March 31, 2012
Book Bits | 3.31.2012
● Abundance: The Future Is Better Than You Think
By Peter H. Diamandis and Steven Kotler
Review via The New York Times
His thesis rests on a four-legged stool. The first idea is that our technologies in computing, energy, medicine and a host of other areas are improving at such an exponential rate that they will soon enable breakthroughs we now barely think possible. Second, these technologies have empowered do-it-yourself innovators to achieve startling advances — in vehicle engineering, medical care and even synthetic biology — with scant resources and little manpower, so we can stop depending on big corporations or national laboratories. Third, technology has created a generation of techno-philanthropists (think Bill Gates) who are pouring their billions into solving seemingly intractable problems like hunger and disease. And finally, we have what Diamandis calls “the rising billion.” These are the world’s poor, who are now (thanks again to technology) able to lessen their burdens in profound ways. “For the first time ever,” Diamandis says, “the rising billion will have the remarkable power to identify, solve and implement their own abundance solutions.”
● Inequality and Instability: A Study of the World Economy Just Before the Great Crisis
By James K. Galbraith
Summary via publisher, Oxford University Press
As Wall Street rose to dominate the U.S. economy, income and pay inequalities in America came to dance to the tune of the credit cycle. As the reach of financial markets extended across the globe, interest rates, debt, and debt crises became the dominant forces driving the rise of economic inequality almost everywhere. Thus the "super-bubble" that investor George Soros identified in rich countries for the two decades after 1980 was a super-crisis for the 99 percent-not just in the U.S. but the entire world. Inequality and Instability demonstrates that finance is the driveshaft that links inequality to economic instability. The book challenges those, mainly on the right, who see mysterious forces of technology behind rising inequality. And it also challenges those, mainly on the left, who have placed the blame narrowly on trade and outsourcing. Inequality and Instability presents straightforward evidence that the rise of inequality mirrors the stock market in the U.S. and the rise of finance and of free-market policies elsewhere. Starting from the premise that fresh argument requires fresh evidence, James K. Galbraith brings new data to bear as never before, presenting information built up over fifteen years in easily understood charts and tables.
● Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments
By Josh Brown
Interview with author via Yahoo's Breakout
Josh Brown, author of "Backstage Wall Street: And Insider's Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments" wants to make one thing clear up front: This book is not just another "tell all" chronicle of financial evil-doers. "This is not 'everyone is terrible on Wall Street,'" Brown says in the attached clip. Instead he's offering a how-to guide for avoiding what he colorfully refers to as "Murder Holes." Taken from the WWII movie Saving Private Ryan, a murder hole is more or less just what a sounds like, in financial terms. In short, it's an investment in which unwitting investors are piled into with no chance of financial escape. Why would a firm do such a thing to investors? If you have to ask you're probably new to this game. "The worst investments have the highest compensation scheme for the people who sell sell them," says Brown, ticking off Chinese RTO's, heavy-load mutual funds, and the ETNs made famous by the ongoing TVIX debacle. If it's too complicated to easily understand, it's probably something to avoid.
● Winning with ETF Strategies: Top Asset Managers Share Their Methods for Beating the Market
By Max Isaacman
Summary via publisher, FT Press
Today, using the right ETF strategies, you can pursue virtually any investing objective, and achieve your goals in any market: sideways, bear, or bull. In Winning with ETF Strategies, 23 of the field’s most respected and innovative money managers reveal their current strategies and methods, and show you how to select and apply the right approaches for your needs. The ETF money managers presented here have been featured in leading media including CNBC, Fox Business, Bloomberg, Barron’s, The Wall Street Journal, and Research Magazine’s ETF Advisor Hall of Fame.
● The Devil's Deal: An Insider's Tale of How Money is Made
By Andreas Loizou
Review via Financial World
In his first foray into the world of publishing, Andreas Loizou has written a primer about financial markets structured as a thriller. While knowingly winking and nudging at those in the banking industry, The Devil’s Deal deftly informs, educates and entertains the reader. It is the story of how a financial trainer’s apparently chance meeting with a former student sees him caught up in an intricate web of lies, deceit and, ultimately, international fraud. There is truth in the story; indeed, Loizou states in his preface that he “had to change the names of certain characters and firms to avoid even more letters from lawyers. The people involved are unlikely to complain about being made anonymous”.
● The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public
By Lynn A. Stout
Essay by author via Harvard Business Review Blog Network
A recent report by the Aspen Institute [PDF] suggests a big part of the problem with corporations' focus on the short term is shareholders themselves. Today's shareholders are relentless in demanding that executives "maximize shareholder value." Shareholder value, in turn, is typically measure by share price — meaning share price today, not share price next week or next decade. This narrow focus on raising stock price by any means possible keeps companies from making long-term investments, protecting the interests of essential stakeholders like employees or customers, or taking much account of social welfare and ethical considerations in making business decisions.
● The End of Cheap China: Economic and Cultural Trends that will Disrupt the World
Excerpt via publisher, Wiley
One inevitable trend in the coming decades—now that rising costs and the end of easy money are forcing Chinese companies to become long-term strategic thinkers and look for new revenue models—is that more Chinese companies will go abroad. Western consumers had better get used to seeing Chinese brands, not just the “Made in China” stickers, on the shelves of America’s retailers. Likewise, Western brands will have to start fending off competition from new emerging Chinese brands that will disrupt the world’s markets and the global pecking order, much as Japanese firms did in the 1980s.
March 30, 2012
Rethinking/Reinventing The Sharpe Ratio
Desperately searching for a fresh dose of chatter about risk metrics? You're in luck. In my latest article for Financial Advisor, I consider a few of the possibilities for replacing, or at least supplementing the Sharpe ratio, the granddaddy or risk measures. The story's in the March issue, although you can find the online version here.
Consumer Spending Up Sharply In February As Personal Income Growth Stays Sluggish
Consumer spending rose sharply in February, the Bureau of Economic Analysis reports. Unfortunately, income growth was weak again last month, raising fresh worries about the economic outlook.
It’s tempting to focus on the spending side of the ledger, where personal consumption expenditures (PCE) soared 0.79%. Bloomberg, for instance, ran a story this morning with the headline: “Consumer Spending in U.S. Climbs 0.8%, More Than Forecast." Indeed, last month witnessed the strongest gain for PCE since August 2009. But no one should ignore the problem with disposable personal income (DPI), which rose a mere 0.16% last month. That’s slightly better than January’s near-flat 0.04% rise, but there’s not enough juice here to overcome the concern that the income trend is in trouble.
The monthly numbers per se are the least of our worries. The bigger concern is that DPI's sliding growth rate shows no sign of stabilizing, much less reversing in terms of its year-over-year pace. As the second chart below shows, DPI’s deceleration on this front is becoming more pronounced, slipping to a modest 2.65% annual increase for the year through last month—the slowest in nearly two years. The fact that the rate of growth has been consistently falling for months is even more disturbing. This warning sign has been a concern on these pages for for months, and today’s update offers no reason to think differently. If the slowdown in DPI rolls on, the odds increase that the economy will stumble, perhaps even suffer a new recession. There's a lot that has to happen before we get to the point of no return, but today's income numbers boost the risk a bit more.
One reason for remaining hopeful in the recent past has been the relatively buoyant trend in private sector wages, which account for roughly 43% of personal income. The reasoning here is that if wages are climbing at a healthy rate, growth overall has a better chance at survival. But is that pillar of support now crumbling too? Wage growth has been moderating on a monthly basis recently and the slowdown knocked down the annual rate to 5.38% in February—the slowest year-over-year pace since last August. Maybe it's just noise, but until the next update the jury's out.
The bottom line: If the headwinds for income growth persist, it’s only a matter of time before the trouble infects consumption. If it comes to that, the cyclical jig will be up. Perhaps the only way out is if job growth continues to accelerate, as it has in recent months. A surprisingly strong employment report would surely help at this point. In fact, anything less would ikely be fatal at this stage. It’s anyone’s guess if next Friday’s payrolls update for March will comply, although the continued decline in new jobless claims suggests that the labor market hasn’t rolled over, at least not yet.
But until—if?—personal income growth revives, or at least stops falling, there’s a dark cloud hanging over the macro horizon. Lightening may not strike in the near-term future, but if the sky continues to darken by way of the weakening income trend, it's getting easier to assume that a storm is coming. Is this future fate? Not yet, but we’ll need to see quite a bit of good news in the next round of economic reports to minimize the concern brewing with DPI.
Is Extremism In The Defense Of The Gold Standard An Economic Vice?
It's human nature to emphasize the points that advance your claims while minimizing the facts that undermine it. We all do it in some degree, and sometimes for practical reasons, such as brevity. But there are limits to cherry picking the facts. At some point your credibility suffers if you go too far and slice your reasoning too thin. Yet that's a risk that advocates for reviving the gold standard don't seem to understand.
When you listen to the arguments in favor of tying the nation's monetary policy to gold, the associated claims for why this is reasonable are often presented as airtight. One example that I hear frequently is the claim that the gold standard's application in U.S. history was virtually flawless in promoting economic growth. The implication: any one who questions a policy that genuflects to a certain shiny, malleable metal is either uninformed, inebriated, or part of some vast big-government monetary conspiracy.
The case for the gold standard is commonly presented as open and shut by its more ardent supporters, but the historical record is slightly more nuanced. At the very least, there are substantive questions that should—must—be addressed in any reasonable discussion about reviving a gold-based monetary system. But don't hold your breath. Most gold bugs aren't eager to embrace the awkward bits of history that cast aspersions on their metal's monetary past.
A recent example that caught my eye is a Forbes column by Brian Domitrovic, a professor in the department of history at Sam Houston State University. The professor's latest brief asserts that the metal's influence over the U.S. economy, when the gold standard reigned supreme in the decades following the Civil War, was nothing less than spectacularly productive. Yes, he concedes, there were some minor problems, but these were mere trifles, barely worth mentioning. As Domitrovic explains:
Whatever criticism there is to be leveled at the gold standard during its halcyon days in the late 19th and early 20th centuries, we now know, it is small potatoes. However many panics and bank failures you can point to from 1870 to 1913, the underlying economic reality is that the period saw phenomenal growth year after year, far above the twentieth-century average, and in the context of price oscillations around par that have no like in their modesty in the subsequent century of history.
While we can all agree that economic growth was impressive during the roughly four decades until the creation of the Federal Reserve in 1913, it's debatable how much of that growth is attributable to gold. The U.S. was an emerging market at the time and so it's reasonable to ask if the country's natural growth rate was higher compared with the relatively mature economy that currently prevails. But let's accept Domitrovic's premise at face value and give the gold standard the benefit of the doubt. What, then, are we to make of the nasty run of deep and relatively prolonged recessions that harassed this era on a routine basis? Small potatoes? Hardly.
According to NBER data, recessions a century ago were relatively frequent and lengthy by the current standards of the last several generations of macro history. During the 43-year span of 1870-1913, the U.S. endured 11 recessions. By contrast, there have been roughly half as many downturns—six, to be exact—in the 41 years since 1971, when the last vestiges of the gold standard were abandoned. Meantime, the recessions of 1870-1913 lasted longer, running for an average of nearly 24 months (peak to trough) vs. a comparatively short 12-month average from 1971 onward. Keep in mind, too, that the longest U.S. recession on record—a 65-month monster during 1873-1879—surfaced in the era that Domitrovic hails as gold-inspired macro nirvana.
You can, of course, argue that robust economic growth over the broad span of 1870-1913 is a reasonable tradeoff for any short term volatility. Then again, arguing for the wisdom of such a tradeoff may not be all that persuasive if you're one of the victims of the era's many downturns. The public may have been a stoic lot in the 19th and early 20th centuries during episodes of macro turmoil, but the tolerance for such events is virtually nil in the 21st century. Dealing with political sentiment in democratically elected governments may be inconvenient, but it's reality.
Domitrovic also dismisses the various studies over the years that place some if not most of the blame for the Great Depression on the gold standard. For example, he advises that Barry Eichengreen’s book Golden Fetters from 1992 has been superseded by Richard Timberlake's research. The argument here is that the gold standard really wasn't operative in the 1930s. Maybe so, but it's hard to overlook the fact that the economy grew strongly soon after Roosevelt removed the link between the dollar and gold in March 1933. Meanwhile, before we throw out Eichengreen’s research, consider too that he documents that the earlier a country left the gold standard in the 1930s, the sooner its economy began to heal from the deleveraging crisis:
Gold bugs would have us believe that a monetary system based on the metal relieves us of the burden of maintaining a central bank. But once again, history tells us different. During the The Panic of 1907, before there was a Federal Reserve, and at a time when the U.S. was on a version of the gold standard that Domitrovic recognizes as legitimate, a financial crisis forced the country to invent a central bank on the fly (under the leadership of J.P. Morgan) to inject some much-needed liquidity into the system and prevent a meltdown. In fact, similar events had been common in the previous decades. After the 1907 debacle, the country decided that it had had enough and established a formal central bank.
The point of all this is to remind us that the alleged open-and-shut case for returning to a gold standard has a few defects after all. There are tradeoffs in binding a nation's money supply to gold. You can argue that the tradeoffs, when all is said and done, favor a gold standard. History, in my opinion, suggests otherwise, but, hey, it's certainly legitimate to have this debate. But that's the issue here: there are debatable aspects in this conversation. You wouldn't know it from listening to some of the gold standard people, but history isn't anywhere as compact and tidy as some claim.
March 29, 2012
Another Four-Year Low For Jobless Claims
Initial jobless claims dropped to another four-year low last week, the Labor Department reports. That's another sign that the labor market is likely to continue expanding, perhaps at a moderately faster rate than we've seen in recent months. New filings dropped 5,000 to a seasonally adjusted 359,000 for the week ending March 24. (Today's update reflects an annual data revision going back to 2007 and so the latest numbers don't correspond with last week's report.)
“The labor market is still improving at a modest pace,” says Russell Price, senior economist at Ameriprise Financial, via Bloomberg. “Across almost all sectors, companies have shed as many workers as they possibly can. Now, they’re responding to the modest improvements in demand.”
Price's analysis is based on more than wishful thinking. Private non-farm payrolls have increased by 752,000 for the three months through February. That the highest three-month jump in nearly a year (the February-April 2011 gain was slightly higher at 782,000).
Robust job growth is needed to help offset the recent slowing of income growth, which represents a potential risk for the economy. If the labor market expands at a faster pace, there's a chance that the deceleration in personal income growth could stabilize or even turn higher.
A bit of slightly brighter news on that front: today's third and final update of 2011's fourth-quarter GDP shows that household income grew at a faster pace than previous reported. Reuters brings us the details:
The Commerce Department said on Thursday personal income increased to a seasonally adjusted annual rate of $13.162 trillion, $3.3 billion more than reported last month, likely reflecting the strengthening labor market.
Growth in disposable income was $10.6 billion more than previously estimated.
While the government's final estimate left gross domestic product growth at an unrevised 3.0 percent pace last quarter, when measured from the income side, output increased at a 4.4 percent rate.
That was the fastest rise in gross domestic income since the first quarter of 2010 and followed a 2.6 percent rise in the third quarter.
"The data paints a clear picture of an economy that built momentum throughout the course of the year, closing on a high note," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors in Kalamazoo, Michigan.
Is this a good sign for tomorrow's report on personal income and spending for February? The consensus forecast among economists expects a slight improvement with a 0.4% monthly rise vs. 0.3% in January, according to Econoday data.
The wild card remains gasoline prices, which continue to march higher. A gallon of regular gas rose to a national average of $3.918 last week—the highest since last May, according to the U.S. Energy Information Administration. Is this a problem for the economic recovery? Will this dark trend bring a negative surprise in tomorrow's income and spending report? It wouldn't be the first time that energy prices spoiled the party.
“For goodness’ sake, it’s only March, and this is the earliest point in the year that pump prices have soared to this price level,” observes John B. Townsend II, a spokesman for AAA Mid-Atlantic.
Surprisingly, there's no fallout in the latest consumer confidence survey, at least not yet. Tomorrow's income news will tell us if that's just a head fake.
Note: Due to a technical glitch on the Labor Department's web site, the chart above wasn't initially published with this post.
Strategic Briefing | 3.29.12 | Oil Supply & Demand
A rational reason for high oil prices
James Hamilton (Econobrowser) | Mar 28
"There is no rational reason for high oil prices," writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today's Financial Times. Well, I can think of one-- if oil prices were lower, the world would want to consume more than is currently being produced.
Oil prices fall as supplies grow
Associated Press | Mar 28
Oil prices dropped 2 percent Wednesday amid indications that Western nations may be considering a release of oil reserves onto the world market. In the U.S., the supply of oil is already ample, and growing.
US Republicans seek drilling boost if oil reserves tapped
Reuters | Mar 28
Republicans in the U.S. Congress are proposing measures that would require President Barack Obama to allow more domestic oil production if he decides to tap emergency oil reserves. The proposals are unlikely to become law, but they give Republicans another opportunity to slam Obama's energy policy as consumers fret about high gasoline prices leading up to November's presidential election.
France Joins U.S. and Ponders Tapping Strategic Oil Reserve
The Wall Street Journal | Mar 28
France said it is in talks with the International Energy Agency about tapping emergency oil stockpiles, joining the U.S. and U.K. in pondering such a move amid concerns that tensions with Iran could tighten oil supply.
Saudi Arabia says will act to push down oil prices
AFP | Mar 29
Saudi Arabia will act to bring down oil prices, Saudi oil minister Ali Naimi said in the Financial Times newspaper on Thursday as concern grows that rising energy prices are hurting the world economy. Saudi Arabia "would like to see a fair and reasonable price that will not hurt the global economic recovery, especially in emerging and developing countries", the minister wrote in a column. While the market is "fundamentally balanced" Saudi Arabia "will use spare production capacity to supply the oil market with any additional required volumes", the minister said.
Monthly Oil Market Report
Opec | Mar 2012
World oil demand is forecast to grow by 0.9 mb/d in 2012, unchanged from the previous report,
following marginally decreased growth of 0.8 mb/d in 2011. The weak pace of growth in the OECD economies is negatively affecting oil demand and imposing a high range of uncertainty on potential consumption growth. Although US economic data points toward a better performance, the situation in Europe along with higher oil prices has resulted in considerable uncertainties on the future oil demand for the remainder of the year.
Did Libya's Oil Bubble Burst Already?
