As the world’s original central bank, it’s fitting that Sweden’s Riksbank has become the first to breach the zero-bound line by lowering one of its key interest rates to negative 0.25% since July 8.
The drop in the price of money below zero is reportedly the first of its kind. The dip refutes the idea that the zero bound was a barrier for monetary policy beyond which no central bank could tread. Back in 2004, Fed Chairman Ben Bernanke (a Fed governor at the time) co-authored a research paper that advised that “the nominal policy interest rate may become constrained by the zero lower bound.”
Well, so much for a constraint at zero. The Riksbank dropped rates below zero in early July with no more effort than falling out of a chair. Granted, Sweden’s -0.25% deposit rate (the rate that banks receive on accounts held at the central bank) isn’t the main tool of monetary policy in the country. That’s reserved for the repo rate (the Riksbank’s Fed funds equivalent) and it remains at a positive 0.25%, or roughly in line with the current Fed funds rate. Nonetheless, the precedent has been set. Dropping rates below zero has come and gone in the modern age of central banking and the financial world is still standing.

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Personal consumption expenditures rose by 0.25% last month, which looks encouraging on the surface, in part because it’s the third straight month of gains, albeit modest gains. The superficial message appears to be that the consumer is repairing his capacity and willingness to spend.But this is premature.
The government’s stimulus efforts remain a key source of support for consumer spending, most notably through the so-called cash-for-clunkers program, i.e., government-subsidized auto purchases. But as one economist tells Bloomberg News today, “The cash-for-clunkers program helped auto sales but hurt other sales, which shows consumption remains weak. Consumers don’t want to spend on other things and cannot spend, to some extent, because income growth is still anemic,” opines Christopher Low, chief economist at FTN Financial.

Meanwhile, disposable personal income continues to sink, albeit just modestly in July vs. a 1.1% loss in June. “The fiscal stimulus that boosted disposable incomes in the spring is now fading,” advises Paul Dales, an economist at Capital Economics, in a report to clients via the Christian Science Monitor. “Excluding the fiscal stimulus, incomes have been trending lower for the last seven months.”
Reversing the trend will ultimately require a rebound in the labor market. So far, the best one can say on this front is that job losses are slowing. That’s encouraging, but only relative to the recent past, when job destruction was accelerating.
There’s nothing in today’s update on personal income and spending that changes our fundamental view that the “technical” end of the recession is here or imminent but that it will be followed by a long period of negligible growth.
Learning to live with anemic growth is the new new challenge, and the learning curve has only just begun.

Is today’s update on new orders for durable goods a sign of an approaching V, U or W? Translated: Is the economy poised to rebound sharply and deliver strong growth—a V recovery? Or is a U-type future, with slow to negligible growth, approaching? Even worse, could an imminent rebound be little more than a prelude to a second recession, a.k.a. the W cycle?
That summarizes the great questions that prevail as the world attempts to handicap the winding down of the Great Recession. As always, the central challenge is that we’re left with a great unknown, even if today’s news on durable goods suggests otherwise.
As monthly numbers go, July’s update for the series is undoubtedly encouraging. New orders for manufactured durable goods in July increased 4.9%, the U.S. Census Bureau reports. That’s the third increase in the last four months and the largest percent gain in two years.

No one can deny that such news constitutes progress. Ditto for the accumulating evidence in other economic reports that the economy, if not quite on the mend, is no longer contracting. A number of clues have been suggesting no less for months, as we’ve been discussing on these digital pages for some time, including the all-important weekly updates on initial jobless claims. Additional support for thinking the economy’s stabilizing arrived in yesterday’s upbeat news on consumer sentiment and housing prices: both are rising.

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Expectations are driven by many things, but recent history usual tops the list when it comes to the crowd’s outlook on things to come. No wonder, then, that investors are feeling pretty good about the prospects for equity markets, which have been soaring this year.
As our chart below illustrates in no uncertain terms, 2009 ranks as one of the best calendar years in terms of positive returns…so far. The “worst” performer, based on our slicing and dicing of the major regions/markets for the world’s stocks, is Japan, dispensing a relatively slight 7.5% total return so far this year through August 21, according to data from Standard & Poor’s. On the opposite extreme is the nosebleed ascent for Latin America, which is up an astounding 71% year to date.

It’s been hard to lose money in equities this year. Virtually every corner of the global stock market is sitting on tidy gains. Along the way, claims of talent if not genius are once again being thrown about in the active management community, conveniently overlooking the fact that equity beta, which is available to everyone at virtually no cost, has delivered much of the heavy lifting this year.

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Warren Buffett advises in today’s New York Times that the Great Stimulus must one day be clipped as the Great Recession fades. As the Oracle of Omaha explains, the “enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects.”
We’ve been making a similar argument for some time, although the cause seemed lost when we advised in May that the crowd should recognize that the Federal Reserve must begin raising interest rates at some point. That future has been easily ignored, and perhaps for obvious reasons, given the economic events of the past year or so. But the arrival of Buffett’s warning suggests that sentiment may be set to turn by focusing the crowd’s gaze on the inevitable. If so, that’s healthy, if only because recognizing the risks that loom, as opposed to the ones that just passed, is always a productive exercise in managing money and otherwise boosting one’s odds of survival.
As we wrote in May, “At some point, the economic trends will shift and waiting too long to raise interest rates will be the primary hazard. We don’t know if the turning point will come in a few months or a few years, but we shouldn’t delude ourselves that it’s never coming.”

