eyes increasingly focused on employment trends, this morning's update on new filings for jobless benefits was a disappointment--a disappointment in the sense that it didn't tell us anything new that wasn't already apparent.
Initial jobless claims rose a slight 4,000 to 319,000 (see chart below) for the week through September 8, the Labor Department reported today. Yes, that's not the direction the optimists are looking for. But as smoking guns go, it's mostly a dud.
Further complicating the search for clarity, the four-week moving average of jobless claims declined slightly through September 8, as the second chart below illustrates.
What can we distill from the latest numbers? Not much. Yes, the reported trend in jobless claims gives no compelling reason to think that a stealth boom is about to explode. On the other hand, the pessimism that reverberates from last Friday's August employment report isn't yet confirmed in the initial jobless claims. That doesn't mean that confirmation isn't coming. But for the moment, there's no obvious statistical sign in this morning's report that the labor market's poised for an imminent and dramatic turn for the worse. The future, it seems, may take its own sweet time in arriving, frustrating those of us in need of instant satisfaction.
Economic growth, in short, continues until it stops. Clear and obvious warning signs may or may not arrive in a timely manner. That leaves mortal observers to sift through the data as it comes, looking for crumbs of insight when (and if) they're dispatched. One might be tempted to equate the task of standing guard for signs of economic danger with watching grass grow.
All of which reminds that a fair amount of subjectivity still hangs over next Tuesday's FOMC meeting, when the Fed will decide if the economy requires a change in the price of money, or not. The current target Fed funds rate is 5.25%, as it's been for more than a year. Common wisdom suggests that the Fed will cut rates by 25 basis points, perhaps 50 basis points to offset the anticipated economic slowdown.
For those looking exclusively at the housing market and the trend in monthly employment, the case for a rate cut looks persuasive. But a broader view of the world still raises questions--and risks. The sinking dollar, for instance, lends no encouragement for dropping rates. The battered buck hit a new low against the euro yesterday, and the prospect of lower U.S. interest rates implies that even lower lows may be coming.
No, the dollar isn't the only factor under consideration when it comes to the Fed's monetary policy. It may not even be a leading factor. Then again, no central bank worth its name can completely dismiss the news that its currency is sinking like a stone in the foreign exchange market. With that in mind, if there's any argument at all for keeping the dollar stable then there's also a case for minimizing any rate cut if not delaying it completely.
Alas, your editor's at a loss as to what is the ideal decision is at this moment. That, in turn, is directly related to our inability at seeing the future. Perhaps there are others who are also struggling with the interpretation of the broad array of economic and financial data. Fortunately, strategic-minded investors have a solution in the form of diversification across the major asset classes and the opportunity to add a currency-diversification overlay. Yes, the outlook is uncertain, and arguably getting more so by the day. The good news: diversification's still as valuable as ever, perhaps more so.
Meantime, there are three business mornings of economic updates left till the FOMC announces its new and hopefully enlightened monetary notions. If the data gods are in a generous mood, maybe they'll bring some much-needed clarity between now and 2:15 p.m. next Tuesday, Washington time. Maybe, but don't hold your breath.
Posted by jp at September 13, 2007 9:50 AM
Perhaps. I've written for some time now that all the major asset classes have been up for several years running, which is unprecedented in recent history on a calendar year basis. Does that mean that everything will go down at some point as well? If so, the diversification argument fades.
But this is pure speculation. Recessions of any degree have been rare over the past generation or so. NBER dates the last one as a brief and mild affair, running from March to November 2001.
Meanwhile, diversification worked wonders in 2001. Yes, domestic and foreign stocks were generally down, and so were commodities that year. But REITs, U.S. bonds across the board and emerging-market debt posted gains in 2001. In fact, it's worth reminding readers that bonds have always been a useful diversification tool because they tend to do well in recessions. The reason's obvious: an economic contraction eventually convinces the central bank to cut rates, which of course is bullish for fixed income securities. They don't call them bond ghouls for nothing.
That aside, almost everything has been running higher since the end of 2001. Maybe that invalidates diversification in 2007, maybe not. No one really knows. And that's why diversification's still the only game in town.
If you're worried, there's always the old standby: overweighting the original low-correlation asset class that never fails in the short run: cash.
Posted by: JP at September 13, 2007 8:40 PM
Diversification is great unless we really have a recession - then your diversified assets will go to auto-correlation with everything (stocks, bonds, commodities, real estate) getting sold
Posted by: McSmarty at September 13, 2007 11:38 AM