The world lost one of its foremost financial historians and analysts on Friday, when Peter L. Bernstein died in New York.
As an author, editor and investment strategist, Bernstein forged an analytical template for what is now common in the blogosphere, mainstream media and virtually everywhere else that assigns import to the money game: Reading the academic literature and interpreting it for a wider audience.
Bernstein wasn’t alone in deciphering the hieroglyphics of financial economists for the masses, nor was he the first to make obscure research accessible. But few did it better. And in 1992, few were doing it all, at least not with the skill and depth that are Bernstein’s trademarks.
Surely the history of financial education will record 1992 as a minor milestone: the year when Bernstein’s Capital Ideas: The Improbable Origins of Modern Wall Street was published. As best sellers go, it was an unlikely success. Who would have thought that telling the story of how financial theory evolved could have been such a popular topic?

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In early March we asked: When Will It End? At the time, we argued that watching the weekly squiggles of new filings for jobless benefits was a productive effort for estimating when the cycle would turn.
The reasoning is that a careful study of history shows that initial jobless claims have a habit of peaking concurrently or just ahead of the technical end of the recession, as defined by the National Bureau of Economic Research. Waiting for NBER to proclaim the downturn’s denouement isn’t practical, since the organization takes its sweet time on such matters. Watching initial jobless claims, then, may be a more timely reading of what comes next for the business cycle. It shouldn’t be analyzed in a vacuum, but as part of a broader review of leading econoimc indicators it’s a valuable tool for discounting the future.
Today’s jobs report, along with yesterday’s update on jobless claims, offer another round of data releases for thinking that our counsel in March is still valid. Although the economy shed lots of jobs again last month, the decline was relatively mild compared to the magnitude of losses in the recent past. Nonfarm payroll employment fell by 345,000 in May, or roughly half the average monthly decline for the prior 6 months, the Labor Department reports.

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Inflation’s still not a risk but arguably neither is deflation. We’re not quite ready to officially claim that the D risk has been vanquished, but we’re close. As it turns out, we’re not alone.
The bond market is increasingly inclined to turn the page on the fear that a deflationary spiral may threaten. But if the deflation risk is passing, as it seems to be, the change doesn’t mean that inflation is back. There’s no switch that turns one off and the other on as cleanly as flicking on a light.
The ebb and flow of the economy is a process, an evolution. What we’re seeing now, or so it appears, is a transition from a heightened risk of deflation to the absence of that risk, which isn’t to be confused with inflation. At least not yet. There’s no law that says inflation must quickly follow deflation. But neither is there any force that prevents one from turning into the other. Much depends on what the central bank does; not today but next month, next year and beyond.

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Today’s update on personal income and spending deserves a closer-than-usual inspection. The devil, along with the government’s stimulus program, is in the details.
First the good news, such as it is: disposable personal income rose a strong 1.1% in April, the Bureau of Economic Analysis reports. That’s a gain worthy of an economic expansion of the strongest order. What, then, is it doing here, in the middle of the deepest recession since the 1930s?
The government, to cut to the chase, has learned a thing or two about Keynesian economics since FDR was delivering fireside chats. But while Washington now excels in handing out checks to the masses in a timely manner, it hasn’t yet figured out how to get Joe Sixpack to spend the state’s stimulus payments. Could a mandatory spending bill be the solution? Or perhaps the government could transfer the payments directly to the retailers and cut out the middleman, i.e., the consumer. In fact, there’s already some of that in play as we speak. Large corporations that should have disappeared continue to operate, albeit on the kindness of government handouts.

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This may be the worst recession since the 1930s, but that doesn’t preclude spectacular runs of bullish behavior in the capital and commodity markets. In fact, the economic context of late probably inspires strong bouts of buying.
But let’s not become complacent about supersized gains in beta. It’s been a great ride over the past several months, recalling the glory days of 2003-2007, when virtually everything was running higher and producing a bumper crop of self-proclaimed money management geniuses. But the basic fuel behind these gains of late—recognition that the world won’t end after all—is fading as primary mover of securities prices. Investors may start requiring more conventional catalysts, such as earnings and a plan for growth. Survival alone may no longer suffice as a reason to throw money at an asset class.
In any case, the recent past looks quite stellar. May was the third installment of a powerful rebound in markets around the world. Virtually everything was up last month, with emerging market stocks and commodities exhibiting particularly strong leadership.

But as the 1-year column reminds, even the three-month rally has only made a dent in the losses of late-2008. Save for bonds in the developed world, everything’s still showing a loss for the 12 months through May.
As for the last three months, no one should be surprised that strong rallies have become so common. After the crushing losses that preceded the great spring rebound of 2009, it was virtually inevitable that prices would recover once it became clear that life would go on. But like all great snapbacks—and this one ranks, so far, as one of the broadest and strongest on record—the question is: What comes next?
One could argue that the ricochet higher since March has been fueled mostly by reversing the apocalypse-based pricing that seems less applicable. The global economy is no longer precariously perched on the brink of implosion and the markets have reacted accordingly. But the all-or-nothing paradigm of the recent past is giving way to a more nuanced economic perspective. It’s time for post-apocalyptic pricing. There’s just one problem: No one’s quite sure of the pricing rules yet, in large part because the the rules generally for the money game ahead are still being hammered out.
The task of pricing assets based on what comes next is destined to get a lot tougher. It’s looking increasingly likely that we’ll survive, but in exactly what form remains to be seen. Putting a proper valuation on the new world order is destined to be arduous since it’s still unclear how this new world order will function. Presumably, the politicians will alert us at the proper time.
Meantime, we can bask in the glory of the past three months.