If deflation’s still a threat, it wasn’t obvious in today’s update of consumer prices for June.
The CPI jumped 0.7% last month, the government reports. That’s the highest since July 2008, which also posted a 0.7% rise.
Much of the gain in CPI last month came from energy. Nonetheless, core-CPI (excluding food and energy prices) still rose by 0.2%. So far this year, core CPI is up every month. In addition, core CPI’s three-month annual rate is now running at 2.4% through June, or slightly above the Federal Reserve’s long-term top-end target for core inflation. Another intriguing statistic is that while consumer prices overall have fallen 1.4%, based on headline CPI, core inflation is up 1.7%.
What does this tell us? That inflation, while still quite subdued, isn’t dead as a threat in the medium-to-long-term horizon. No, there’s nothing in today’s report that tells us that inflation’s about to return as a material hazard. There’s still plenty of deflationary/disinflationary pressures bubbling to keep a lid on prices overall for the time being. But today’s CPI report reminds that the potential for trouble down the road is still there.

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This week’s economic reports are off to a rousing start with today’s updates on retail sales and wholesale prices for June.
Seasonally adjusted retail sales jumped 0.6% last month, the U.S. Census Bureau reports. That’s the best monthly rise since January.

The wholesale price report for June also brings good news: deflation was MIA. The Producer Price Index climbed 1.8%, seasonally adjusted, according to the Bureau of Labor Statistics. Quite a bit of that was due to a rebound in energy prices, but even after stripping out fuel there was a clear rise: core PPI advanced 0.5%. Overall, headline PPI is up three months running.
No, these numbers still don’t give us the all-clear signal—not even close. But the reports are encouraging nonetheless. One reason is that the numbers could have been worse, a lot worse.
As we’ve been discussing for some time now, the first step is stabilizing the economy, which begins with insuring that the deflationary risk is banished. We may be close to declaring victory on that front. Perhaps it’s time to say as much now. In any case, we’re still making progress. The apparent peaking in new filings for jobless benefits have been telling us that for several months.
But we’re still of a mind to expect that while the economy may be stabilizing, meaningful growth is still a ways off. One reason is that consumer spending, despite the latest number for retail sales, is likely to be weak for some time. Indeed, the labor market continues to destroy jobs at a robust clip. Repairing the trend will take time. Meanwhile, consumer spending will suffer. But at least it’s no longer in freefall. That’s no minor point for an economy that derives ~70% of GDP from Joe Sixpack’s spending habits.

Every economic report these days seems to dispense a crucial piece of the puzzle for deciding what comes next, and this week promises (threatens?) to offer no less.
The question now is whether the stability of recent months is in danger of giving way, pushing the economy once again toward the forces of contraction. It’s been tempting to conclude that we moved beyond that in the spring, thanks to some encouraging numbers. Growth still was a ways off, but at least the recession wasn’t getting any worse, or so it seemed. If anything, the cycle appeared poised for some flat lining and perhaps a modest uptick down the road.
But in the wake of the June payrolls report, which surprised on the negative side, it’s become fashionable once more to wonder aloud if another round of trouble awaits. In that case, do we need another round of stimulus? Several key economic numbers updated this week will offer some pivotal clues.
Meantime, Warren Buffett says it’s time to fire up the stimulus guns once more. But not everyone’s convinced, at least not yet.

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Forecasting is tough, especially about the future, runs the old joke. But the dark art of prognosticating these days is no laughing matter.
Case in point: the burning question at the moment is whether the so-called green shoots of economic recovery turning brown? It’s getting harder to answer “no” these days. It’s not clear if we’re headed for a second slump, but the risk has gone up a bit in recent weeks. The hope that the economy had at least stabilized looked increasingly persuasive over the past several months, a trend that inspired the hope that the recession might soon end.
That’s still our view, although the transition from the end of the contraction to robust economic growth threatens to be a long and rocky period, as we’ve discussed, including here. But the outlook on the economy is in continual flux. As new information arrives, strategic-minded investors adjust their forecast and perhaps their asset allocation. No wonder, then, that expected risk premiums vary through time. Unfortunately, the current view for the economy looks a bit less encouraging these days; or, if you prefer, the future is a bit more problematic relative to what looked likely from June’s vantage. In any case, the green shoots have wilted, if only slightly.