OilPrice.com | Mar 28
Libyan crude oil production has witnessed a notable uptick since major combat operations ended last year. In mid-2011, at the height of the international conflict, it looked as if the loss of Libyan crude oil could unravel any hopes of a global economic recovery. Crude oil prices have in general increased during the first four months of 2012, though some optimism was expressed because of Libya's return. With Tripoli headed for its first free election in 40 years, however, nothing is certain regarding the former OPEC giant.
What can the oil futures curve tell us about the outlook for oil prices?
Dan Nixon (Bank of England) | Mar 2012
Large movements in the oil price have had significant effects on UK CPI inflation over the past few years. In order to produce an inflation forecast, it is necessary to assume a path for oil and other commodity prices. The Monetary Policy Committee assumes that oil prices follow the path given by market futures prices when deciding their central projections for CPI inflation and GDP growth. This article considers arguments for and against using the futures curve as an assumed path and describes some of the other indicators used by the Committee in assessing the outlook for oil prices.
Modeling Peak Oil and the Geological Constraints on Oil Production
Samuel Jovan Okullo (VU University Amsterdam), et al. | Mar 2012
Geological constraints are considered in the context of a Hotelling type extraction-exploration model for an exhaustible resource. It is shown that such constraints, in combination with initially small reserves and strictly convex exploration costs, can coherently explain bellshaped peaks in natural resource extraction, and hence U-shapes in prices. As production increases, marginal profits (marginal revenues less marginal extraction cost) are observed to decline, while as production decreases, marginal profits rise at a positive rate that is not necessarily the rate of discount. A numerical application of the model to the world oil market shows that geological constraints have the potential to substantially increase the future oil price. While some non-OPEC producers are found to increase production in response to higher oil prices induced by the geological constraints, most producers’ production declines, leading to a lower peak level for global oil production.
March 28, 2012
Durable Goods Orders Rebound After January's Slump
New orders for durable goods rose 2.2% last month, taking some of the sting out of January’s sharp 3.6% tumble. February’s rebound isn’t particularly impressive next to last November’s 4.2% surge, or even December’s 3.3% increase. But the latest pop was enough to support the year-over-year pace and keep it firmly in 10%-plus territory. In short, this crucial series—economist Bernard Baumohl calls durable goods orders "an excellent leading indicator of economic activity"—remains decisively in the growth camp. Whether that's enough to offset trouble brewing elsewhere—decelerating income growth, for instance—remains to be seen. But for now, the macro news du jour looks a touch brighter.
"Business spending will remain a key driver of the U.S. economy, not to the same extent as last year, but still a positive force," says Sal Guatieri, a senior economist at BMO Capital Markets.
"The economy is slowly improving, but it is definitely a halting recovery where we're not accelerating to any great degree," notes Liam Dalton, president of Axiom Capital Management.
On the topic of looking ahead, new orders for capital goods— non-defense capital goods ex-aircraft orders—rebounded last month as well. Even better, the year-over-year change in capital goods orders continues to turn higher, rising 8.4% in the 12 months through February—the fastest pace since last October. Economists see this subset of durable goods orders as a benchmark for business investment plans.
"The three-month-on-three-month annualized growth rate of core capital goods shipments was only 1.1 per cent in February," Paul Ashworth, chief US economist at Capital Economics, tells the Financial Times. "That strongly suggests the first-quarter growth rate of business investment in equipment and software will be similarly lacklustre, helping to explain why most economists still expect overall first-quarter GDP growth to come in at or just below 2.0 per cent." But there may be silver lining struggling to get out, he added. "Thankfully, the survey evidence points to a pick-up in business investment growth in the second quarter, suggesting that the first quarter lull may reflect the impact of the expiry of the accelerated depreciation tax allowances at the end of last year."
Nonetheless, there's still plenty of skepticism about how the broader macro trend will unfold in the months ahead. “While there is a lot of optimism about the U.S. economy, GDP growth is still only going to be around 2%” opines Peter Boockvar, equity strategist at Miller Tabak.
Speaking of GDP, tomorrow's update for the third and final number on last year's fourth quarter is expected to remain at 3.0%, according to the consensus forecast via Briefing.com. But tomorrow's other scheduled economic report will likely have much more traction on framing the macro outlook: initial jobless claims. Last week's number put new claims at a four-year low. For what it's worth, economists don't seem to think that we'll make much progress with tomorrow's update. The consensus prediction anticipates virtually no change for the next round of claims data.
Anxiously Awaiting Friday's Update On Personal Income
Personal disposable income growth has been slowing, a trend that threatens to derail the economic recovery--if it rolls on. Deciding if this hazard has reached the point of no return is still an open debate, which is why Friday's update on income and spending for February will be closely analyzed for clues about the next phase for the business cycle.
The consensus forecast sees modest growth for the monthly change, but what's needed is something considerably stronger to stabilize if not reverse the two-year deceleration in the annual rate. One reason for thinking optimistically is related to wage growth, which has growing at a considerably higher rate vs. disposable personal income (DPI). Wages represent roughly half of personal income and so the two will eventually converge. But convergence in recent history is in short supply, as the chart below shows. Since last summer, the two have been moving in opposite directions on a year-over-year basis, with DPI (red line) falling while the pace of wage growth (blue line) has turned higher.
Rising wages alone may not be enough to keep the economy out of a new recession, but it's a safe bet that keeping growth alive is a whole lot tougher if wage growth slows sharply in the months ahead. In the last update, wages were rising by 5% a year, according to the Bureau of Economic Analysis. Growth is good, but 5% isn't all that impressive in historical terms. The more immediate worry is that wage growth will tumble. That would be ominous, since it would strengthen the warning in DPI's slowdown.
This much is clear: the gap between the annual rates of changes for wages and income overall will close... eventually. The details of how and when it closes remain the stuff of speculation. As for dissecting the clues in hand, Karl Smith at Modeled Behavior reports that "the biggest drag on personal income right now is the decline in transfer payment from the government." He continues:
At first this seems natural as the economy is recovering and automatic stabilizers like unemployment insurance work in both directions. They slow the descent into recession but as they roll off they also slow the recovery.
Yet, the recent numbers were to big to explained by unemployment insurance alone. It turns out government health care spending is dropping by unprecedented amounts.
What does this mean for next round of personal income and spending data? We'll know more on Friday. But whatever's coming, the front line in the battle to keep the economy expanding is still closely linked to job growth. On that note, tomorrow brings us a new number for the weekly initial jobless claims report. Last week's update showed a fresh drop to a new four-year low, which implies that the labor market will continue to expand. Will that be enough to counteract the perception of trouble ahead if Friday's income and spending report disappoints? And the answer is....
March 27, 2012
The Rise of Robo Rebalancing
Tara Siegel Bernard tells us that automatic rebalancing options are becoming common at 401(k) plans, but the service is still a rarity for online brokerages. TD Ameritrade and Fidelity are among the handful of exceptions, she reports in The New York Times. In a perfect world, these options would be standard everywhere. Rebalancing, after all, is crucial for risk management and earning a decent risk premium through time. Making this essential task easier, by putting it on auto pilot, would be a huge plus for investors.
You can, of course, rebalance on your own. The problem is that most of us don't, at least not on a timely basis, perhaps not at all. The price of inaction can be costly because the rebalancing bonus can be substantial. For example, my research shows that a simple regimen of rebalancing a portfolio comprised of the major asset classes improves performance considerably vs. an unrebalanced strategy over the past decade-plus. Optimizing the process holds out the promise of doing even better.
That’s old news, of course. Numerous studies over the years find that rebalancing is the foundation for successful portfolio design and management. A few examples:
"Portfolio Rebalancing in Theory and Practice," by Yesim Tokat (Vanguard)
"Active Portfolio Rebalancing: A Disciplined Approach to Keeping Clients on Track," by John Nersesian (IMCA)
"The Importance of Portfolio Rebalancing in Volatile Markets," by Steven Weinstein, et al. (CCH Inc.)
"The Subtle Art of Rebalancing," by Bill Montague (Consulting Group)
Although the topic of rebalancing is no stranger to financial analysis, it's premature to say that the subject has been exhausted as a research topic. Identifying the ideal set of parameters that govern the rebalancing rules is certainly in no danger of full transparency, as a new paper from Research Affiliates reminds. It's well know and widely documented that the value factor earns a sizable risk premium over growth in the equity market, advises "Rebalancing and the Value Effect," by Denis Chaves and Robert Arnott. "Less well known, however, is how this outperformance is achieved," they note.
Decomposing the total returns of these strategies, we find that (a) value portfolios enjoy higher dividend income and (b) the average growth stock enjoys faster dividend growth than the average value stock; but, surprisingly, (c) value portfolios experience higher growth in dividends than growth portfolios. We argue that the first two findings are expected, but the third one is not completely understood by investors.
This third result is a consequence of the nature of the rebalance rules for growth and value portfolios. Each rebalance replaces lower-yielding value stocks with new higher-yielding replacements, and replaces higher-yielding growth stocks with new lower-yielding replacements. It is, therefore, the act of rebalancing and reconstituting the growth and value portfolios that increases the growth rate for dividend income in value strategies, and rather sharply reduces it in the case of growth strategies.
Another recent study labels the rebalancing effect as "Dynamic Beta: Getting Paid to Manage Risks." That's a fair description of what's going on here, but to borrow a phrase from New York's lottery campaign, you've got to be in it, to win it.
There are no guarantees with rebalancing, of course, but the same caveat applies to every other investment strategy. Everything has risks, and so it's all about managing the risks intelligently. Rebalancing, combined with broad diversification across the major asset classes, offers the most bang for the average investor's portfolio buck. But as several studies have found, relatively few individuals (and perhaps quite a few institutional investors) are mining rebal's gold on a systematic basis. That's probably because the discipline required to rebalance when it's most productive—i.e., when markets soar and crash—is usually in short supply. That also explains why the expected premium from rebalancing is substantial and persistent.
That's another way of saying that if more investors embrace rebalancing, and do so on a timely basis, the expected return from this portfolio technique will decline. Given human nature, however, it's safe to assume that the ex ante rebalancing premium will remain healthy for the foreseeable future.
Nonetheless, it's getting easier to automate the process. Online tools like MarketRiders, for instance, herald a new age for optimizing the rebalancing process. It's anyone's guess how many investors will take advantage of these tools. Rebalancing, after all, has a hard time competing for the average investor's attention in the grand scheme of financial news and information. But maybe that's good news for the few who exploit the strategic opportunities that seem to elude so many of us. In short, the death of the expected rebalancing premium, and the associated benefits that arise from dynamic asset allocation, are greatly exaggerated.
March 26, 2012
Chicago Fed: US Economic Activity "Near Average" In February
The plot thickens for deciphering the next move for the business cycle… or does it? The Chicago Fed National Activity Index (CFNAI)—a broad measure of the U.S. economy—slipped last month. "Two of the four broad categories of indicators that make up the index deteriorated from January, but of these two, only the production and income category made a negative contribution to the index in February," the Chicago Fed reports. On the other hand, monthly numbers are noisy, which is why we're told to pay closer attention to CFNAI's three-month moving average, which "suggests that growth in national economic activity was above its historical trend."
Putting the index's three-month average in historical perspective certainly perks up the case for thinking optimistically. Indeed, this average rose to 0.30 in February from 0.22 in January—the highest in two years. How should we read this information? The Chicago Fed advises that a value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun." By that rule, the latest reading suggests that the economy will continue growing for the foreseeable future.
As usual these days, there's lots of disagreement about what the future holds. Even the recent uptick in jobs creation hasn't muffled worries about the business cycle. Yours truly is still concerned about the deceleration in personal disposable income. Back in November I wondered if slowing income growth would eventually bite us, and I've been watching this potential time bomb closely ever since, including the latest report. Alas, the same old concern still weighs on the cyclical outlook. The good news is that there have been offsetting positives, but if the income problem continues to deteriorate, eventually it'll drag everything down with it.
It may end up as a false alarm if the labor market can extend its recent revival in minting jobs. The trend in initial jobless claims suggests that growth is still on our side. But let's not soft-pedal the stakes. There's a lot riding on this Friday's scheduled update for February income and spending. On the income side in particular, encouraging numbers are desperately needed at this point. Based on the consensus forecast, however, modest growth is the best-case outlook at the moment. If so, that falls short of what's needed to stabilize if not reverse the slowdown in the annual rate of growth in personal income. Here's to hoping there's a robust surprise coming our way!
Strategic Briefing | 3.26.12 | What's Next For The Labor Market?
Mild Winter Weather and Payroll Employment
Macroadvisers | Mar 22
To summarize, we estimate that unseasonably mild weather this winter has had a measurable effect on employment, with the level of employment in February 72 thousand above the level consistent with no deviation in weather from seasonal norms. Our model suggests that in the event weather in March returns to seasonal norms, the change in payroll employment will be reduced by 58 thousand. Furthermore, a continuation of seasonally normal weather into April would result in a further drag on the change in employment then of about 14 thousand. The result for March provides an estimate of the significant adjustment one should make to the headline employment number in March to more accurately judge the underlying strength of employment.
Morgan Stanley Explains Why The Next Jobs Report Is Very Likely To Turn South
The Business Insider | Mar 25
In his Sunday evening note to investors, Morgan Stanley's Joachim Fels discusses the meh recovery, and touches on why the jobs report won't be as hot as previous ones:
Our US team continues to see GDP tracking at a meagre 1.7% in the current quarter, and attributes most of the decent labour market data in recent months to unusually mild winter weather. In fact, the four-week average of initial jobless claims has now been very little changed for a month and the big improving trend from mid-September to mid-February has thus now stalled. Our initial forecast for March non-farm payrolls, due on April 6, is that job growth will moderate to +175k, down from the average +245k gains in the three prior months, with a bigger weather-related payback likely ahead in the spring. Moreover, softer-than-expected housing market data provided a useful reminder that, contrary to a widespread view, the sector that was the epicentre of the Great Recession may still not have bottomed yet. If our cautious view on growth is right, the Fed has more work to do and will likely implement additional easing measures in coming months, with an extension of Operation Twist, including sterilised MBS purchases. All eyes are on Ben Bernanke’s speech this Monday at the NABE conference, where he has an opportunity to push back on the market’s substantial shifting forward of expectations of the first Fed rate hike to late 2013 or 2014.
Why we debate
Macroblog (Atlanta Fed) | Mar 23
If you try, it isn't too hard to see in this chart a picture of a labor market that is very close to "normalized," excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the "Great Recession." Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly.
Consumer Credit Growing at Highest Rate in Past Decade: Unhealthy and Unsustainable?
Dan Alpert's Two Cents (EconoMonitor) | Mar 22
While aggregate payrolls are up 4.6% YoY since February 2011, as 2 million net jobs were created over the past year, this has come at the expense of declining real wages and pretty flat (up 1.8% YoY) nominal wages. So the income/expense hole for many workers has become wider, and even the newly employed and re-employed are coming on in such low wage categories that when you subtract foregone transfer payments (unemployment and other benefits) their net additional income (and the contribution thereof to consumption/GDP) hasn’t risen all that much.... Are we once again entering a zone similar to the period immediately prior to the Great Recession in which consumer borrowing also grew rapidly, and more and more of the new borrowing was applied to debt service instead of new consumption? Watching retail sales trends over coming months should be instructive in this regard.
Bursting The Permabullish Bubble: 11 Out Of 13 Economic Indicators Have Missed
Zero Hedge (quoting David Rosenberg/Gluskin Sheff) | Mar 22
As for the other "beat" - jobs: why it is simply a case of applying the wrong seasonal adjustment factor to the months of one of the warmest winters on record.
The current edition of Maclean's runs with this on its front cover: The Year That Winter Died. This is the warmest winter in 65 years and with the least amount of snowfall as well. In fact, going back to 1960, I found a dozen times when it felt a bit like March in February. This past January was warmer than each of the prior two Februaries and four of the past five; January felt like February; February felt like March. And somehow nobody outside of us, the economists at my old shop at Merrill and NY Fed President Dudley have figured this out — how the data have been completely distorted by this weather pattern.
We estimate that if we had applied the February seasonal factor to this past January's raw payroll data, and if we had applied the March seasonal factor to the February data, both months would have shown a decline! Instead, the world buys into to the reported data that suggests that payrolls surged 511k in the first two months of 2012 (even better, the Household survey shows +1.28 million ... the best in 12 years!). Sure ... and the Leafs are making the playoffs.
Disposable Income Growth Is At Recessionary Level
Investor's Business Daily | Mar 23
No matter how much goes right for the economy — solid job gains, a booming stock market, a mild winter — growth continues to disappoint. The puzzle can be explained to a large extent by one simple data point: real disposable income. Year-over-year growth in real disposable income — the earnings Americans have left after taxes and inflation — is stuck below 1%, a level typically associated with recessions. It was just 0.6% in January. Why has disposable income lagged so badly while job gains in general and private-sector wages in particular are growing at a solid, if not spectacular, rate? The answer lies in large part in the unwinding of extraordinary government supports. It may seem hard to imagine that fiscal policy is anything but expansionary when deficits remain north of $1 trillion, but the reality is that some of the income props set up a few years ago are going away. The upshot: As the private economy finally starts to pick itself up, growth in the larger economy will be muted somewhat. And the drag could get worse, given the tax hikes and spending cuts scheduled to hit in 2013.
O'Brien: After decades leading economic growth, science and engineering jobs stall
Mercury News | Mar 24
We take it as an article of faith that compared with other industries, high-tech companies are job-creating machines minting high-paying science and engineering gigs that promise bright futures. Unfortunately, it may not be true. In a recent study by the nonprofit Population Reference Bureau, researchers found that science and engineering jobs represent about the same percentage of the U.S. economy as they did a decade ago. Even more alarming: For several previous decades, science and engineering employment was growing significantly faster than the rest of the economy. That means that between 2000 and 2010, the rate of growth in science and engineering jobs actually slowed. "Science and engineering employment was rapidly growing for five or six decades," said Mark Mather, a demographer and co-author of the study. "This data clearly is showing that science and engineering growth has stalled over the past decade." Nowhere are the implications of such a trend more important than Silicon Valley. Economists point to the health of science and engineering employment as a strong indicator of how innovative the U.S. economy is. Such creativity and invention are key to spawning new products and new industries that replace old, declining sectors of the economy.