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Last week, The Wall Street Journal published a story explaining why Pimco, the behemoth bond fund manager, believes active management is preferable for running a portfolio of TIPS, or inflation-indexed Treasuries. According to the article, “Pacific Investment Management Co….says that while indexing may work wonders in the stock market, with TIPS it often leads to missed opportunities and hidden costs.” Meanwhile, you can find Pimco’s research paper that inspired the article here.
Some commentators have picked up on the article and announced a variety of revelations to the masses, ranging from the idea that investing in TIPS is somehow different compared with owning conventional bonds and even stocks to allegations that the Journal story highlights a new smoking gun in the case against indexing.
Nonsense. Nothing’s changed, even if the article suggests otherwise. Indexing is no more or less persuasive today vs. last year, for TIPS or any other asset class. The evidence begins with the fact that the long-term record speaks for itself, which boils down to the reality that beating the market is still very difficult over time.

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The highest real (inflation-adjusted) yields in 15 years for Treasuries are boosting demand, Bloomberg reported at the end of last month.
Halfway through August, there’s no reason to think otherwise. The 10-year’s yield hasn’t changed much in recent weeks, closing yesterday at roughly 3.59%. Meanwhile, inflation, as defined by the consumer price index, appears in no imminent threat of rising.
The July CPI report shows that inflation was flat last month, the Bureau of Labor Statistics tells us today. For the 12 months through July, CPI was negative to the tune of -1.9%, the steepest fall in 60 years.
On the surface, it looks like deflation is roaring. But this bite is worse than it appears. The year-over-year comparisons for CPI are troubling, but it’s temporary. Recall that oil prices hit an all-time high in July 2008. The energy driven inflation wave, as it turned out, wasn’t set in stone either. But the damage to the inflation numbers was done and that legacy remains intact. As a result, comparing overall prices today with those of a year ago is doomed to reflect sharp price declines.

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The Federal Reserve’s FOMC meeting yesterday was a bit of a yawn, although the boys at the bank did tell us that “economic activity is leveling out.” But they also recognized that the leveling isn’t likely to lead to growth any time soon and so the central bank announced that it would keep the target rate for Fed funds at an extraordinarily low 0-0.25% range, as widely expected.
Nonetheless, it’s clear that Bernanke and company have turned optimistic, if only marginally and relative to the deep pessimism of the recent past. That’s no surprise considering that the supporting clues have been bubbling for some time. We’ve been arguing for months that the recession was near a technical end, in part due to the encouraging signs from the declining trend in initial jobless claims. This data series tends to peak at or just ahead of business cycle troughs, as we discussed in some detail back in March, which so far remains the high point for new jobless claims. Much of the credit can go to the Fed, which has been aggressively pumping liquidity into the system to slow and ultimately halt the downturn. The jury’s still out on how the central bank plays its cards from here on out–i.e., the so-called exit strategy. But for the moment, there’s reason for mild optimisim.

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We’re swimming in it. Or maybe downing is a better term. Whatever the correct label, the digital supply of financial and economic data, information and analysis is exploding. We can’t get enough of it. Or are we getting too much? More to the point, Is it helping?
The question for strategic-minded investors is whether the growing amount of information is enhancing our investment results? This is a critical question, in part because the information revolution has only just begun. As David Leinweber notes in his fascinating new book Nerds on Wall Street: Math, Machines and Wired Markets, “We are just beginning to see the decentralized use of information technology in this industry.”
The future, then, is sure to be one of even more financial and economic information. But is more really better when it comes to investing?
Back in the good old days, when your editor was a staff writer at Bloomberg, there was a brief, shining moment when I thought the financial world was my oyster. In the early days of the job, I was awed by the apparent possibilities that arose from sitting in front of a Bloomberg terminal, which was made available to all employees. The array of data, news and analysis at my fingertips was overwhelming, but I was determined to become proficient at leveraging this amazing machine for not only my day job but for my personal investments as well.

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Some said it was dead. Others claimed it was misleading. Many simply ignored it, in good times and bad. But asset allocation is hardly dead. In fact, it couldn’t be any more relevant.
The mistake that many investors make is comparing a multi-asset class portfolio to something riskier, such as any one asset class. In fact, there are countless ways to beat a multi-asset class portfolio over the short- as well as long-term horizons. Doing so after adjusting for risk, however, is far more difficult.
It’s easy to find one asset class or one security with an expected return that’s far higher than the market portfolio, which we’re defining as all the world’s major asset classes weighted by the market values. The problem is that there’s something approximating an equal abundance of asset classes and individual securities with lesser prospects at any one time relative to the market portfolio. Distinguishing one from the other isn’t impossible, but it’s devilishly hard to do continually, year after year.
Does that mean we should simply buy and hold the market portfolio? Probably not, although it’s worth pointing out that you could do a lot worse. Consider, for instance, one measure of the market portfolio, as defined by the Global Market Index (GMI), courtesy of The Beta Investment Report. For the 10 years through the end of July 2009, GMI posts a 3.8% annualized total return, which is considerably better than the 1.2% annualized loss for U.S. stocks, as per the S&P 500.

Still, the temptation is always there to do something else. There have been times in the past, and there will be times in the future, when U.S. stocks beat GMI, for instance. That’s true for any of the various stock, bond, real estate and commodities components that collectively comprise GMI. Why not simply own the components with the highest expected returns and shun everything else?

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