The danger is not the past, but the future.
Today’s update on weekly jobless claims may be the warning sign. New filings for jobless benefits were unchanged last week, hovering at 505,000, matching the previous week’s tally. Although this number is down sharply from it’s recessionary peak of 674,000, set back in late-March, 500k reflects distress in the labor market. In other words, job growth is largely MIA.
It’s too soon to tell if the drop in claims is stalling. But there’s a case to be made that the big, easy reductions are behind us. As we discussed many times this year, there was always a strong case that a snapback on multiple economic and financial levels was in the offing for 2009. Unless the system was truly headed for a collapse, the natural order of the business cycle was righting itself after such a sharp deviation from equilibrium. In short, much of the events in 2009, particularly since the spring, aren’t a huge surprise to students of economic history. But the world is likely to become increasingly nuanced and complicated, and not necessarily for the better.
We’ve commented often in 2009 that the main threat was a stalled rebound in the job market. The risk was less about a double dip recession and another cataclysm and more of meager growth in the all-important labor market. Today’s data point in jobless claims isn’t proof that our forecast is turning into reality, but neither does the latest number do anything to dispel our worry of what may be looming.
Monthly Archives: November 2009
THE NEW NEW BALANCING ACT
Definitive statements about the future are always suspect in finance and economics, but it’s reasonable to assume that the threat of deflation as a clear and present danger has passed. But we can’t say for sure. To the extent that a double-dip recession remains a possibility, so too will does hazard of a fresh round of deflationary pressures.
Yet those concerns look minimal at this point. The primary challenge, as we’ve discussed routinely this year, is tied to the headwinds of growth. The risk of another of follow-up cataclysm to last year’s drama, by contrast, fades with each passing month. In short, the central issue is one of managing the chronic problems that await rather than the acute ones that recently passed.
Yet we shouldn’t underestimate the complications and potential fallout that are likely to accompany what we expect will be a subpar economic recovery, in large part because of what’s likely to be a sluggish rebound in the labor market. (For some background on our thinking about the job market, take a look at this post from earlier this month and our analysis here, for example.)
THE BURDEN OF FIAT MONEY: REAL-TIME DECISIONS
Central bankers are a powerful lot and so it’s an easy to assume that they’re also prescient. When you’re making decisions that affect the livelihoods of millions of people—billions on a global scale—confusing people with their institutional authority can become habit forming. But central bankers are mortal, and therefore prone to mortal decisions, a.k.a. flawed decisions. Heck, it happens to the best of us at times. The only difference is that most people’s day jobs don’t cast a long shadow over a nation’s money supply.
No less an expert on central banking than Paul Volcker, the patron saint of inflation slayers everywhere, advises that “central bankers suffer from hubris like everybody else.” That’s not surprising, but it does have consequences.
The monetary policy du jour, as a result, may not be exactly what the macroeconomic gods ordered. A mismatch between the optimal monetary policy and current events is in some sense fate. Working with limited information makes it hard to know if today’s actions will suffice for the uncertainty that arrives tomorrow. As a result, we can talk of monetary policy in terms of its degree of inaccuracy or accuracy.
THE RECESSION FADES AS QUESTIONS OF GROWTH LINGER
The news on new filings for unemployment benefits once again favors the idea that economic recovery is continuing. It’s a tenuous rebound, one ripe with caveats, including a big one we’ll discuss below. But it’s a rebound nonetheless.
The Labor Department today reports that initial jobless claims dropped to 502,000 last week, down from the previous week’s 514,000. That leaves us at the lowest level since the week through January 3, 2009. As our chart below reminds, the trend has certainly been our friend this year for the general change in jobless claims.
Back in March, we wrote about the possibility if not the likelihood that a peak in jobless claims would signal the end of the recession. In subsequent months, we revisited the mounting evidence that the initial claims pattern was on a sustainable downtrend, including here and here. Jobless claims alone don’t suffice as a definitive sign of things to come, but this data series is on the short list of clues to watch for judging turning points in the business cycle.