March 24, 2012
Book Bits For Saturday: 3.24.2012
● Why Nations Fail: The Origins of Power, Prosperity, and Poverty
By Daron Acemoglu and James Robinson
Review via The Guardian
Acemoglu and Robinson are intellectual heavyweights of the first rank, the one a professor of economics at MIT, the other a professor of political science at Harvard. Mostly, such people write only for other academics. In this book, they have done you the courtesy of writing a book that while at the intellectual cutting edge is not just readable but engrossing. This alone would be reason to take notice: a vital topic, top scholars, and a well-written book. But this is not the half of it. The reason that Why Nations Fail is not to be missed is that their thesis pulls apart the two big brute facts of global development. Far from seeing China as the clue to spreading prosperity, Acemoglu and Robinson see it as yet another instance of a society rushing into a cul-de-sac. China is not, on their analysis, on course for our own level of prosperity. Their argument is that the modern level of prosperity rests upon political foundations. Proximately, prosperity is generated by investment and innovation, but these are acts of faith: investors and innovators must have credible reasons to think that, if successful, they will not be plundered by the powerful.
● Crisis by Design: The Untold Story of the Global Financial Coup and What You Can Do About It
By John Truman Wolfe
Review via Sonoran Newws
“The recent global economic crisis didn’t just happen – it was created,” said John Truman Wolfe, a banking industry expert and author of Crisis By Design: The Untold Story of The Global Financial Coup and What You Can Do About It, which explains how the financial crisis was caused. “It was designed by a group of international bankers operating out of the Bank for International Settlements (BIS) in Basel, Switzerland. The purpose was twofold: to remove the United States and the U.S. dollar as the stable point in international finance, and to replace them with what Timothy Geithner (at the time, President of the New York Fed) called a GMA – a Global Monetary Authority.
● Gambling with Borrowed Chips: The Common Misdiagnosis of the Crisis of 2007-08
By Christopher Faille
Review via All About Alpha
Christopher C. Faille, intrepid reporter for AllAboutAlpha.com has just published his book-length analysis of the crisis of 2007-08, in a book titled, Gambling with Borrowed Chips. Faille takes issue with what he calls the “common misdiagnosis” of that crisis, the idea that it was all the consequence of rampant speculation and leverage. There is, he says, nothing wrong with speculation (“gambling”). Nor is there anything wrong with borrowing chips to engage in it. Both speculation and leverage serve a variety of valuable functions.
● China Versus the West: The Global Power Shift of the 21st Century
By Ivan Tselichtchev
Lecture by author via TED.com (Technology, Entertainment, Design)
Historian and diplomat Joseph Nye gives us the 30,000-foot view of the shifts in power between China and the US, and the global implications as economic, political and "soft" power shifts and moves around the globe. The former assistant secretary of defense and former dean of Harvard's Kennedy School of Government, Joseph Nye offers sharp insights into the way nations take and cede power.
● Let Them Eat Carbon: The Price of Failing Climate Change Policies, and How Governments and Big Business Profit from Them
By Matthew Sinclair
Review via ConservativeHome.com
Matthew Sinclair, Director of the TaxPayers’ Alliance (TPA) has written a new book exposing the crippling cost of climate change policy, and the special interests that profit most. His ultimate call is for such policies to be scrapped, that are detrimental to the consumer, and are only beneficial to huge businesses that thrive at their expense. ‘Let them eat carbon’ evaluates the financial implications involved in climate change policy. In ‘Let them eat carbon’ Sinclair reveals the financial implications of regulations such as the Renewables Obligation and the EU Emissions Trading System (EU ETS).
● The Rent Is Too Damn High
By Matthew Yglesias
Interview with author via The New York Times/Economix
Matthew Yglesias, the Moneybox columnist for Slate, is the author of “The Rent Is Too Damn High,” a short new electronic book. The title refers to an obscure political party in New York: The Rent Is Too Damn High Party. In the book, Mr. Yglesias argues that high rent — by which he means both rents and purchase prices — is a major drag on the American economy and society. “The real value of Yglesias’s book,” John Mangin wrote at The Washington Monthly’s Web site, “lies in its explanatory power, and in its potential to recast an important issue.”
● Showdown: The Inside Story of How Obama Fought Back Against Boehner, Cantor, and the Tea Party
By David Corn
Summary via publisher, HarperCollins
In Showdown, astute political journalist David Corn chronicles and examines this crucial time in the Obama presidency and its impact on the nation's future. Drawing on interviews with White House officials, Obama's inner circle, members of Congress, and others, Corn takes the reader into the Oval Office and the back rooms on Capitol Hill for a fast-paced and gripping account of the major events as they unfolded: the controversial tax-cut deal with Congress in December 2010; the repeal of Don't Ask/Don't Tell; the passage of the New START treaty; the near shutdown of the government in early 2011; the revolutionary Arab spring; the killing of Osama bin Laden; the intense, high-wire debt-ceiling negotiations (in which intransigent House Republicans risked the nation's financial standing); House Speaker John Boehner's erratic maneuvers during the rise and fall of the grand bargain; and the face-off between Obama and congressional Republicans over how best to create jobs.
● In Pursuit of the Unknown: 17 Equations That Changed the World
By Ian Stewart
Review via Publisher's Weekly
Stewart (Game, Set, and Math) shares his enthusiasm as well as his knowledge in this tour of ground-breaking equations and the research they supported. “Equations are the lifeblood of mathematics, science, and technology,” allowing scientists, engineers, and even economists to quantify ideas and concepts. Stewart, Warwick University emeritus professor of mathematics, proceeds chronologically, beginning with Pythagoras’ theorem. He opens each chapter with an equation, then summarizes its importance and the technological developments it brought about. Many of the equations are famous, from Maxwell’s equations unifying electricity and magnetism, and of course Einstein’s “E=mc²”, to Schrödinger’s equation and its unhappy cat. Some are broader mathematical concepts rather than equations, from logarithms and calculus to chaos theory.
March 23, 2012
How Much Is Investment Management Worth?
The question comes up a lot because there are several variables to consider. Like so many aspects of finance and economics, the answer is dependent on market conditions, the particulars of the strategy, the investor's expectations and assumptions, the time horizon, and so on. Even when the main issues are nailed down, there’s still plenty of debate for deciding what’s a fair price. It may be reasonable to pay above-average fees—perhaps even a lot above average—for certain types of management services, but the opposite tends to be the prudent rule due to our old nemesis: uncertainty about the future.
Moving beyond generalities, however, is tricky. What’s needed is a good benchmark, but that’s not always easy to find, especially for assessing diversified portfolio strategies. What is clear is that fees are all over the map. On one extreme, some index funds charge virtually nothing. As I noted recently, you can find U.S. equity ETFs, for instance, charging as little as 5 basis points—a mere 0.05% of assets. On the other side of the aisle, nose-bleed pricing is widespread. According to Morningstar’s software Principia, there are thousands of mutual funds and ETFs charging 1%, which includes 2,000-plus funds at or above 2%. There are even 100 or so products in the 3%-and-higher club. And if we go right up to the edge, a handful bite investors for 6% and 7%.
That’s just the beginning for climbing the fee scale once we consider the two-and-twenty crowd in hedge fund land—2% of assets and 20% of profits (assuming there are any, which may be a questionable assumption as a general rule, according to Simon Lack).
Paying up wouldn't be a problem if managers reliably delivered juicy results. Alas, that's the exception rather than the rule, which means that most investors end up paying too much—for both the funds they own and any investment advice.
So what’s a fair price for money management? The answer, or at least some valuable perspective, starts by considering what’s available at minimal cost. For example, you can build a broadly diversified portfolio with the major asset classes using ETFs for less than 50 basis points (0.50%). That wouldn’t mean much if the strategy was a dog, but for a number of reasons (as I discuss in my book Dynamic Asset Allocation) you can grab a fair share of the available supply of the global risk premium with a passive, market-value weighted mix of equities, bonds, REITs and commodities. For instance, my Global Market Index (a proprietary benchmark of the major asset classes) earned nearly 7% a year on a total return basis through the end of February 2012. Not too shabby, considering that the U.S. equity market (Russell 3000) generated a relatively light 4.8% a year over that stretch.
Rebalancing the Global Market Index to market weights at the end of every year would have boosted performance further by 100 basis points a year. Equally weighting the major asset classes and rebalancing would have increased returns by 300 basis points a year over the unmanaged GMI performance. The fact that these naïve strategies based on asset allocation and/or rebalancing beat most actively managed multi-asset class mutual funds is one reason why we should remain skeptical about paying high fees for portfolio strategies.
In other words, there’s no compelling reason to overpay for beta, either in isolation or when repackaged in a multi-asset class product. Most of what masquerades as enlightened money management ends up as overpriced beta strategies. The ruse may not be obvious to the untrained eye, which is why factor analysis is essential for evaluating money managers. All too often, the results of this test suggest that you can do quite well by simply using a mix of low-priced beta products and managing the funds with forecast-free strategies to reflect your particular preferences.
But let’s not go overboard. There’s value for the average investor in paying an advisor for some strategic-minded hand holding. The main challenge in harvesting risk premia is less about choosing asset classes and managing the asset allocation than it is about staying calm when markets turn volatile and mustering the discipline to act at the most opportune moments. Sounds simple enough, but excelling on this front is rare. A key reason why rebalancing tends to earn a premium is because most investors (individuals as well as institutions) don’t reset their portfolios at all or do so in a suboptimal fashion so as to miss most of the opportunities.
As a result, paying a fee can be worthwhile if an advisor helps you exploit the major building blocks of earning attractive risk-adjusted returns through time—asset allocation and rebalancing. But there are limits here as well. As a rough estimate for figuring out a fair price, 50 to 100 basis points is reasonable for securing informed counsel. If you’re convinced you’ve found a superstar advisor, maybe 150 basis points is acceptable, although that's probably pushing it since true superstars are far and few between.
Remember too that advisor fees are in addition to the underlying fund expenses. Let’s assume a 100-basis-point fee for investment counsel plus 50 basis points for a portfolio of ETFs. That’s 1.5 percentage points off of whatever you earn, year after year. It doesn’t sound like much, but it adds up. For those who pay substantially more, the odds of earning a decent, much less stellar return fall dramatically.
Keep in mind too that we still haven’t factored in trading costs, commissions, and taxes. At the end of the day, it’s not unusual to fork over 200 basis points a year when all the costs are tallied. If you’re not careful, the price tag could go even higher. The worst-case scenario: you wind up paying a lot for mediocre or even misinformed advice.
In short, there are many pitfalls when it comes to expenses in the investment world, many of which eat away at returns quietly, virtually undetected if you’re not paying close attention. That didn’t matter much in years past, when risk premiums for betas were lofty. But if a decent returns will be tougher to generate in the years ahead, as I suspect is a reasonable assumption, overlooking expenses threatens to take a bigger, perhaps fatal bite out of your net results.
The good news is that keeping expenses low is easy. The problem is that most investors aren't monitoring this aspect of money management closely, if at all. No wonder that most investors earn dismal returns in the long run. One reason is that they’re overpaying for beta and for investment advice. Even worse, many investors in this infamous club don’t realize that they’re being gouged.
March 22, 2012
New Unemployment Claims Drop To A New 4-Year Low
New filings for unemployment benefits dropped to another post-recession low last week, the Labor Department reports. The case for expecting economic growth, in other words, just got a bit stronger.
Initial jobless claims slipped to a seasonally adjusted 348,000 for the week through March 17, the lowest level in four years. With each new low in this series, arguing that a recession is brewing looks a touch more challenged. It's dangerous to read too much into any single economic report, of course. That said, history shows that the onset of recession is accompanied by rising claims for unemployment, either in advance of the official recession start date (as determined after the fact by NBER) or in the early stages of a new downturn. That leaves three interpretations for the recent decline in jobless claims: 1) the pro-growth message is wrong this time; 2) claims will soon reverse course and trend higher to reflect deteriorating economic conditions that aren't yet reflected in new unemployment filings; or 3) the economy is poised for expansion for the foreseeable future.
A broad reading of the data favors the latter view. Granted, that's an opinion, but subjectivity is par for the course for evaluating the cyclical tea leaves in real time. Meantime, let's recognize that there are still troubling risks afoot, including the deceleration in the rate of growth for personal disposable income. But as long as jobless claims trend lower, and the decline translates into stronger job growth, as it has in the last three months, the forces of expansion still have the edge. It may be a small edge, and perhaps an artificial one due to an unusually warm winter. But the persistent descent in new jobless claims suggests that there's more than climate change driving the macro news of late.
Indeed, even some worrying trends that have been a concern seem to be fading. For instance, the slowing pace of industrial production has been worrisome, but last week's update leaves room for optimism with the second straight month of a higher year-over-year increase.
As for dismissing the drop in unemployment claims due to seasonal factors, that criticism looks weak. The virtuous cycle for new jobless filings holds up even when we look at unadjusted numbers on a year-over-year basis. As the second chart below shows, new claims have been consistently falling each and every week for nearly a year. That's a strong sign that the labor market's healing has momentum.
"On the labor front, we have dug a deep hole but we seem to be digging out of it," says economist Gus Faucher at PNC Financial Services.
Today's jobless claims news implies that the March employment report (scheduled for release on April 6) will show job creation in the private sector on par with the 200,000-plus gains in each of the previous three months. Nothing less than another robust jobs report is needed to minimize the potential for trouble. Today's claims update suggests there's still a good argument for thinking positively.
Strategic Briefing | 3.22.12 | Is The Euro Crisis Over?
Draghi Says Worst of Debt Crisis ‘Is Over,’ Bild Reports
Bloomberg | Mar 21
European Central Bank President Mario Draghi said the worst of the sovereign debt crisis is over, Germany’s Bild newspaper reported, citing an interview. “The worst is over, but there are still risks,” Draghi was quoted as saying. “The situation has stabilized. The important indicators for the euro zone, like inflation, current account and above all the budget deficits, are better than, for example, in the United States.” Investor confidence has returned and “the ball is now with governments,” Draghi said, according to Bild. “They must sustainably secure the euro zone against crises.”
ECB's Draghi says worst of euro zone crisis over
Reuters | Mar 21
The worst of the euro zone crisis is over and the European Central Bank will act if inflation risks grow, ECB President Mario Draghi said in a German newspaper interview released on Thursday, seeking to ease angst in Germany about price rises. Draghi was quick to add, however, that there was no inflationary threat from twin long-term lending operations the ECB has conducted in recent months which have unleashed more than 1 trillion euros into financial markets.
Merkel: Eurozone crisis not over yet
EUobserver.com | Mar 22
German Chancellor Angela Merkel on Wednesday (21 March) said the eurozone crisis is "not over" yet, but merely in one of its "various phases," even as investor confidence seems to be returning to troubled euro-countries. "Concerning the development of the crisis, we cannot say today that it is over, we still find ourselves in one of the various phases of the crisis," she told a meeting organised by her Christian Democrat parliamentary group.
U.S. Notes Europe’s Progress in Easing Its Debt Crisis
The New York Times | Mar 21
For the United States, the looming threat from the long-simmering European sovereign debt crisis seems finally to have started to subside. European leaders did not combat the crisis with the force American policy makers had urged. But a Continent-wide agreement to slash deficits and lifelines tossed to European banks have helped reduce borrowing costs, and Washington now seems to be breathing a tentative sigh of relief.
Is the worst of the euro crisis over?
Global Post | Mar 21
Maybe. But several pitfalls still lie ahead. (We're looking at you, Portugal.).... The immediate risk of catastrophe has receded, but the euro zone is far from finding its way out of the woods — and the big bad wolf of currency collapse is still lurking among the trees. Portugal might still be forced into a Greek-style default. Greece could still backslide after its impending elections. The frontrunner in France’s presidential election wants to pick apart new rules on fiscal discipline. Soaring oil prices may still drag the euro zone recession down to unsustainable levels, and southern Europe’s inability to generate growth could vanquish all efforts to stem those countries’ rising debt.
Greece’s new bonds: Is another default coming?
Jacob Funk Kirkegaard (VOX) | Mar 21
Last week’s historical restructuring of Greek debt appears to have gone smoothly. This column argues that appearances may be deceptive.... The new concern is Greece’s new long-term bonds that were thrust upon the country’s hapless private creditors in last week’s coercive bond swap. They have begun trading at north of 20% yields. In what is probably an illiquid market, these yields suggest that markets expect a second Greek default against private creditors.
March 21, 2012
Expecting Growth... And Inflation?
The recent pop in the 10-year Treasury Note's yield—up about 40 basis points this month to ~2.4%--has inspired cries that the end is near. One Wall Street analyst lamented that the recent pop in this rate was a sign of rising inflation expectations and that this was something to worry about...NOW! He also recognized that the market's repricing of Treasuries for higher yields also reflected a brightening economic outlook. But he couldn't see that the two trends are, in fact, connected these days because the new abnormal continues to rule.
Indeed, higher inflation expectations and the outlook for growth are still closely linked. This may be a revelation in some circles (or ignored or even damned in others), but it's been reality for several years now. The main empirical fact is the high positive correlation between the stock market and the market's inflation forecast (e.g., the yield spread on the 10-year nominal Treasury less its inflation-indexed counterpart).
Higher inflation isn't always associated with good news for growth, of course. Critics rightly point out that Milton Friedman and Robert Lucas long ago warned us to be to wary of blindly accepting the Phillips curve as permanent gospel. There's a price to pay for allowing inflation to rise too far… eventually, especially under certain economic conditions. But in the new abnormal, higher inflation is still useful. There will come a day when it's detrimental, but not now.
Meanwhile, higher nominal yields are telling us something about growth expectations. Economist David Beckworth crunches the numbers and shows us the relationship over the last several decades, explaining: "the expected growth rate of nominal GDP or aggregate demand is strongly related to the 10-year treasury yield. Thus, the recent rise in long-term yields can be interpreted as the bond market pricing in a rise in the expected growth of aggregate demand. And that is great news given the ongoing aggregate demand shortfall in the U.S. economy."
March 20, 2012
Housing's Uneven Recovery In February
Is the housing market recovering? Yes, but it’s slow and uneven. That’s the message in today’s update for February housing starts and newly issued building permits. Residential construction continues to revive, and that’s a positive for the wider economy, although the revival is modest.
New building permits last month rose to a seasonally adjusted annual rate of 717,000--another post-recession high and a handsome jump over January’s rate of 682,000. The advancing permit levels imply stronger housing activity in the months ahead. New housing starts, however, slipped a bit to a seasonally adjusted annual rate of 698,000 in February, down from January’s upwardly revised 706,000. A sign of weakness? Maybe, but looking at the trend suggests otherwise.