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You can’t generate robust forecasts of risk premia by looking only at the past, but you can certainly learn a lot about how the capital markets fluctuate.
With that in mind, we present a cursory look at recent history. In particular, the chart below compares the Global Market Index to a few of the major asset classes since the late-1990s. (For a larger view, click on the chart.) We’d like to include all the corners of the capital and commodity markets, but the chart would be far too busy.

Nonetheless, you can grasp a sense of how a passively allocated mix of all the world’s major asset classes (as defined by GMI) has fared against a few of the usual suspects. As the chart suggests, GMI tends to deliver middling performance relative to its major components over time. That’s one reason why GMI, or an equivalent, is worthy as everyone’s benchmark.
Does that mean we should never deviate from GMI’s asset allocation? No. In fact, every investor should hold a customized asset allocation that fits his particular needs and expectations. But strategic-minded investors should wander from GMI cautiously and for reasons that are economically sound.
Beating GMI over the long haul isn’t easy, at least on a risk-adjusted basis, but it can be done. But even if that’s your goal, the first step is analyzing GMI and building projections for each of its major asset class components. That’s not easy, nor does it lend itself to quick profits. No wonder, then, that the finer points of multi-asset class investing tend to be an afterthought, if that.

The case for seeing equities as one global beta is compelling if you’re looking out over very long time frames. But in the shorter term, perhaps even as long as 10 or 20 years, the rationale for making geographic distinctions is persuasive. Why? The answer begins by recognizing that valuations differ, as do trailing returns, throughout the world at any given time. As a result, expected returns vary, sometimes by quite a lot among the regional components that collectively make up the global equity market.
Add in the fact that different investors have different risk tolerances, investment horizons and financial situations and you’re looking at a persuasive argument for adjusting global equity allocations through time to match your particular outlook and personal outlook.
With that in mind, comparing recent performance among the world’s major equity regions offers some ideas about how the future may unfold, with an emphasis on “may.” We go into a bit more detail about our thoughts in the soon-to-be published July issue of The Beta Investment Report.

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The pundits are shocked, shocked to learn that jobs are still being lost. But there’s really nothing surprising in today’s jobs report for June, released this morning by the Bureau of Labor Statistics. Recessions have a habit of doing that, and for longer than the crowd expects. Disappointing and discouraging? Absolutely. Unfortunately, more of the same is probably coming.
Meantime, that doesn’t change our view that the recession may be close to a technical end. But before we get into that point—again—let’s look at how the latest nonfarm payrolls stack up.
As our chart below shows, last month’s job loss was steeper than May’s. Nonfarm payrolls were lighter in June by 467,000, quite a bit deeper than May’s 322,000 decrease. The good news is that last month’s decline is still a lot better than the worst monthly tumble so far in this recession—January’s 741,000 slump.

But let’s not mince words here: job destruction remains potent. The month-after-month declines are adding up and the economy is sure to take a heavy blow as a result. At the top of the list of likely victims: consumer spending, as we’ve been discussing, including here.

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The weather in June was cool and rainy in the New York region, and something similar prevailed over the capital and commodity markets last month as well.
As our table below shows, June was a month of mixed messages, ranging from a healthy rally in high-yield bonds to loss in REITs. Disappointing, perhaps, given the previous bout of good times. But the arrival of red ink is hardly unexpected. The March-to-May rally, after all, elevated all the major asset classes by dramatic levels. That couldn’t last. But what comes next?

The optimistic interpretation is that June was a month of backing and filling. The markets are reportedly digesting the recent gains and building a foundation to capitalize on the expected economic recovery. Prices got ahead of themselves in recent months, and bit of profit-taking was inevitable.

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