Consider the recent history for permits and starts, as shown in the chart below. We can debate the latest data points and try to draw conclusions, but it’s the trend that’s important and by that standard it’s hard to dismiss the recent gains for both starts and permits as statistical noise. Indeed, permits have broken into new post-recession high territory and starts, while down slightly in the latest reading, are holding their ground at just under the highest levels since 2008. It may all come crashing down, but based on the data we have in hand, and considering it in context with recent history, there's a reasonably good case for arguing that positive momentum is bubbling.
For another perspective, consider how new starts and permits fare on a rolling 12-month-percentage-change basis, as shown in the second chart below. Both series are up by roughly 35% vs. their year-earlier levels as of February—the fastest year-over-year rates of increase in two years and (more importantly) a sharp rise compared with the annual paces of recent months.
It’s premature to argue that the housing market has fully recovered or that it’s now destined for a healthy, sustained recovery. But it’s clear that modest signs of growth appear to be taking root, which is good news for the broader economy. Even so, it’s still too soon to celebrate with oil and gasoline prices on the march. Some observers argue that higher energy prices are a sign of economic strength, and so there’s less risk here than it appears. Maybe, but if gasoline prices continue to rise, there’s less confidence for thinking that housing, or the economic recovery, will remain unaffected.
So far, at least, housing appears immune to the energy factor, and without a sharp rise in gasoline prices from here on out there may be more good news for housing in the months ahead. “The housing market continues to recover at a very gradual rate,” says Sal Guatieri, an economist at BMO Capital Markets. “The increase in permits likely flags further strength in the months ahead.”
But let's be clear: energy prices are the wild card--for housing and so much more. And with quite a bit of the rise in oil and gas bound up with geopolitical risk in the Middle East generally, and Iran in particular, it's hard to say how this all plays out, or when. As CNN prudently asks: Is oil the new Greece?
Strategic Briefing | 3.20.12 | Oil Prices
Oil Drops From Three-Week High on Speculation of Rising Supplies
Bloomberg | Mar 20
Oil dropped from the highest price in almost three weeks in New York on signs U.S. crude supply is rising and speculation that Saudi Arabia may boost output.... “The market is currently well-supplied with oil, but supply disruptions and looming supply shortage from Iran is keeping uncertainty high,” said Hannes Loacker, an analyst at Raiffeisen Bank International AG (RBI) in Vienna who predicts U.S. futures will average $104 this year. “Without an intensifying Iran conflict, further price gains aren’t justified.”
U.S. crude oil imports drop to lowest level since 1999 as domestic oil production rises
US Energy Information Administration | Mar 19
U.S. crude oil imports during 2011 fell to their lowest level in twelve years and were down 12% from their peak in 2005, as higher domestic oil production and decreased consumption of petroleum products reduced American refiners' purchases of foreign crude.
Oil falls from close to 10-month high to near $107
Associated Press | Mar 20
Tensions over Iran's nuclear program have helped to keep high prices at elevated levels. A military attack by Israel or the U.S. against Iran's nuclear facilities would likely trigger a crude price spike while renewed diplomatic negotiations would probably cause prices to drop. "The market is anticipating additional favorable U.S. economic news," energy trader and consultant Ritterbusch and Associates said in a report. "And until concerns ease regarding Iranian risk, the market appears capable of maintaining price gains, especially if equities remain strong."
Is oil the new Greece?
CNN | Mar 20
As gas prices rise, due largely to fears that tensions with Iran will cut off supply, is oil set to become the new Greece? The chief economist at HSBC thinks so. Much like worries of the eurozone debt woes could weigh on the global economy, now rising oil prices are attracting similar attention. “If they continue rising, they really choke off consumer spending,” HSBC’s Stephen King told Quest Means Business. “We’re not talking about recession here, but we’re talking the growth rate which is quite strong could fade during the course of this year.”
Saudi Arabia sends tankers to US with pledge to bring down oil price
The Telegraph | Mar 20
Saudi Arabia has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks.
Oil slips towards $124 on Saudi, Libya supplies
Reuters | Mar 20
Brent crude fell towards $124 a barrel on Tuesday as signs of increased supply from Saudi Arabia and a return to pre-war exports from Libya eased pressure on the market, while a slowdown in Chinese demand and a stronger dollar also weighed. Saudi Arabia has said it stands ready to fill in for any gap created by the loss of Iranian oil, and late on Monday said it would work to return oil prices to "fair" levels, according to a state news agency. Supply concerns were also eased by Libya, where oil exports in April are set to exceed pre-war levels, according to a senior official at its National Oil Corporation.
Templeton's Mobius bets on further oil price increases
Reuters | Mar 20
Franklin Templeton funds that focus on developing economies are heavily invested in energy stocks as the firm believes oil prices have room to increase further, the head of its emerging markets group Mark Mobius said on Tuesday. "If you look at inflation and the oil price over the long term, you'll find that the oil prices have not kept up with inflation, so there's some catch-up to do," Mobius told a news conference.... As for China, he said he was confident about its continued prospects despite signs of slowing economic growth and worries among some investors that the world's second-largest economy is headed for a hard landing. "People ask me if China is going to have a hard or soft landing. I tell them China is not landing, they are going to continue flying," he said.
Energy crisis only joke to Obama
Boston Herald | Mar 20
President Barack Obama’s shtick on energy is getting old. The latest version in response to rising gasoline prices goes something like this: He can’t really do anything about high gasoline prices.... According to the first part of his shtick, high gasoline prices are not his fault; they result from high crude oil prices driven by geopolitical forces — Middle East instability and increased demand by China and India.... But wait. He has done something about high oil prices . . . by drilling more! In the second part of his routine, touted in a new White House report on energy security, he assures us that the United States is producing more oil today than at any time in the last eight years. In addition, he said, he is all about opening new areas in the Arctic Ocean and the Gulf of Mexico to exploration. The problem with this claim is that most of the expansion in domestic oil and gas production over the past three years is the result of steps taken by the Bush administration. Obama has actually reduced output from what it would have been had his administration not reversed many of President George W. Bush’s policies.
March 19, 2012
A Big Week For Housing Reports
Late last year, I wondered if the housing market was finally in a recovery mode. There was a modest case for thinking positively then, and there's been encouraging news so far in 2012. Will it last? This week's scheduled updates on several housing measures may provide an answer.
Later today the March update for the NAHB Housing Market is scheduled for release, followed tomorrow with February data on housing starts and building permits, existing home sales on Wednesday, and new home sales on Friday. In all four cases, the consensus forecast anticipates mild improvement, according to Econoday via Barrons.com.
“Our view is that housing bottomed out last year,” says Barclays Capital economist Michael Gapen. “It’s no longer a drag on the recovery.”
There's a fair amount of anecdotal support for expecting that housing is on the mend. For instance, AP reports:
Through the housing crisis, the challenges of big regional and national homebuilders such as Beazer Homes USA Inc. and Toll Brothers Inc. were widely broadcast. But the devastation in the industry also was acute for many private homebuilders and other small businesses that are part of the housing industry. Ruma is one of many smaller homebuilders now seeing early signs that the housing industry is recovering.
"It's very encouraging to see traffic coming out," Ruma says. Between the houses that the central Ohio builder signed contracts on in the second half of 2011 and the homes it expects to sell between now and July, he estimates that the company will have 21 closings this year. That would be Virginia Homes' best performance since 2009 when it sold 12 homes. The company sold just six in 2010 and seven last year.
Meanwhile, CNN notes that the residential market's looking firmer in Phoenix.
There are other isolated reports of positive change, but the real question is how is the nation faring overall? Here too there's mildly good news. New housing starts (blue line in the chart below), for instance, are near their highest levels since the recession was technically over as of mid-2009. Newly issued building permits (red line), a sign of future activity in housing, is doing even better, reaching the highest level in January since 2008.
Re/Max tells us too that things are looking up:
With a median price of $171,881, prices in the 53 cities surveyed by the RE/MAX National Housing Report rose by 1.1% over February 2011. Home sales were even higher, up 8.7% from one year ago. With a positive sales trend of 8 straight months above the previous year, it's looking like 2012 will witness a very strong home-selling season. As a result of reduced foreclosure activity, inventory continued a downward trend for the 20th straight month, 22.4% lower than the housing inventory in February 2011. Consumer sentiment appears to be rising, and record low mortgage rates coupled with favorable home prices are attracting homebuyers and investors who don't want to miss a historic opportunity.
"All the data is pointing to a very active spring and summer selling season this year, which is great news for a recovering housing market," said Margaret Kelly, CEO of RE/MAX, LLC. "As sales numbers have trended higher for several months, we have been anticipating a turnaround in home prices, and it looks like it's finally starting."
If the housing numbers set for release in the week ahead bring more signs of improvement, the economic outlook generally will brighten. Housing, after all, has been a drag on macro conditions for several years. If this weight is truly lifting, even only slightly, the change will be more than trivial. Housing as a share of the U.S. economy may be as high as 18%, according to the National Association of Home Builders.
No one thinks that housing is set to boom any time soon, of course. Indeed, quite a bit of the positive news in recent months is simply a rebound from what has been a long and painful correction. The hole is still quite deep, but maybe we're climbing out of it. If this sizable portion of the economy can transition to a mildly net contributor for growth, a continued run of positive momentum may be in the cards overall. In fact, it's reasonable to wonder if the broader economic recovery can survive if the housing market doesn't show ongoing improvement. Any way you slice it, there's a lot riding on the housing numbers this week.
March 17, 2012
Book Bits For Saturday: 3.17.2012
● The Race for What's Left: The Global Scramble for the World's Last Resources
By Michael T. Klare
Interview with author via Democracy Now!
We look at rising fuel costs, one of the major issues raised by the Republican contenders in the 2012 presidential campaign. Since the beginning of the year, the average of price of a gallon of regular gasoline has jumped 16 percent to more than $3.80. Earlier this week, President Obama partially blamed his Republican rivals, saying one reason for the increase is rumors of war with Iran. Meanwhile, Republican candidates have used the spike in gas prices to attack President Obama’s rejection of the Keystone XL tar sands oil pipeline and his stance on expanded domestic oil drilling. Our guest, Michael Klare, says oil prices are destined to remain high for a long time to come because most of the remaining oil on the planet is no longer easily accessible.
● Power, Inc.: The Epic Rivalry Between Big Business and Government--and the Reckoning That Lies Ahead
By David Rothkopf
Lecture/panel discussion with author via the Carnegie Endowment
Foreign Policy magazine and the Carnegie Endowment for International Peace hosted the launch of David Rothkopf’s newest book, Power, Inc. The Epic Rivalry Between Big Business and Government—and the Reckoning that Lies Ahead. Rothkopf presented his book, which traces the changing relationship between public and private power and looks at the implications of the rise of great private actors and the weakening of many states. A panel discussion followed with Robert Hormats, undersecretary of state for economic growth, energy, and the environment; and Daniel Yergin, Pulitzer Prize-winning author of The Quest and The Commanding Heights. Ed Luce, Washington columnist and commentator for the Financial Times, moderated.
● Finance and the Good Society
By Robert Shiller
Summary via publisher, Princeton University Press
The reputation of the financial industry could hardly be worse than it is today in the painful aftermath of the 2008 financial crisis. New York Times best-selling economist Robert Shiller is no apologist for the sins of finance--he is probably the only person to have predicted both the stock market bubble of 2000 and the real estate bubble that led up to the subprime mortgage meltdown. But in this important and timely book, Shiller argues that, rather than condemning finance, we need to reclaim it for the common good. He makes a powerful case for recognizing that finance, far from being a parasite on society, is one of the most powerful tools we have for solving our common problems and increasing the general well-being. We need more financial innovation--not less--and finance should play a larger role in helping society achieve its goals.
● Red and Blue and Broke All Over: Restoring America's Free Economy
By Charles Goyette
Summary via publisher, Sentinel/Penguin
Goyette explains how the growth of federal power and its costly warfare and welfare spending are bankrupting America and strangling our prosperity. The incredible $1.2 trillion a year we spend on state security is leading us straight down the road to ruinous debt. Transfer payments and social spending are equally unsustainable financial time bombs. The time has come to release the stranglehold of excessive government spending and ineffective over-regulation and let the free economy function as it was originally intended. Career politicians continue to pointlessly argue without enacting real and effective change. No wonder a feeling of disenfranchisement is growing. Their destructive agenda needs to be exposed and stopped before it does us any more harm.
● America in Decline
By Mike Sharpe
Summary via publisher, M.E. Sharpe
By Mike Sharpe
This collection gathers ninety-one essays written by Mike Sharpe that appeared in Challenge: The Magazine of Economic Affairs from 1973 through 2011. They deal with virtually every aspect of the U.S. and international economies. The title reflects the fact that income and wealth inequalities in the U.S. have increased to disastrous levels not seen since the 1920s. The wealthy have recaptured the power to make the rules almost unilaterally. The author also examines the decline of Europe and Russia, the problematic rise of China, and the enigmatic portent of the Arab Spring. The book begins with the stagflation of the 1970s and ends with the bust of the 2000s, clinching the case, in the author's opinion, that America has been in decline for more than three decades. The tide can be reversed if and when we are ready to use fact-based economic policies.
● The Idea Factory: Bell Labs and the Great Age of American Innovation
By Jon Gertner
Article by author via The New York Times
“Innovation is what America has always been about,” President Obama remarked in his recent State of the Union address. It’s hard to disagree, isn’t it? We live in a world dominated by innovative American companies like Apple, Microsoft, Google and Facebook. And even in the face of a recession, Silicon Valley’s relentless entrepreneurs have continued to churn out start-up companies with outsize, world-changing ambitions. But we idealize America’s present culture of innovation too much. In fact, our trailblazing digital firms may not be the hothouse environments for creativity we might think. I find myself arriving at these doubts after spending five years looking at the innovative process at Bell Labs, the onetime research and development organization of the country’s formerly monopolistic telephone company, AT&T. Why study Bell Labs? It offers a number of lessons about how our country’s technology companies — and our country’s longstanding innovative edge — actually came about.
March 16, 2012
Industrial Production Flat In February But Annual Pace Turns Up
Industrial production was unchanged in February, the Federal Reserve reports. That's bad. But the year-over-year pace for industrial production rose slightly—that's good.
The flat report for industrial production last month may be a sign of trouble for the economy, but if it is it'll be a hazard that will soon send a clearer warning through the 12-month rolling change for this series. But after today's update, the future is still open for debate on that front. Recall that one of the factors that persuades the Economic Cycle Research Institute to maintain its recession forecast (first announced last September) is the weakening trend of late for industrial production. ECRI's co-founder Lakshman Achuthan yesterday explained (before today's update) that part of his firm's dark outlook is bound up with the fact that "growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010." Does today's report inspire a fresh take on that indicator's signal for the cycle? Maybe. At the very least, the latest data point keeps the dialogue going on where the economy is headed for the rest of the year.
Consider how the 12-month percentage change for industrial production fares in recent history. For the second month in a row, the year-over-year change turned higher, advancing 4.0% for the year through February vs. the 3.6% annual change in the previous month. Definitive? Hardly, but marginally better beats continued deceleration.
It's true that industrial production is still growing at a relatively low annual rate compared with the upper ranges witnessed over the last two years. But it's not obvious that 4%—above the roughly 3% average 12-month growth rate for industrial production since 1960—is an unambiguous warning for the economy, assuming it holds. What is clear is that if a new recession is here, or set to pounce, industrial production's annual rate is destined to go into freefall. Anything's possible, of course, and a sudden drop from a robust growth trend isn't unprecedented in history when recession risk mounts. But for the moment, at least, the year-over-year rate looks a bit more stable.
Consider too that consumer spending's trend perked up a bit on a 12-month rolling basis in February, based on the latest retail sales report. That's encouraging in light of yesterday's update on new jobless claims, which continue to suggest that growth will roll on in the labor market. Nothing less is required to stabilize the recent deceleration in income growth and tip the argument towards anticipating the expansion will roll on.
But let's recognize that there are still risks lurking. “The trend for manufacturing has been good but not great,” says Aaron Smith, a senior economist at Moody’s Analytics. “Slowing in certain parts of the world -- Europe and China -- will have an impact, and the lift from inventories is fading.”
Perhaps our cyclical fate is sealed and rougher seas are inevitable, but arguing so is still a forecast rather than an observation drawn from overwhelming evidence. Predicting is still hard by looking backward. Today's industrial production news, at worst, muddies the water and so optimism vs. pessimism remains a matter of opinion. "On a month-to-month basis those [industrial production] numbers can be quite volatile," advises Jack De Gan, chief investment officer at Harbor Advisory. "The general direction of most economic inputs -- and the high frequency ones like jobless claims and Empire State manufacturing -- have all been trending higher."
Update: This is a corrected version of this story, which was initially posted with incorrect industrial production data and the wrong chart.
The New Abnormal: An Update
The market's inflation expectations and the outlook for growth remain tightly bound. The new abnormal, in other words, rolls on. Implied inflation, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, continues to rise, right along with the stock market's climb. This positive correlation dance confounds some pundits, although some simply ignore it. Recognized or not, this relationship endures, and it's important to understand why.
The trend of the stock market rising in sympathy with the inflation forecast is, of course, abnormal in the grand scheme of U.S. economic history. But the relationship's persistence is a sign of the times… still. Indeed, this abnormal state has been the rule for several years. In case you didn't notice, something changed in the fall of 2008 and the blowback persists on a number of fronts--relations between risky assets and pricing pressures being one example, albeit a critical one.
Based on yesterday's close, the Treasury market's implied inflation forecast for the decade ahead was 2.37%, the highest since last August. Meantime, the S&P 500 yesterday closed well above its previous highs of last year. In fact, the S&P finished the trading session yesterday above 1400 for the first time since 2008.
What's going on here? Economist David Glasner has the answer:
Since the beginning of 2012, the S&P 500 has risen by almost 10%, while expected inflation, as measured by the TIPS spread on 10-year Treasuries, has risen by 33 basis points. The increase in inflation expectations was at first associated with falling real rates, the implied real rate on 10-year TIPS falling from -0.04% on January 3 to -0.32% on February 27. Real rates seem to have begun recovering slightly, rising to -0.20% today, suggesting that profit expectations are improving. The rise in real interest rates provides further evidence that the way to get out of the abnormally low interest-rate environment in which we have been stuck for over three years is through increased inflation expectations. Under current abnormal conditions, expectations of increasing prices and increasing demand would be self-fulfilling, causing both nominal and real interest rates to rise along with asset values. As I showed in this paper, there is no theoretical basis for a close empirical correlation between inflation expectations and stock prices under normal conditions. The empirical relationship emerged only in the spring of 2008 when the economy was already starting the downturn that culminated in the financial panic of September and October 2008. That the powerful relationship between inflation expectations and stock prices remains so strikingly evident suggests that further increases in expected inflation would help, not hurt, the economy. Don’t stop now.
March 15, 2012
Jobless Claims Drop To Post-Recession Low For A 2nd Time
New jobless claims dropped last week by a sizable 14,000 to a seasonally adjusted 351,000. That’s a post-Great Recession low, for the second time. Mid-February also witnessed the 351,000 level and the numbers are knocking on this door again.
There are several messages in today’s update. One is that the recent declines in new filings for unemployment benefits are holding their ground. That’s good news because it suggests that real improvement is unfolding in the labor market (despite the challenges of late) and the recent progress in moderately stronger job growth so far this year has legs. The latest decline in claims also sets up this series to poke its way lower to a new post-recession low. A decisive drop in the near future below the 351,000 level would send an even stronger message that economic growth will roll on.
Granted, it could all dissolve tomorrow if the Iranian factor goes ballistic, or some other shock hits. But the fact that jobless claims have continued to stay relatively low after months of declines is a robust sign that the labor market healing will roll on.
“The labor market is gaining momentum,” says Kevin Cummins, an economist at UBS Securities. “Claims corroborate the pickup in employment we saw in February and suggest the pace of the job growth is likely to continue.”
Such forecasts could be dismissed if corroborating evidence of improving labor market conditions was MIA. Fortunately, there's statistical support in several corners. For instance, the annual pace of average weekly hours worked for production and nonsupervisory employees in the private sector has been rising recently at a healthy clip. It's off its highest levels post recession, but it appears to be holding up rather well. If the dark forces of recession were ready to pounce, as some analysts insist, it's likely that we'd see the trend in weekly hours worked deteriorating on a year-over-year basis. Maybe that's coming, but it's premature to say that this series has run out of steam.
The future is uncertain generally, of course, and there are considerable risks to consider. Making definitive arguments for growth is going too far. But so is arguing that the cycle is doomed to stumble. Indeed, if the labor market can hold up, it's easier to forecast continued growth for the economy, even if it's destined to remain subpar relative to history. Meantime, there's even a glimmer of hope that some of the troubling signs for the cycle may be easing. For instance, I've been concerned for some time that the deceleration in consumer spending is a troubling signal. But the latest retail sales report provides a bit of light for thinking that maybe, just maybe, this trend isn't fatal.
If optimism turns out to be dead wrong, we'll have confirmation soon via a rather large and sudden deterioration in the labor market. In that case, initial jobless claims should provide an early warning of what's coming. But for the moment, jobless claims continue to offer hope that the macro revival will endure. We can debate if other indicators trump the labor market signals, but at worst it's still a debate.
Defending Milton Friedman's Monetary Policy Prescriptions (Again)
Paul Krugman notes that Amity Shlaes has misinterpreted Milton Friedman’s legacy on monetary matters, as I did earlier this month. But then he loses me when he claims “that this time the Fed did all that Friedman denounced it for not doing in the 1930s. The fact that this wasn’t enough amounts to a refutation of Friedman’s claim that adequate Fed action could have prevented the Depression.” Huh?
The Princeton professor’s critique is confusing for several reasons, starting with the fact that we just heard the exact opposite from Berkeley economics professor Christina Romer, a fellow Keynesian and former chair of the Council of Economic Advisers in the Obama administration. Earlier this week, Romer again criticized the Fed for not doing more, calling the central bank’s reluctance to act more forcefully as a “missed opportunity.” Romer, in fact, has been chastising the central bank for some time. For example, in a widely quoted speech in May 2011 she said:
I give the Federal Reserve a lot of credit for preventing the financial crisis from spiraling out of control. They took a number of incredibly creative and aggressive actions to unfreeze financial markets and keep credit flowing in the fall of 2008. In early 2009, they did a round of quantitative easing that helped to reduce mortgage rates and stabilize the housing market.
My main criticism is that they took their eye off the ball in late 2009 and 2010. They started to think more about exit than about the fact that the economy was still operating far below capacity. The second round of quantitative easing, which started last November has been helpful, but it came about a year too late.
Krugman suggests that the Fed did all it could, but Romer begs to differ, even though the Fed's target interest rate is virtually zero. In fact, you don’t have to look very hard to find other economists who agree with Romer. Market monetarist Scott Sumner, for instance, tells us:
Romer is a very strong advocate of the position that monetary policy does not run out of ammunition at the zero bound. Indeed Romer has recently been calling for NGDP [nominal gross domestic product] targeting, level targeting. Bernanke said the BOJ could definitely increase prices if they wanted to, and called on them to show “Rooseveltian resolve.” He clearly thought the lessons of 1933 had relevance for today. Bernanke has repeatedly said the Fed is not out of ammunition.
It's understandable that even Nobel-prize winning economists can misinterpret zero interest rates as an easy monetary policy that's at its limits, but Sumner sets us straight on this confusion, largely by drawing on the insights laid out by Milton Friedman:
America and Japan have dramatically enlarged their monetary bases; they’ve cut interest rates to almost zero. If even that wasn’t enough, just imagine how much monetary stimulus it would take to get a meaningful recovery!
I hear this all the time, and I have to respond to this over and over again in the comment sections. And also to the question of what the Fed should buy, and will those purchases cause major distortions in the economy?
Unfortunately, the worriers have it exactly backwards. They aren’t looking at robust monetary stimulus that failed; they are seeing what ultra-conservative monetary policy looks like, policy which drives NGDP growth to very low levels. The fruits of ultra-tight money just happen to look like what most people (wrongly) think ultra-easy money looks like: near zero rates and a huge monetary base (as a share of GDP.)
Sumner also asserts:
In late 2008 the markets were telling us that the Fed was making a tragic mistake by allowing NGDP expectations to plunge. But the economics profession didn’t listen, as they view stock investors as being irrational. Economists were obsessed with the notion that the real problem was banking distress, and that fixing banking would fix the problem. No, the real problem wasn’t banking, the real problem was nominal.
One of the arguments for why the Fed isn't doing enough is that it's worried about raising inflation expectations. But if the macro problems are truly nominal these days, as Sumner and others argue, then raising nominal GDP equates with raising inflation. Why's that important? Because we're still in a period that I like to call the new abnormal, or a time when growth and inflation expectations are positively correlated. A deeper explanation for what's going on here comes from economist David Glasner, who writes:
As I showed in this paper there is no theoretical basis for a close empirical correlation between inflation expectations and stock prices under normal conditions. The empirical relationship emerged only in the spring of 2008 when the economy was already starting the downturn that culminated in the financial panic of September and October 2008. That the powerful relationship between inflation expectations and stock prices remains so strikingly evident suggests that further increases in expected inflation would help, not hurt, the economy. Don’t stop now.
One of the lessons in all of this is that expectations matter, a lot. As David Beckworth, an economics professor at Texas State University, recently observed: "…the Fed could pack more of punch if it did a better job managing expectations about future nominal spending (and by implication inflation) via a nominal GDP level target."
This is an idea that stretches back through economic history. To take the most compelling example, it was an attitude adjustment that pulled us out of the deep dive of the Great Depression all those decades ago. The recovery was squandered by a premature monetary tightening in the mid-30s, but that's another story. As for the first phase of the rebound in the second half of 1933, the record is clear. Gauti Eggertsson wrote a valuable study for the New York Fed a few years ago that explained how
…the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and—even more important—announced the policy objective of inflating the price level to pre-depression levels.
As for arguing that the Fed over the last several years has embraced Milton Friedman's advice at full throttle, the empirical evidence looks weak. Marcus Nunes has been making this point for a long time by letting graphics tell the story. For example, the relatively weak rebound in job growth since the Great Recession formally ended in mid-2009 can be explained by the ongoing slump in NGDP growth relative to the trend. "The Fed dug a 'deep hole' and shoved employment inside," the hole, he explains. "Four years later it still refuses to 'shine the light'" by engineering an appropriate monetary policy that addresses the problem.
Casual observation may suggest that the Fed has done all it can do, but a fair reading of the evidence suggests that Milton Friedman's advice hasn't been fully implemented. Krugman argues otherwise, although one might wonder why he's willing to give the apparent failure of fiscal stimulus a pass but offers no leeway for interpreting monetary policy? Indeed, Krugman has opined that the Obama administration's efforts with fiscal stimulus were too small if not missing entirely, and so Keynesian economics can't be blamed for the weak recovery. In evaluating the effectiveness of monetary policy, on the other hand, he's subjectively holding it to a higher standard.
March 14, 2012
The Beta Investment Report | US Bond ETFs (Broad) | 3.14.12
Here’s the second installment of our review of ETFs that can be used to replicate the Global Market Index, a passive, unmanaged benchmark that’s comprised of the major asset classes. In the previous edition, we looked at broadly defined U.S. equity funds. This time the focus is on the short list of investment-grade U.S. bond funds that cover the waterfront in this corner of the capital markets.
The first point to note is that the short list really is short. That’s partly because there’s only a handful of ETFs that cover the broad spectrum of investment-grade bonds in the U.S. in one fell swoop. We’re talking here of Treasuries, government agencies, corporates, and a small amount of international dollar-denominated bonds (inflation-protected Treasuries and munis are excluded, however). We’re also limiting the choices to market-cap weighted benchmarks exclusively in the ETF space. That leaves us with four choices, as shown in the table below:
All four ETFs track the Barclays Aggregate Bond Index, which means that the benchmark factor isn’t an issue here. Instead, trading liquidity and expense ratio come into play. As a result, our first choice is Vanguard Total Bond Market (BND). The combination of the highest daily trading liquidity and low expense ratio within the group make this an easy choice. It doesn’t hurt that BND has slightly outperformed it competition over the last three years, in no small part due to a lower expense ratio vs. the other two ETFs with several years of history.
The newer Schwab U.S. Aggregate Bond ETF (SCHZ) boasts a slightly lower expense ratio vs. BND, but SCHZ's light trading volume is a caveat. Of course, if the intended purchases are relatively small and you plan on buying and holding for the long haul, the lesser trading volume in SCHZ may not be a stumbling block. Then again, SCHZ’s expense ratio is a mere one basis point lower than BND's, a rather insignificant discount for relatively small investment sums. In fact, a routine amount of rebalancing could easily wipe away SCHZ’s advantage in expense ratio through the higher trading costs associated with lower trading volumes.
In the grand scheme of choosing ETFs, however, the above issues amount to nitpicking. All four of the ETFs above are solid choices for capturing the broad profile of the U.S. bond market. There are differences, but compared with ETF choices in other asset classes, the distinctions will be minor for most investors who are using these funds as part of a broad, multi-asset class asset allocation.
March 13, 2012
Retail Sales Rise In February, But Gas Prices Climb Too
Retail sales are strengthening so far in 2012, according to the Census Bureau. February sales jumped a robust 1.1% on a seasonally adjusted basis, the best monthly increase since last September. There was also good news for the annual pace of retail sales: for the first time in five months, the 12-month percentage change in retail sales rose, suggesting that the worrisome deceleration trend in consumer spending may have run its course.
As for last month's retail sales, today's update shows growth persisting across the board. Even after stripping out the volatile numbers for auto sales, spending was higher last month by 0.9%. Consumption, in other words, showed no signs of rolling over last month, confounding some analysts who argue that the economy's headed for trouble.
For the moment, even the threat posed by rising energy costs haven't taken a toll. Economist Jonathan Basile at Credit Suisse tells Bloomberg that today's numbers suggest that consumers are "unfazed by higher gas prices." As such, "this is a pleasant surprise on the overall picture for the economy."
Indeed, given all the worries swirling about, from the euro mess to worries about Iran and the Middle East, Joe Sixpack's resilience is striking. Of course, if job growth is stronger, and recent data suggests it is, it's really not all that surprising that retail sales are holding up rather well. Pessimists might be tempted to dismiss today's retail sales news as noise, but the fact that the year-over-year change inched higher for the first time in five months implies that the broad economic expansion has momentum. Retail sales climbed 6.5% for the year through last month, up from the 6.3% annual pace for January. Simply holding that pace is no small feat. Six-percent-plus represents a strong trend and one more sign that growth still has the upper hand.
"The big thing for the consumer is that the labor market has improved and there's income growth," says Stephen Stanley, chief economist at Pierpont Securities, via Reuters. What could go wrong? Gasoline is still on the short list of potential party crashers. "There is a risk if gasoline prices continue to rise," Stanley notes. "That will bite into household budgets."
In fact, it's already biting. As of last month, gasoline sales as a share of total retail sales climbed to 11.5%. The fallout so far has been minimal: the year-over-year change in retail sales less gasoline is holding at roughly 6%. But the pressure is building and if gasoline prices continue to rise, there will be a price to pay.
Average regular gasoline prices in the U.S. rose again last week to $3.83 a gallon, according to the Energy Information Administration. That's the highest since last spring, and just a stone's throw from the all-time highs of just over $4 reached in the summer of 2008.
The question, of course, is whether rising gasoline prices can derail the economy? There's widespread recognition that the U.S. has become less dependent on energy prices for growth, even over the last several years, and so rising fuel costs pose less of a threat. True, although energy efficiency will mean less if prices keep rising. It's also clear that quite a bit of the higher energy prices of late reflects a fear premium via worries over whether Israel will attack Iran. To the extent that this geopolitical risk is driving oil and gas prices higher, the future looks relatively hazy for making assumptions about economic growth.
The haze will surely thicken if gas continues to climb. On the other hand, an easing of tensions over Iran would bring the opposite effect. Figuring out which scenario is more likely is anyone's guess at this point. Meantime, the energy markets continue to vote for the pessimistic outcome.
The Forecast File: US Retail Sales For February
Today's update of February retail sales, scheduled for release at 8:30 a.m. eastern, will bring some fresh numbers for thinking about the recent deceleration in personal consumption expenditures. Here's a brief look at some of the commentary and predictions:
Retail Sales in U.S. Probably Rose in February by the Most in Five Months
Bloomberg | Mar 13
Retail sales in the U.S. probably rose in February by the most in five months, spurred by the strongest demand for automobiles since 2008, economists said before a report today. The 1.1 percent rise would follow a 0.4 percent gain in January, according to the median forecast of 81 economists surveyed by Bloomberg News. Excluding autos, purchases may have climbed 0.7 percent.
US Retail Sales Expected to Show an Active US Consumer
Action Forex | Mar 13
Expectation for February US retail sales is for a strong pickup in activity as the labor market has improved putting more money in the hands of households and consumers. The expectation of a 1.1% reading would be the highest since October 2011 and should help to dent the downward slope of the annual pace of retail sales (seen in red above). While part of the gains expected come from robust motor vehicles sales during the month, as well as a pickup in gas purchases due to higher prices, the expectation for core retail sales is for a 0.8% increase - also quite a strong figure.
US Retail Sales Ahead of FOMC Decision Should Not Be Overlooked
Daily FX | Mar 13
Although the key event risk for the day comes in the form of the FOMC rate decision, the big market mover might in fact come a little earlier when US retail sales are released. At the end of the day, the Fed is not expected to do anything at all at today’s meeting and it would probably be in their best interest to leave its outlook as is. Right now the Fed is in a position where it needs to start to consider the possibility of signaling an earlier reversal of monetary policy than had been anticipated given the better than expected improvement in the US economy. However, it is still probably too early to make any material changes and a wait and see approach is most likely the best course of action for the time being. At the same time, this does make today’s retail sales data all the more interesting, with any signs of strength out of the numbers to do a good job of reaffirming the likelihood for a near-term shift in the outlook of the Fed and a transition to a less dovish policy.
Will Rising Gas Prices Spoil Retail Sales Results?
CNBC | Mar 12
Rising gasoline prices could drag down retail stocks ahead of monthly sales figures, especially as fuel costs average $3.80 per gallon, up 50 cents year to date and up 30 cents over the past month. “I think it’s a potential headwind, for sure,” Karen Finerman of Metropolitan Capital Advisors said Monday on “Fast Money.”
Wells Fargo Retail Sales Forecast For Feb: A "Modest" +0.7% Rise
Wells Fargo Economics Group | Mar 9
Retail sales expanded at a slower-than-expected pace of 0.4 percent in January as motor vehicle sales fell 1.1 percent and electronic store sales failed to rebound. The modest growth in retail spending was a bit surprising given the strong pace of auto sales, which rose 5.9 percent from January to February. Core retail sales, which exclude automobiles and gasoline rose 0.7 percent. Expectations are also high for February with auto sales again surging higher for the month. Given the disconnect between last month’s auto sales and retail sales, our forecast calls for a slight improvement in the headline number to 0.9 percent. We expect core retail sales to post a modest 0.7 percent increase. Going forward, consumer spending will remain restrained for most of the year, averaging just 1.5 percent. If price pressures from higher gasoline prices emerge over the next few months, there could be further downside risk to consumer spending in the months ahead.
March 12, 2012
Tactical ETF Review: 3.12.2012
"The rally in risk assets is running out of steam," warns The Economist. Maybe, but that's a forecast. The recent past, meanwhile, has been quite steamy, according to a recap of the major asset classes via our usual list of ETF proxies.
Indeed, equities in the U.S., the developed and emerging markets have been persistently trending higher this year. The first real bout of turbulence in 2012 hit last week, but that's been a minor disturbance so far. Bonds have generally been winding northward too, albeit with less consistency. Commodities (broadly defined), on the other hand, haven't gone anywhere year to date, although oil and gasoline have rallied sharply (see USO and UGA, for instance). Don't confuse those rockets with natural gas, however, which continues its long descent (UNG).
As for the stock market, The Economist worries that the ascent in prices will be a replay of last year. Martin Hutchinson at Breakingviews recently offered a rationale for managing expectations down:
There’s a bubble in U.S. stocks - but it’s in profitability, not valuation metrics. The S&P 500 Index trades at 14 times historical earnings, so the valuation multiple isn’t excessive. But a measure of domestic U.S. profit margins stands 50 percent above its long-term average. Global profitability has soared even higher. This is unlikely to last long.
It's premature to argue that 2012 is destined to be a mirror image of last year until we learn more about the staying power of the U.S. economy. The latest jobs report is certainly encouraging. But even if growth prevails, the markets may be due for a breather. For the moment, however, positive momentum has the upper hand.
US STOCKS • Vanguard Total Market (VTI) • Benchmark: MSCI US Broad Market Index
Now THAT's a positive trend...
FOREIGN DEVELOPED MARKET STOCKS • Vanguard Europe Pacific (VEA) • Benchmark: MSCI EAFE
Trending higher here too, although the Ides of March may be threatening...
EMERGING MARKET STOCKS • Vanguard Emerging Markets (VWO) • Benchmark: MSCI Emerging Market
Emerging market stocks hang in there...
US BONDS • Vanguard Total Bond Market (BND) • Benchmark: Barclays US Aggregate
Living on borrowed time, perhaps, but still coasting higher...
INFLATION-INDEXED US TREASURIES • iShares Barclays TIPS Bond (TIP) • Benchmark: Barclays US TIPS
Pretty good for a "low inflation" environment...
HIGH YIELD BONDS • SPDR Barclays High Yield Bond (JNK) • Benchmark: Barclays High Yield Very Liquid
Junk still draws a crowd...
COMMODITIES • iPath Dow Jones-UBS Commodity (DJP) • Benchmark: DJ-UBS Commodity
Commodities sit this one out...
REAL ESTATE INVESTMENT TRUSTS • Vanguard REIT (VNQ) • Benchmark: MSCI US REIT
Second thoughts for spring?
FOREIGN DEVELOPED MARKET GOVERNMENT BONDS • SPDR Barclays Int’l Treasury (BWX) •
Benchmark: Barclays Global Treasury ex-US Capped
The forex factor takes a toll...
EMERGING MARKET GOVERNMENT BONDS • Van Eck Market Vectors Emg Mkt Local Currency Bond (EMLC) •
Benchmark: J.P. Morgan GBI-EMG Core
A new safe haven in the making?
FOREIGN GOVERNMENT INFLATION-LINKED BONDS • SPDR DB International Inflation-Protected Bond (WIP) •
Benchmark: DB Global Government ex-US Inflation-Linked Bond Capped
Pricing in inflation worries abroad...
FOREIGN CORPORATE BONDS • PowerShares International Corporate Bond (PICB) •
Benchmark: S&P International Corporate Bond
Back in favor?
Charts courtesy of StockCharts.com
March 10, 2012
Book Bits For Saturday: 3.10.2012
● Stewardship: Lessons Learned from the Lost Culture of Wall Street
By John G. Taft
Review and interview with author via Marketplace
The term "Stewards of Capital" used to mean the businesses of Wall Street, which were supposed to hold and grow assets for clients. Now, it's a quaint archaic term that decades ago, gave way to "Masters of the Universe."
John G. Taft, the CEO of RBC's wealth management arm in the U.S., is trying to hit the brakes and take the Wayback Machine to a time when Wall Street businesses were there to serve clients - not serve themselves from a big buffet table full of money. Taft said that investors have lost faith that the market will grow their wealth over time, and he calls himself "someone who is dedicated to making sure that the financial system does more good on the earth than it does bad."
● Guardians of Finance: Making Regulators Work for Us
By James R. Barth, Gerard Caprio, Jr. and Ross Levine
Summary via publisher, MIT Press
The recent financial crisis was an accident, a “perfect storm” fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. And policy makers? They did everything they could, given their limited authority. It was all a terrible, unavoidable accident. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan Greenspan. In Guardians of Finance, economists James Barth, Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system, had years to process the evidence that risks were rising, had the authority to change their policies--and yet chose not to act until the crisis had fully emerged.
● From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics
By Thomas Palley
Excerpt via publisher, Cambridge University Press
The U.S. economy and much of the global economy are now languishing in the wake of the Great Recession and confront the prospect of extended stagnation. This book explores how and why we got to where we are and how we can escape the pull of stagnation and
restore shared prosperity.
The focus of the book is ideas. Marshall McLuhan (1964), the famed philosopher of media, wrote: “We shape our tools and they in turn shape us.” Ideas are disembodied tools and they also shape us. The underlying thesis is that the Great Recession and the looming Great Stagnation are the result of fatally flawed economic policy. That policy derives from a set of economic ideas. The implication is that avoiding stagnation and restoring shared prosperity will require abandoning the existing economic policy frame and the ideas on which it is based and replacing them with a new policy frame based on a new set of ideas.
● The Assumptions Economists Make
By Jonathan Schlefer
Summary via publisher, Belknap/Harvard University Press
Economists make confident assertions in op-ed columns and on cable news—so why are their explanations often at odds with equally confident assertions from other economists? And why are all economic predictions so rarely borne out? Harnessing his frustration with these contradictions, Jonathan Schlefer set out to investigate how economists arrive at their opinions. While economists cloak their views in the aura of science, what they actually do is make assumptions about the world, use those assumptions to build imaginary economies (known as models), and from those models generate conclusions. Their models can be useful or dangerous, and it is surprisingly difficult to tell which is which. Schlefer arms us with an understanding of rival assumptions and models reaching back to Adam Smith and forward to cutting-edge theorists today. Although abstract, mathematical thinking characterizes economists’ work, Schlefer reminds us that economists are unavoidably human. They fall prey to fads and enthusiasms and subscribe to ideologies that shape their assumptions, sometimes in problematic ways. Schlefer takes up current controversies such as income inequality and the financial crisis, for which he holds economists in large part accountable.
● Templeton's Way with Money: Strategies and Philosophy of a Legendary Investor
By Jonathan Davis and Alasdair Nairn
Excerpt via publisher, Wiley
In 1954, looking for new ways to expand the business more quickly, Templeton decided to launch a new mutual fund. This was the Templeton Growth Fund, domiciled in Canada. It was unusual in being one of the very first mutual funds to offer North American investors the opportunity to invest in a managed fund that set out to invest across the globe. At the time, it was still a commonplace view among investment professionals that it was too risky to commit anything but a small proportion of their assets to investment opportunities outside the United States. In addition, legislation prevented many pension funds and charitable foundations from investing in securities outside the United States. The fund itself was the first of a number of new managed funds to be domiciled in Canada, where there was no capital gains tax. The tax advantages of the fund had obvious advantages to a U.S. investor, and they duly featured prominently in the way that the fund was marketed.
Behind those immediate benefits, however, were the seeds of a distinctive new investment philosophy. Templeton’s argument, still a minority view at the time, but now mainstream thinking, was that widening the range of potential investment opportunities could only increase the universe of potential bargains, to the benefit of investors. His view had always been that the risk of global investing is exaggerated and can in any event be offset by diversification.
● Hannibal and Me: What History's Greatest Military Strategist Can Teach Us About Success and Failure
By Andreas Kluth
Review via Kirkus Reviews
Economist writer Kluth takes lessons from the great military strategist and other historical titans in his quest for fulfillment beyond success. In 218 BCE, Hannibal and his army surprised the Romans by crossing the Alps to attack Italy by land. The author narrates Hannibal's story with precision, but his analysis extends beyond the highlights of the battlefield. In this retelling of the ancient drama, the major players become archetypes whose motivations, triumphs and failures mirror those of more recent historical figures. The influence of Carl Jung pervades as the narrative as Kluth digs into their psyches—examples include author Amy Tan’s teenage rebellion, Eleanor Roosevelt’s loneliness and Albert Einstein’s dark side—to create a plausible formula for surviving disaster or even sudden, explosive success. Though brief, the contemporary examples bridge the gap between modern readers and the ancient world. Kluth’s own connection to Hannibal is tenuous, explained with a brief recap of how he took off his expensive tie and left London’s Wall Street to become a journalist. But his desire for a balanced life (and European disdain for ostentation) makes his voice unique among others who analyze the nuances of greatness.
March 9, 2012
February Delivered Another Respectable Month Of Job Growth
Today’s employment report from the Labor Department showed that job growth slowed in February, but not enough to raise serious doubts that the economy is doomed to stumble in the immediate future. Private-sector payrolls rose 233,000 last month. That’s down from January’s 285,000 gain, but it’s strong enough to keep hope alive that growth generally will prevail for the foreseeable future.
If we strip away the monthly variation, the year-over-year percentage change in private job growth looks quite a bit better with a 2.07% annual advance, or just a hair below January’s 2.10% gain over the year-earlier month. By that standard, we haven’t seen private sector payrolls rising at recent levels (2.1% a year) since 2006.
Admittedly, payrolls aren’t a reliable early warning indicator of new recessions. But if there’s a new downturn lurking, as some analysts insist, we should see confirmation soon in the payrolls data. For the moment, expecting cyclical darkness based on the trend in jobs growth is a stretch.
“The labor market has found its legs in the last few months, and it looks like there’s enough of a broad base that the momentum can be sustained,” says Julia Coronado, chief economist for North America at BNP Paribas. Patrick O’Keefe, director of economic research at J. H. Cohn, goes even further and asserts that “we’re at what I think we could characterize as escape velocity. The jobs recovery will finally have achieved the momentum that is necessary.”
Maybe, but there's more work to be done. As I've been discussing for some time now, a sustained rise in job growth is necessary if there's any hope of slowing the deceleration in personal income and spending growth, which currently signals trouble ahead. If the ongoing bout of job creation can salvage this descent, we should see some evidence soon (the February update for spending and income is scheduled for March 30).
Even if you buy into the idea that job growth will roll on at decent if not especially strong levels, there was disappointment that the official unemployment rate was unchanged last month at 8.3%. What's more, some economists question if the previous decline (unemployment was 9.0% as recently as last September) is accurate. As Reuters reports today:
Several Wall Street economists believe the government is mismeasuring seasonal shifts in the labor market, and suggest the jobless rate's sharp winter drop was partly an illusion….
"We think that the improvement over the last few months dramatically overstates the underlying improvement," said Andrew Tilton, an economist at Goldman Sachs in New York.
Regardless, there's no recovery or any chance of avoiding a downturn if job growth stumbles. For the moment, that risk continues to look minimal. But we're still holding our breath, one month at a time. After fours years of practice, we're under no illusions that this is about to change any time soon.
Research Review | 3.9.2012 | Portfolio Strategy
Building a Better Mousetrap: Enhanced Dollar Cost Averaging
Lee M. Dunham (Creighton University) and Geoffrey Friesen (University of Nebraska) | Dec 2011
This paper presents a simple, intuitive investment strategy that improves upon the popular dollar-cost-averaging (DCA) approach. The investment strategy, which we call enhanced dollar-cost-averaging (EDCA), is a simple, rule-based strategy that retains most of the attributes of traditional DCA that are appealing to most investors but yet adjusts to new information, which traditional DCA does not. Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium. EDCA is most effective when applied to high volatility assets, when cash flows are highly sensitive to past returns, and during secular bear markets. Historical back-testing on equity indexes and mutual funds indicates that investor dollar-weighted returns can be enhanced by between 30 and 70 basis points per year simply by switching from DCA to EDCA.
Momentum and Reversal: Does What Goes Up Always Come Down?
Jennifer Conrad (University of North Carolina) (UNC) and M. Deniz Yavuz (Purdue) | Feb 2012
We examine whether risk characteristics of stocks interact with return continuation and reversals. We find that a momentum portfolio whose winner stocks are chosen from high expected return securities, and whose loser stocks are chosen from low expected return securities, has significant momentum profits, but shows no evidence of subsequent reversals. In contrast, a momentum portfolio that buys low expected return winners and sells high expected return losers has no significant momentum but strong reversals. Overall, we find evidence that intermediate-horizon momentum and longer-horizon reversal patterns may not be linked. Our results have implications for several explanations of momentum profits.
Diversifying Diversification Strategies: Model Averaging in Portfolio Optimization
Felix Miebs (European Business School) | Feb 2012
The literature on portfolio optimization in the presence of parameter uncertainty has suggested several approaches to mitigate the impact of estimation error on portfolio performance. However, empirical evidence finds no single approach that can achieve a consistently higher risk-adjusted performance than 1/N. In this paper, I propose three averaging rules that synthesize the established approaches in order to mitigate the impact of estimation error on portfolio performance. The evaluation of the proposed averaging rules on empirical and simulated datasets shows that each rule achieves a consistently higher risk-adjusted performance than 1/N, while all individual portfolio strategies considered in the averaging exercise do not. I find that the observed performance gains are economically and statistically significant. The performance gains are attributable to persistent diversification effects between the portfolio strategies under consideration, as well as to empirical characteristics in portfolio returns that are exploited by one of the averaging rules.
Managing Risk Exposures Using the Risk Budgeting Approach
Benjamin Bruder and Thierry Roncalli (Lyxor Asset Management) | Jan 2012
The ongoing economic crisis has profoundly changed the industry of the asset management, by putting risk management at the heart of most investment processes. This new risk-based investment style does not rely on returns forecasts and is therefore assumed to be more robust. In 2011, it has particularly encountered a great success with the achievement of minimum variance, ERC and risk parity strategies in portfolios of several large institutional investors. These portfolio constructions are special cases of a more general class of allocation models, known as the risk budgeting approach. In a risk budgeting portfolio, the risk contribution from each component is equal to the budget of risk defined by the portfolio manager. Unfortunately, even if risk budgeting techniques are widely used by market practitioners, they are few results about the behavior of such portfolios in the academic literature. In this paper, we derive the theoretical properties of the risk budgeting portfolio and show that its volatility is located between those of minimum variance and weight budgeting portfolios. We also discuss the existence, uniqueness and optimality of such a portfolio. In a second part of the paper, we propose several applications of risk budgeting techniques for risk-based allocation, like risk parity funds and strategic asset allocation, and equity and bond
The Sharpe Ratio Indifference Curve
David Bailey (Lawrence Berkeley National Laboratory) and Marcos Lopez de Prado (Tudor Investment Corp) | Feb 2012
The problem of capital allocation to a set of strategies could be partially avoided or at least greatly simplified with an appropriate procedure for strategy approvals. This paper proposes such procedure. We begin by splitting the capital allocation problem into two tasks: Strategy approval and portfolio optimization. Then we argue that the goal of the second task is to beat a naïve benchmark, and the goal of the first task is to identify which strategies improve the performance of such naïve benchmark. This is a very appealing result, because it doesn’t leave all the work to the optimizer, which should add robustness to the final outcome.
We introduce the concept of Sharpe ratio Indifference Curve, which represents the space of pairs (candidate strategy’s Sharpe ratio, candidate’s correlation to the approved set) for which the Sharpe ratio of the expanded approved set is remains constant. This proves that selecting strategies (or portfolio managers) solely based on past Sharpe ratio will lead to suboptimal results, particularly when we ignore the impact that these decisions will have on the average correlation of the portfolio.
March 8, 2012
Jobless Claims Rose Again Last Week
New jobless claims jumped 8,000 last week to a seasonally adjusted 362,000, the Labor Department reports. That's the third weekly increase in a row and the biggest weekly gain since late-January. In addition, the four-week moving claims average inched higher for the first time in two months. Are those reasons to worry? Well, yes. You (still) can't take anything for granted in macro these days, least of all the idea that a recovery is destiny. Having said that, now's a good time to roll out the standard caveat that weekly claims are a volatile series and to the extent that we can draw any conclusions here it arises from the trend. On that front, fortunately, the news is still encouraging.
As the chart below shows, new claims have been trending down for nearly a year. This is a robust signal that job growth will continue. So far, so good. The drop in new claims is interrupted at times by temporary pops, and now may very well be one of those times. But in the last leg down, which began last spring, the high points have been lower and (more importantly) so have the lows. I'll be the first to point out if the trend appears to be in mortal danger, in which case the outlook for the labor market would be negatively impacted (and so too would the prospects for continued economic growth). Indeed, the strongest case for remaining optimistic on the macro view is bound up closely with job growth these days. Without this factor on our side, the cycle is far more likely to succumb to the dark forces. But thinking in those terms is still premature, at least according to the numbers in today's claims update.
It's clear from the above chart that new claims have been zig-zagging lower. Although the recent numbers aren't helpful, the uptick is (still) marginal and well short of refuting any prediction that the downdraft is over. We can find some confirmation by looking at the raw year-over-year claims data, which continues to indicate declines in line with recent history.
Yesterday's update of ADP's estimate of private payrolls for February also suggests that the moderately virtuous cycle of job growth rolls on. If tomorrow's payrolls report from the Labor Department delivers an equally robust review, it'll be easier to think that the healing process will continue.
"The downtrend in claims, even with this modest uptick this week, is being sustained," Eric Green, chief market economist at TD Securities, tells Bloomberg. “This is consistent with a much better labor market. The shift higher in job activity looks to be in tact.”
Nick Bennenbroek, who oversees currency strategy at Wells Fargo in New York, tells Reuters: "We remain in this lower range as far as the jobless claims are concerned and most analysts are looking forward to at least a moderately encouraging payrolls report tomorrow."
I'm still worried about the slowdown in personal income and spending growth, but a decent number in tomorrow's payrolls report will help raise the odds that the economy can move forward. But as Bloomberg's consensus forecast suggests, expectations are somewhat muted: Private payrolls are expected to rise by 220,000 for February, down from 257,000 the month before. That wouldn't be terrible, but it wouldn't be a game changer either.
For the moment, it seems that more of the same is a reasonable view. That's been enough to bring us this far, but with energy prices creeping higher and geopolitical risk via Iran still lurking, the margin for error may be shrinking. In other words, we need a surprisingly strong jobs report tomorrow to keep a lid on worries. Stay tuned....
Strategic Briefing | 3.8.12 | Jobs, Jobs, Jobs
Treasuries Slide Before U.S. Payrolls Report as Greek Bond Deadline Looms
Bloomberg | Mar 8
“The jobs report is key,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “The market has been telling itself over the past two months that the U.S. is not going to have a double-dip recession. If you look at the 10-year yield it seems that is has been forming a new range, a higher, much narrower one.”
Labor market shows more signs of life
Reuters | Mar 7
"After two years of expansion without much gain in employment, we're finally hitting the point where firms need to begin adding people in order to meet increased orders," said Steve Blitz, senior economist at ITG Investment Research in New York. "There are still risks ahead, but if you could just stop the clock right where we are now, you've got a recovery that is gathering some momentum; it appears to be self-reinforcing." Economists polled by Reuters expect Friday's report to show a gain of 210,000 in nonfarm payrolls, with a gain in the private sector of 225,000 jobs offsetting a modest decline in government jobs.
NFIB Jobs Statement: Job Creation Breaks Even in February; Hiring Plans Look Grim
Nat'l Federation of Independent Businesses | Mar 2
Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on the February job numbers, based on NFIB’s monthly economic survey that will be released on Tuesday, March 13, 2012. The survey was conducted in February and reflects the responses of 642 randomly-sampled NFIB members: “February was a ‘break-even’ month for job creators on Main Street. For small employers, the net change in employment per firm (seasonally adjusted) was 0.04. While this is better than January’s net zero report, it’s certainly nothing to get excited about.
Will Weather Give a Lift to February Employment Data?
Northern Trust | Mar 7
The February employment report will be published on Friday, March 9. Payroll employment rose 243,000 in January and the unemployment rate fell to 8.3% from 8.5% in December. There is a possibility that favorable weather conditions could provide a lift to employment numbers of February. The Bureau of Labor Statistics publishes data of the number absent from work due to bad weather. In 2010 and 2011, inclement weather led to people missing work and held down employment. This time around, surprisingly favorable weather could boost employment. Based on the downward trend of initial jobless claims and the likely positive weather impact, employment could show a strong reading for February. The consensus forecast is a steady unemployment rate of 8.3% and an increase of 210,000 payroll jobs. The Conference Board’s responses about labor market conditions in February point to the possibility of a decline in the unemployment rate. The number of respondents indicating that jobs are plentiful rose, while the number responding that jobs are hard to get, fell in February.
Drop in unemployment tied to aging labor force
McClatchy Newspapers | Mar 8
New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search for a job. In a March 1 report titled "Dispelling an Urban Legend," economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. workforce is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected.
Three Measures of a Healthy Labor Market: A Cyclical View
Wells Fargo Economics Group | Mar 6
Looking at the data more carefully, we see several demographic trends that are also exerting downward pressure on the unemployment rate and these have several long-run implications. First, the participation rate has declined and this is consistent with the aging demographic of the baby boom. Second, a lower female participation rate is a significant turnabout from the historical trend since WWII. Lower participation rates suggest fewer labor inputs to production and, thereby, a reduction in the potential growth rate of the U.S. economy over time. This slower growth rate will put additional pressure on local, state and federal budgets that already are dealing with reduced employment and income gains in the short run. This intermingling of cyclical and secular forces require the most careful strategic choices by decision makers going forward.
March 7, 2012
ADP Reports Faster Job Growth In February
Job growth in the private sector accelerated in February, according to the ADP Employment report. Employment rose 216, 000 last month, up from January’s 173,000 gain. "This does suggest we are moving in the right direction," Beth Ann Bovino, senior U.S. economist at Standard & Poor's Ratings Services, tells Reuters. "It supports the expectations of another 200,000-plus in Friday's payroll report [from the U.S. Labor Department]. The jobs numbers are looking healthier."
Good thing, too, since the deceleration in personal income and spending still looks worrisome. If there’s a cure for this slowdown, stronger job growth is on the short list of possibilities. January's employment report was certainly helpful, although some pundits questioned if it was statistical smoke and mirrors due to seasonal adjustments. Will Friday's update bring some clarification?
"The last three monthly gains in employment shown in the ADP National Employment Report have averaged 223,000, compared to 156,000 per month over all of 2011," says Joel Prakken, chairman of Macroeconomic Advisers. "This pick-up is consistent with the recent acceleration of the nation's gross domestic product which, in the fourth quarter, grew at the fastest pace (3.0 percent) since second quarter of 2010." Prakken also thinks that today's ADP update strengthens the case for expecting February's jobless rate declined a bit.
“Everything is pointing to broader employment gains,” asserts Troy Davig, a senior U.S. economist at Barclays Capital . “As people start experiencing a steadier stream of income, that will translate into consumption and that will start building a stronger foundation for growth going forward.”
We'll need to see exactly that for arguing that the slumping year-over-year growth rate for spending and income will soon stabilize if not turn higher. Meantime, today's data point gives the optimists one more number to rally around. Before we see the official jobs report for February via the Labor Department on Friday, however, there's one more hurdle: tomorrow's update on weekly filings for new jobless benefits. The consensus forecast doesn't anticipate much of a change. Tomorrow's initial claims is expected to rise a bit to 355,000 from the previous reading of 351,000, according to Briefing.com. Lower would be better, of course, but if the recent drop in claims can hold its ground, there's still a good case for thinking that Friday's jobs report will bring another much-needed round of numerical encouragement.
Death For Buy & Hold? Where Is Thy Sting?
Rumors of buy-and-hold's death are premature but persistent. If you Google the phrase, you'll find a long list of stories and books through the years that proclaim that buying and holding is an investment idea that's passed to the afterworld of defunct strategies. But a funny thing happened on the way to the funeral: the corpse survived. In fact, he's doing quite well, to judge by the performance numbers.
Yet the obituaries keep coming. The latest arrives via MIT professor Andrew Lo, who tells Money Magazine:
Buy-and-hold doesn't work anymore. The volatility is too significant. Almost any asset can suddenly become much more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it's gotten.
The conceit here is that the future will be unusually harsh on betas, but alpha will be unaffected and perhaps even shine brighter. The interview with Lo doesn't convincingly explain why this scenario is likely to unfold. Meanwhile, history gives us quite a bit of evidence to remain skeptical that the future will be much different when it comes to the relationship between beta and alpha.
This much is clear: buying and holding a portfolio that passively owns all the major asset classes, each initially weighted by market values, has generated competitive returns in recent history. For example, consider how the Global Market Index (GMI) has fared for the 10 years through the end of 2011. This unmanaged market-value weighted index of the major asset classes earned a 6.0% annualized total return for the past decade. Should we be impressed by that result? Judge for yourself by considering the performance histories of 1,201 actively managed, multi-asset class mutual funds with at least 10 years of history, as illustrated in the chart below.
GMI's track record rises to the 89th percentile in this group for the past decade. In other words, a buy-and-hold strategy that's comprised of all the major asset classes earned strong above-average results relative to the actively managed competition. Keep in mind that you can replicate GMI with ETFs for under 50 basis points, or about half as much as what many actively managed funds charge. In fact, quite a few actively managed multi-asset class funds even charge three times more than the investable version of GMI.
There's reason to wonder if GMI will deliver equally strong performance results over the next 10 years. In fact, I expect that its relative performance will fade a bit. That said, there's no reason to think that GMI won't deliver average to moderately above-average results in the years ahead. To expect otherwise requires some rather radical assumptions.
One of the reasons that GMI has earned such a handsome relative return vs. active managers is that the future's uncertain. Predicting winners and losers, whether it's individual securities or asset classes, is tough—really tough. We know this to be true because mediocrity is widespread in actively managed funds. The chart above is just the tip of this empirical iceberg. Maybe this will change in the years ahead, but making a persuasive argument along these lines relies heavily on predictions, starting with the idea that more active managers will do a better job at overcoming the uncertainty that otherwise harasses the rest of the crowd. Good luck with that.
If the future will suffer higher volatility, as Lo predicts, it's not clear how this will translate into dramatically stronger performance records for active managers. Predicting is tough enough in periods of relative calm. Will forecasting get any easier if markets are headed for rougher seas? Unlikely. Actually, you can just as easily make the opposite case: greater volatility will enhance the relative allure of a buy-and-hold strategy that holds everything. If prices are going to bounce around a lot more, and markets are becoming increasingly complex, as Lo says, it's not obvious that the job of active management is destined to get easier.
But let's think about what's required to improve a manager's relative ranking vis-à-vis GMI. In other words, what would we have to do to earn a substantially higher return vs. a buy-and-hold strategy built on holding all the major asset classes? One possibility is rethinking the asset allocation. An extreme example: choose the asset class (or group of asset classes) with the highest expected return and shun (or short) those that look poised for trouble.
Another possibility: trade in and out of asset classes with a fair amount of frequency in an effort to time the markets. Yet another strategy is picking the most-promising securities within the asset classes while avoiding those that appear to have relatively dark futures. The problem, of course, is that few investors can take advantage of these opportunities in relative terms because of a simple fact: alpha sums to zero. For every investor who earns above-average performance, there is someone who lags the benchmark. In other words, the winners are financed by the losers. Meanwhile, the market average—the benchmark—is forever in the middle. After adjusting for expenses, the impact of trading, and taxes, average results tend to become above-average results through time. That's a key reason why GMI has earned competitive returns in the past, and it's a foundational argument for thinking that GMI will continue to earn above-average results in the future.
But how, then, does one square that view with all the research that tells us that markets aren't perfectly efficient? Doesn't that open the door to earning benchmark-beating returns? Yes, although quite a bit of these opportunities have little if anything to do with assuming that buy-and-hold investing is dead.
A quick example is everyone's favorite poster boy for earning alpha: Warren Buffett. But think about how Buffett has earned alpha through the decades. It's not from trading. Rather, he's a buy-and-hold man, right down the line, albeit with a twist. Buffett is a buy-and-hold investor with a preference for what financial economists call return anomalies. In particular, Buffett favors the value anomaly--companies trading at a discount to market value, but he's succeeded by emphasizing that anomaly in a buy-and-hold framework.
In fact, there are lots of documented return anomalies, as outlined by Antti Ilmanen in his magnificent book Expected Returns: An Investor's Guide to Harvesting Market Rewards. What's in short supply, however, is clear, verifiable evidence that more investors are exploiting these anomalies on a sustained basis. Why? Alpha still sums to zero, even if you're conversant in the finer points of market anomalies.
To the extent that you can earn market-beating returns, shunning buy and hold isn't an absolute requirement. True, some anomalies require trading, but many don't. Meanwhile, history counsels that we should be cautious in thinking that earning alpha is going to be any easier in the future than it has been in the past. Buy and hold isn't dead. As usual, however, it continues to be underestimated.
March 6, 2012
The Great Depression Vs. The Great Recession: The Update
Economists Barry Eichengreen and Kevin O’Rourke have been comparing the downturn in the 1930s to the recent macro debacle in charts and words and offer a fresh update. The quick summary is that we're doing better in the 21st century, but the recovery seems to be struggling. "While industrial production and trade recovered much more quickly than during the Great Depression," they write, "both series now appear to be slowing down." What does it mean? "It suggests that, as St Augustine would have said had he been managing director of the IMF, there is a case for additional fiscal consolidation and monetary normalisation, but not yet."
Small Business Job Growth Slows In February, Intuit Reports
This week brings updates on three employment reports, and the first one arrived yesterday. The Intuit Small Business Index rose in February, the payrolls firm Intuit advises. "Job creation among small businesses continued in February, albeit slowly," the firm says in a press release. "This slow growth was accompanied by a small uptick in compensation and a slight decrease in hours worked."
Does the Intuit index offer clues about tomorrow's ADP Employment Report or Friday's U.S. payrolls update from the Labor Department? If so, this clue isn't particularly encouraging for expecting a substantial acceleration in job growth. Then again, there's nothing in Intuit's report that suggests that the modest growth in payrolls is set to fade either.
What we do know is that the Intuit benchmark posted another month of employment growth, although the pace continues to slow. February's rise was the fourth straight month of decelerating growth and the slowest percentage increase over the previous month since March 2011. Meanwhile, the annual increase for the Intuit index was unchanged in February, advancing by 3.66% over the year-earlier month.
“We saw another month of tepid improvement for small businesses in February, echoing pretty much all of the other indicators of economic activity,” says Susan Woodward, the economist who worked with Intuit to create the Index, in the accompanying press release. “As an overall trend, employment is up modestly, but the number of hours worked by hourly employees is about the same as last month, seasonally adjusted.”
Keep in mind that the Intuit index draws on data from businesses with less than 20 employees that use the firm's payroll services. As a result, the benchmark may not be all that useful for developing intuition about the national employment trend.
Speaking of small businesses, there's a perception that this is the source for most of the nation's job growth. As it turns out, the truth is a bit more complicated. A recent NBER research study notes: "once we control for firm age there is no systematic relationship between firm size and growth."
Meantime, tomorrow's update of ADP's employment report for February is expected to show a faster rate of job growth, according to the consensus forecast via Briefing.com: 220,000 vs. 170,000 in January. Friday's private nonfarm payrolls news from the government, however, is predicted to bring the opposite effect: a rise of 220,000 in February, down from the previous month's 257,000 gain.
Nonetheless, the latest Associated Press survey of economists tells us that dismal scientists remain upbeat about the big picture: "The economy has begun a self-sustaining period in which job growth is fueling more consumer spending, which should lead to further hiring," AP reports. If so, it's reasonable to expect that we'll see some evidence for this optimism in Friday's employment report.
March 5, 2012
Will The ISM Services Sector Index's Feb Rise Spill Over To Friday's Jobs Report?
The services sector, which dominates the U.S. economy relative to manufacturing, grew at a modestly faster pace in February, the Institute for Supply Management reports. The ISM non-manufacturing index rose to 57.3 from 56.8 in January, reaching the highest level since March 2011. Any reading above 50 equates with economic growth and so higher levels imply a strengthening expansion. Today’s news is clearly another reason to remain optimistic, although this is hardly an all-clear signal that blows away other risk factors. Nonetheless, the services sector overall employs most of the labor force in the U.S. and so we have another data point for thinking positively about Friday’s jobs report.
For good or ill, the stakes are quite high for the February employment report. Indeed, nothing less than a strong rise is needed to soften the potential blowback from the ongoing slowdown in the annual growth rates of personal income and spending, which has been a concern on these pages for months--a "troubling trend," as I called it in January. The deceleration is high on the list of worries for other analysts as well, including John Hussman of the Hussman Funds, who reminds that the deceleration in the year-over-year growth rates of consumer spending and income is looking increasingly threatening. The slide in real personal consumption growth, for instance, has fallen to 1.5%--a level "that we have simply never observed historically except in connection with recessions."
The rise in the ISM non-manufacturing index, on the other hand, suggests that job growth will roll on. In a note to clients today, economist Ed Yardeni tells us to expect no less. Friday’s jobs report "could well exceed expectations, confirming that the economic expansion is no longer ‘jobless,’" he writes.
During the previous two economic recoveries there were lots of concerns that not enough jobs were being created, which raised nagging fears that the economic upturns might not be self-sustaining and could stall out. So this is the third jobless recovery. We expect that it will end the same way--not with a recession, but with a pickup in employment that should permit self-sustaining growth. We think we are already there, based on the past two months of strong employment reports, and we expect this to be confirmed by a much-better-than-expected report for February and solid upward revisions for December and January.
The recent decline in new filings for jobless claims suggests that payrolls could post a tidy gain for February, but this idea isn’t wholly convincing to Hussman. "While we know that payrolls and new claims for unemployment are actually lagging indicators, not leading ones, we still generally see new claims for unemployment creeping higher before recessions, unlike today," he writes. "So from our standpoint, the essential question is whether the improvement in job growth negates the evidence from leading indicators, and from coincident indicators that are now at year-over-year growth rates also associated with oncoming recessions. As uncomfortable as it is to contemplate a renewed economic downturn, the weight of the evidence still leans to the leading indicators and coincident growth rates." The smoking gun, Hussman continues, quoting from the latest warning via the Economic Cycle Research Institute:
"… downturns in job growth lag downturns in consumer spending growth, which is very clearly in a downturn. That's the sequence: jobs growth follows consumer spending growth, not the other way around."
It may be different this time, if job growth is sufficiently strong. Maybe that’s hoping for too much. But it’s a sure bet that if the labor market stumbles, the odds that the economy can keep out of trouble fall sharply. On that note, the consensus forecast tells us to pare our expectations for Friday’s jobs report, via Briefing.com. February’s non-farm payrolls will rise by 220,000, or down modestly from January’s 257,000. If so, dismissing the slowdown in spending and income isn't going to get any easier.
Debating (And Misreading) Milton Friedman's Legacy For Monetary Policy
Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression and a Bloomberg columnist, complains that Fed chairman Ben Bernanke has besmirched Milton Friedman's recommendations for monetary policy. True, but not for the reasons that Shlaes offers.
Friedman, of course, is the economist who forged the modern template for monetarism, in part by explaining the collapse of the U.S. economy in the 1930s as a failure of central banking to stabilize macro fluctuations. Shlaes pursues her critique on Bernanke by reminding us that Friedman preferred a stable monetary policy. She also notes that the Fed's recent actions run afoul of this ideal. "Survey his former padawans, his old apprentices in economics, and they will give you different answers, but most say Friedman disliked policy that was too arbitrary," she writes. Later in the column, Shlaes asserts: "Other scholars and students do not believe that Friedman would have sanctioned the dollar amounts or the style of 'QEII,' the second great quantitative easing by the Fed; or Operation Twist and other recent interventions of the Bernanke Fed."
That's one interpretation, but there's another view of what Friedman would have recommended. Nonetheless, Shlaes keeps readers in the dark and instead cites John Taylor, a prominent economist who's been skeptical of the Fed's current policies. "In a new book, First Principles, Taylor takes on temporary stimuli, such as Fed purchases of debt. He has lately taken pains to point out that Friedman, while emphasizing the importance of the monetary tool, also liked monetary rules: Friedman believed money supply should follow a regulation, not a whim."
It's true that Friedman preferred a stable, predictable monetary policy that was light on surprises and heavy on promoting a steady pace of economic growth. Given that history, it's curious that Shlaes offers no mention of the Friedman-inspired nominal-GDP-targeting ideas that have animated so much of the monetary policy debates over the last several years. For example, Shlaes doesn't mention Bentley University's Scott Sumner, the widely quoted proponent of what's become known as market monetarism. Sumner, who's written extensively for several years on the subject at his blog, The Money Illusion, has made his mark across a broad spectrum of monetary discussions, from The National Review to Paul Krugman's blog. As a result, market monetarism is no longer an obscure idea in the wilderness. Indeed, The Economist recently recognized Sumner as a dismal scientist
who believes that America’s Federal Reserve should promise to restore “nominal” GDP (as opposed to “real” GDP, which takes account of inflation) to its pre-crisis path. Since inflation is in line with the Fed’s implicit target yet nominal GDP is more than 11% below its pre-crisis path, Mr Sumner’s proposal might require a far more expansive monetary policy than anything the Fed has so far considered. This idea was discussed decades ago, but fell into obscurity in the years before the crisis, when inflation-targeting seemed to work. Alternatives to that conventional wisdom are suddenly a live topic, and blogs have brought experts on them out of the shadows.
Or as Sumner wrote in 2009 about the events that led to the Great Recession: "the real problem was nominal."
Sumner often cites none other than Milton Friedman as the intellectual source for market monetarism. He doesn't come to the conclusion lightly; rather, he cites a broad array of Friedman's writings and speeches over the years. Shlaes rightly notes that no one can be sure what Friedman (who died in 2006) would say these days about monetary policy in the wake of the Great Recession. "What we can do, though, is go back through the record and try to discern what Friedman intended," she allows. In fact, Sumner has been doing exactly that in recent years and he makes a convincing case that Friedman's policy recommendations have more or less mirrored the prescriptions from the market monetarist school. For example, here's Sumner in 2010:
After my recent trip I was appalled to discover the number of leading conservative voices opposing monetary easing. Even worse, many seemed to assume the Fed was already engaged in monetary stimulus. Before considering their views, let’s examine the thoughts of the greatest conservative monetary economist of all time, Milton Friedman. Here he discusses the zero rate problem in Japan:Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy....After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.
Friedman was absolutely right, near-zero interest rates are an almost foolproof indicator that money has been too tight.
That's just the tip of the iceberg for Sumner's research that highlights Friedman's market-monetarist-friendly commentary over the years (see here and here, for instance). But doesn't Friedman's preference for stable and steady monetary policy indict the recommendations of today's market monetarists? No, because if the market monetarists had their way, the Fed would focus on keeping nominal GDP (NGDP) rising at a steady rate by adjusting monetary policy appropriately for the prevailing macro conditions. Economist Ed Dolan reasons that "I see NGDP targeting as the natural heir to monetarist policy prescriptions of the 1960s and 70s." Dolan explains:
If we look at the textbook version of monetarism, the point is almost trivial. Textbook monetarism begins from the equation of exchange, MV=PQ, where M is money (M1, back in the day), V is velocity, P is the price level, Q is real GDP, and PQ is NGDP. Next it adds the simplifying assumption that velocity is constant. It follows that targeting a steady rate of money growth is identical to targeting a steady rate of NGDP growth.
The failure of Bernanke Fed's to keep NGDP growth from dropping sharply during the Great Recession is widely cited by market monetarists as a serious policy blunder and one that conflicts with what Friedman would have recommended. Marcus Nunes summarized this point last week (as he has many times before) in a chart that illustrates how actual NGDP (blue line) crashed in recent years relative to NGDP's long-term trend (red line).
"It´s amazing that having read most of what Friedman wrote, and having 'showered' him with praise in more than one occasion, Bernanke should have 'forgotten' Friedman´s spirited defense of 'nominal stability,' a concept much more general than just 'price stability,'" Nunes writes.
In other words, Friedman might very well have argued that the Fed erred in recent years by not doing enough to keep NGDP hugging its trend line. Indeed, Friedman leveled a similar charge at the central bank for its misguided policy decisions in the early 1930s.
The bottom line: if you're intent on raising substantive doubts about whether Friedman would support the Fed's monetary stimulus of recent vintage--and whether he'd recommend even more aggressive Fed policies--you'll need to refute the market monetarists. Schlaes doesn't even try. She's either unaware of market monetarism or chooses to ignore it. That's not to say that nominal GDP targeting is beyond criticism. Greg Ip at The Economist, for instance, published a skeptical essay on the subject last November, which in turn was refuted by economist David Beckworth. Yes, there's room for debate about whether keeping NGDP stable would do the same for real GDP in times of crisis (i.e., late-2008). But in order to have this debate--and it's a productive one--we must first recognize that there's an alternative view about how the Fed could run monetary policy. Shlaes overlooks the alternative and instead tells us that the U.S. should "appoint more Fed governors who are trained by other masters: Taylor, or, say, Friedrich 'Yoda' Hayek." In other words, let's simply dismiss market monetarism without considering it.
But that's shortsighted, not to mention unsatisfying. Debating monetary policy these days can't sweep market monetarism under the rug. You may or may not agree with its premise, but it's hard not to recognize its influence and empirical support in the debate about a central bank's role vis-à-vis the business cycle. In any case, there's too much at stake to ignore market monetarism without a fair hearing. After all, there's always another recession coming. The only question: How should the central bank deal with the business cycle going forward? The good news is that there's room for improvement. Quite a bit of Milton Friedman's research and analysis tells us as much, even if some pundits suggest otherwise.
March 3, 2012
Book Bits For Saturday: 3.3.2012
● The Escape Artists: How Obama's Team Fumbled the Recovery
By Noam Scheiber
Review via Slate
The moment when the economy seems to be turning around is perhaps not the best time to publish a book explaining why it took so long to get things right. Still, with his new book, The Escape Artists: How Obama’s Team Fumbled the Recovery, Noam Scheiber offers a persuasive take on administration policymaking, one in which there are no heroes and no villains, no fools, no saints, not even a clear road not taken. It’s a portrait of a team that failed in its responsibility to the country to avoid a prolonged and cataclysmic downturn, but did so under extremely trying circumstances—and still, arguably, produced the best possible result.
● In the Wake of the Crisis: Leading Economists Reassess Economic Policy
By Olivier J. Blanchard, David Romer, A. Michael Spence and Joseph E. Stiglitz
Summary via publisher, MIT Press
In 2011, the International Monetary Fund invited prominent economists and economic policy makers to consider the brave new world of the post-crisis global economy. The result is a book that captures the state of macroeconomic thinking at a transformational moment. The crisis and the weak recovery that has followed raise fundamental questions concerning macroeconomics and economic policy. For instance, to what extent are financial markets efficient and self-correcting? How crucial is low and stable inflation for growth and the real stability of the economy? How strong is the case for open capital markets? Too often, the standard models provided insufficient guidance on how to respond to the unprecedented situations created by the crisis. As a result, policy makers have been forced to improvise. What to do when interest rates reach the zero floor? How best to provide liquidity to segmented financial institutions and markets? How much to use fiscal policy starting from high levels of debt? These top economists discuss future directions for monetary policy, fiscal policy, financial regulation, capital account management, growth strategies, and the international monetary system, and the economic models that should underpin thinking about critical policy choices.
● Debacle: Obama's War on Jobs and Growth and What We Can Do Now to Regain Our Future
By Grover G. Norquist and John R. Lott Jr.
Summary via publisher, Wiley
Have President Obama’s economic policies really improved the lives of Americans? Or has his stimulus package proved to be a disaster? In Debacle: Obama's War on Jobs and Growth and What We Can Do Now to Regain Our Future , Grover G. Norquist, founder of Americans for Tax Reform, and economist John R. Lott, Jr. explain why the stimulus package has not only failed to improve the economy but, worse, has also harmed the lives of everyday working-class Americans. They offer a 12-step plan to rescue America from the Obama administration’s policies and return her to prosperity. The authors assert that President Obama delivered the largest spending increases and the largest deficits in American history. Americans are no better for it. They have endured the worst economic recovery since the aftermath of the Great Depression. Incomes for the median household are falling. Poverty is rising by record amounts. Unemployment and job growth have been abysmal. Big government is punishing those who work hard and innovate and ultimately create jobs and wealth—the two key factors needed for economic recovery.
● The Coming Prosperity: How Entrepreneurs Are Transforming the Global Economy
By Philip E. Auerswald
Summary via publisher, Oxford University Press
Ours is the most dynamic era in human history. The benefits of four centuries of technological and organizational change are at last reaching a previously excluded global majority. This transformation will create large-scale opportunities in richer countries like the United States just as it has in poorer countries now in the ascent. In The Coming Prosperity, Philip E. Auerswald argues that it is time to overcome the outdated narratives of fear that dominate public discourse and to grasp the powerful momentum of progress. Acknowledging the gravity of today's greatest global challenges-like climate change, water scarcity, and rapid urbanization-Auerswald emphasizes that the choices we make today will determine the extent and reach of the coming prosperity. To make the most of this epochal transition, he writes, the key is entrepreneurship. Entrepreneurs introduce new products and services, expand the range of global knowledge networks, and, most importantly, challenge established business interests, maintaining the vitality of mature capitalist economies and enhancing the viability of emerging ones. Auerswald frames narratives of inspiring entrepreneurs within the sweep of human history.
● Becoming China's Bitch: And Nine More Catastrophes We Must Avoid Right Now
By Peter D. Kiernan
Summary via publisher, Turner
When it comes to solving our country’s problems, we have become utterly paralyzed: bipartisanship has lulled us into a deadlock, preventing us from taking action. Yet we can no longer ignore the inevitable catastrophes or hand them off to Washington to fix—they must be addressed now, or we will suffer the long-term consequences. In Becoming China’s Bitch, Peter Kiernan presents an unflinching manifesto in which he explores five factors that have sustained our national paralysis, then uncovers the ten challenges that pose the greatest threat to the future of America. Presented from a fresh yet informative Centrist perspective, these ten impending catastrophes include our semiconscious dependency on China, our lack of a centrally coordinated intelligence effort, our downward-spiraling health-care system, and the continually expanding problem of illegal immigration. In a logical, personal, and persuasive voice, Kiernan offers radical yet common-sense solutions to these challenges—solutions that every American must acknowledge and act upon before it’s too late. With provocative insight and analytical depth, Becoming China’s Bitch is the answer to securing our country’s immediate future and restoring our national soul.
● The Power of Habit: Why We Do What We Do in Life and Business
By Charles Duhigg
Review via The Daily Beast
If you punch “self-help” into Amazon, you’ll get something like 294,000 results. We are a people profoundly concerned with improving our weight or athletic performance or sex lives, always looking for easy fixes, for effortless ways to change our most ingrained habits. Much of what is offered is pseudoscientific at best, of course, but that hasn’t stopped an ever-growing army of charlatans from extracting millions from those of us who are desperate to improve ourselves. In The Power of Habit: Why We Do What We Do in Life and Business, New York Times investigative reporter Charles Duhigg brings a heaping, much-needed dose of social science and psychology to the subject, explaining the promise and perils of habits via an entertaining ride that touches on everything from marketing to management studies to the civil-rights movement.
March 2, 2012
Strategic Briefing | 3.2.12 | Crude Oil Imports
US crude oil imports fall to 12-year low
Financial Times | Mar 1
US crude imports have fallen to their lowest level for a decade as a result of weak demand and growth in domestic production, making the economy more resilient to oil price rises. The US imported 8.91m barrels a day of crude oil last year, according to the US Energy Information Administration, the lowest amount since 1999.
US crude imports from Canada reach record high 2.436 million b/d
Platts | Feb 29
US crude imports from Canada climbed to a record high 2.436 million b/d in December, data released by the US Energy Information Administration showed Wednesday. Imports were up 75,000 b/d from November, leaving Canada as the number one exporter of crude to the US. Saudi Arabia came in second at 1.293 million b/d, while Mexico came in third at 945,000 b/d.
U.S. Was Net Oil-Product Exporter for First Time Since 1949
Bloomberg | Feb 29
The U.S. exported more gasoline, diesel and other fuels than it imported in 2011 for the first time since 1949, the Energy Department said. Shipments abroad of petroleum products exceeded imports by 439,000 barrels a day, the department said today in the Petroleum Supply Monthly report. In 2010, daily net imports averaged 269,000 barrels. U.S. refiners exported record amounts of gasoline, heating oil and diesel to meet higher global fuel demand while U.S. fuel consumption sank.
Nice Oil Imports You've Got There. Shame if You Lost Them
Foreign Policy | Feb 29
For decades, Canada has been the single-largest supplier of imported crude oil and refined oil products to the United States. In 2010, Canadian exports provided about 26 percent of all net U.S. liquid fuel imports (consisting of crude oil and refined products) -- or nearly 12 percent of America's total demand for liquid hydrocarbons, roughly every eighth barrel.
US Says World can replace oil lost to Iran sanctions
Reuters | Mar 2
Global oil producers appear to have enough spare capacity to make up for Iranian exports curtailed by tough new sanctions, U.S. Energy Secretary Steven Chu said on Thursday. Chu said it was important that sanctions be used to crimp Iranian oil sales to ensure Tehran does not develop nuclear weapons, despite the release of an Energy Information Administration report this week that showed supplies are tight.
How dependent are we on foreign oil?
US Energy Information Administration | Jun 24, 2011
The United States imported about 49% of the petroleum,1 which includes crude oil and refined petroleum products, that we consumed during 2010. About half of these imports came from the Western Hemisphere. Our dependence on foreign petroleum has declined since peaking in 2005.
India, China plan sharp cuts to Iran oil imports as US pressure mounts
The Times of India | Feb 21
India, China and Japan are planning cuts of at least 10 per cent in Iranian crude imports as tightening US sanctions make it difficult for the top Asian buyers to keep doing business with the OPEC producer. The countries together buy about 45 percent of Iran's crude exports. The reductions are the first significant evidence of how much crude business Iran could lose in Asia this year as Washington tries to tighten a financial noose around Tehran.
Japan crude imports from Iran fall 22.5% in Jan
Reuters | Feb 28
Japan's crude oil imports from Iran fell 22.5 percent in January from a year earlier to 1.67 million kiloliters (339,000 barrels per day), data from the Ministry of Economy, Trade and Industry (METI) showed on Wednesday, as the world's third-biggest oil consumer seeks a waiver from U.S. sanctions.
China's Jan crude oil imports from Iran down 14% month over month
Reuters | Feb 21
China's January crude oil imports from Iran fell 14 percent from December on a daily basis, customs data showed on Tuesday, as top refiner Sinopec Corp slashed imports from Iran in a dispute over payments and prices. Sinopec is Iran's biggest oil buyer and imports nearly all the crude that the Islamic Republic ships to China.
India opts to befriend rather than sanction Iran
Irish Times | Mar 2
INDIA SAYS it is determined to continue importing oil from Iran despite EU and US sanctions aimed at stopping trade until Tehran stops what the West insists is a military nuclear programme. Reacting to US secretary of state Hillary Clinton’s comments that the US was engaging in “very intense and very blunt” conversations with India and others such as China and Turkey to stop oil imports from Iran, New Delhi officials indicated yesterday that they would not be coerced.
March 1, 2012
ISM Index: Manufacturing Activity Cools A Bit In February
The modest retreat in the ISM manufacturing index for February may be nothing more than monthly noise, although a fall in this benchmark certainly won't help sentiment after this morning's disappointing news for personal income and spending in January. The Institute for Supply Management’s factory index slipped to 52.4 last month, down from January's 54.1 reading. That's hardly fatal, but it's definitely not helpful, particularly today. In any case, it's something of a surprise: Economists were expecting a rise, according to Bloomberg.
The ISM dip is all the more notable given the strength in several regional Fed manufacturing surveys for February. Even so, today's ISM number still reflects an expanding manufacturing sector (any reading above 50 indicates growth) and so it's premature to read too much into this update. One number, as they say, a trend does not make. But it's hard to forget that today's ISM news comes after Tuesday's news that new orders for durable goods dropped sharply in January.
The bottom line: the stakes are rising for the labor market to keep hope alive. As I noted earlier today, the latest weekly jobless claims report continues to hold at four-year lows and so there's still a good case for arguing that the all-important recovery in jobs growth remains intact. The question is whether next week's payrolls report for February will corroborate the rosy view? After today's setbacks, it's going to take even stronger news on the jobs front to repair the damage and keep sentiment (and the economy) bubbling.
Slowing Income & Spending Levels Cloud Economic Outlook
Consumer income and spending eked out gains last month, although the increases aren't enough to dispel doubts about the strength and staying power of economic growth. But initial jobless claims are still holding at the lowest levels in four years and so there’s still hope that the cyclical demons can be held off. The critical variable remains the labor market, and the ability of job growth to keep wages growing, which in turn will help keep the pace of income and spending from falling further. The good news is that wage growth rolls on, and so the case for optimism is far from hopeless. But energy prices rising and fears of a fresh round of Middle East turmoil, there's precious little room for disappointment in the economic reports in the weeks ahead.
As for today's news, let’s start by reviewing the latest weekly update for jobless claims. As the chart below shows, new fillings for unemployment benefits dipped slightly to a seasonally adjusted 351,000 last week. If you're an optimist, that's a sign that the recent declines are holding and the flat lining over the past three weeks is merely a pause that will soon give way to further declines. The alternative view is that the economic revival of late is slowing, and the inability of new claims to continue falling is a fresh sign of trouble ahead.
True, personal consumption expenditures (PCE) picked up last month, rising 2.0% vs. a roughly flat performance in December, the Bureau of Economic Analysis reports. But disposable personal income (DPI) growth slowed in January to a sluggish 0.1% gain, down substantially from 0.4% in the previous month.
More ominously, the year-over-year percentage changes for PCE and DPI continue to decelerate. As I've been discussing for months (here and here, for instance), the continued slowdown in these numbers is at the top of my list for things to worry about. Unfortunately, today's update on consumer expenditures and income doesn't remove these clouds on the macro horizon.
The hope is that the labor market will continue to grow and stop if not reverse the deterioration in income and spending. The recent fall in jobless claims suggests that this scenario has some statistical support. But the acid test will be payrolls growth on par with January's encouraging report.
Meantime, optimists can point to the trend in private sector wages, which are still growing at 6%-plus on a year-over-year basis as of January, according to the latest numbers in today's spending and income report from the government. This important contributor to economic growth (private wages comprise 51% of personal income) is a sign that the labor market is still healing and workers are earning more.
The problem is that there's no room for weakness in job growth. Indeed, a dismal report for the February payrolls update would be deeply troubling at this stage. With gasoline prices rising and income and spending levels slowing, we may be facing another rough spring if the labor market stumbles. Next week's update on nonfarm payrolls is more than a week away (scheduled for release on Friday, March 9). Between now and then, don't be surprised if the crowd holds its collective breath.
Update: The original version of this post mistakenly said that the spending and income gains last month would dispel doubts about economic growth. That was a typo--I should have written that the gains aren't strong enough to blow off worries. Sorry.
Major Asset Classes | Feb 29, 2012 | Performance Update
February was a mixed bag of returns for the major asset classes, but that didn’t stop the Global Market Index (GMI) from rising again. Thanks to another strong month of gains in the global equity markets, the passive, unmanaged GMI, which holds all the major asset classes in market-value weights, posted a healthy 2.8% rise in February—it’s third monthly increase in a row.
In contrast to strong gains in stock markets around the world, broad measures of investment-grade U.S. bonds retreated marginally while foreign bonds in developed markets took a slightly heavier beating. Elsewhere in fixed income, however, there was no sign of red ink: junk bonds, emerging market bonds, foreign corporate bonds, and foreign inflation-indexed bonds all registered tidy increases last month (measured in unhedged dollar terms). Broad measures of commodities also moved higher. Meanwhile, U.S. REITs gave up 1.1%.