TWO RULES THAT CAST A LONG SHADOW OVER INVESTING RESULTS
The world is filled with recommendations and research on what works best in the money game. But when you reduce the sea of study down to the essential lessons, we’re left with rule number one—diversify within and across asset classes, i.e., asset allocation—and number two—rebalance.
There are other rules, of course, and some of them are actually useful. But for most individual investors, and perhaps many institutional investors, these two rules are the foundation of intelligent money management. That’s another way of saying that it’s hard to succeed in investing if we ignore or abuse these rules.
Granted, it’s possible to violate these rules and still earn big returns. But finding success on this path requires that you’re smarter than everyone else and/or willing to take big risks that will sink most investors. For the rest of us, asset allocation and rebalancing are the building blocks of prudent investing. Intelligent investing needn’t end there, but it’s a valuable beginning.
INFLATION EXPECTATIONS CONTINUE TO INCH HIGHER
One of the supporting pillars in the recent rally is the recognition that inflation isn’t a problem. Last year’s financial crisis knocked the stuffing out of the system’s tendency to devalue the purchasing power of fiat currencies over time. The net result is an unusual level of economic cover for keeping interest rates low–really low. Indeed, the primary goal of the Federal Reserve and its counterparts around the world over the past year has been the unbridled pursuit of higher inflation, though not necessarily high inflation.
In the depths of the crisis, the immediate objective was simply to deliver some level of inflation, which is to say something other than deflation. Allowing deflation to fester is simply too great a threat. The basic prescription has been printing money. How’s it working?
MORE JOB DESTRUCTION, BUT THAT’S JUST THE TIP OF THE ICEBERG
Today’s update on October’s employment status is neither surprising nor encouraging. The U.S. economy is still bleeding jobs, but that’s hardly shocking at this point. It’s been clear for some time now that the risk of a jobless recovery is high.
Nonfarm payrolls shed another 190,000 positions last month, a modestly lower pace than September’s 219,000 loss but still far away from anything suggesting stabilization in the labor force much less growth. Most of the job destruction came in the goods producing industries, although the services sector managed to shrink by 61,000 jobs in October. The conspicuous points of light were education and health services (a rise 45,000 jobs) and professional and business services (+18,000). But on balance, there’s nothing to cheer in today’s employment report other than to recognize that the pace of decline overall is considerably lower than it was during the height of the financial crisis late last year and early in 2009. Slim pickings after nearly two years of labor-market contraction.
The good news is that the magic level of zero job loss is coming, and perhaps soon. If we’re lucky, it’ll arrive before the year is out, although our guess at this point is that the first quarter of next year is a more likely forecast. Rest assured, stability in the labor market is near. Short of some new cataclysmic change in the current economic profile, the stars are aligned for an end to the job destruction that has been nonstop since January 2008. Alas, the bigger problem is not ending the job destruction; rather, the bigger challenge will be minting new jobs.
THERE’S AN EXIT STRATEGY LURKING OUT THERE SOMEWHERE
Sometimes one comment says it all. That describes Jim O’Neill’s observation that a fair amount of levitation work awaits central bankers the world over. Timing, of course, is unknown. Meantime, there’s a few (or many) potholes on the road to economic salvation.
The chief global economist at Goldman Sachs Group in London tells Bloomberg News that “there are all kinds of risks” bubbling these days at the intersection between the price of money, inflation, economic cycles and everything else in between. Some central banks have already started hiking, if only slightly. Meantime, as the market ponders the future, there’s debate over how much of the reflation of recent vintage is engineered vs. a reflection of fundamental improvement in business and economic conditions. Perhaps it’s a mix of both. In any case, Mr. O’Neill said a mouthful when he opined that “We don’t know how much of the improvement in markets is due to central banks’ largesse, and neither do they. They’re pretty nervous, but they’ve got to get out of it at some stage.”
MINING THE WEB FOR STRATEGIC INSIGHT AND PULLING UP A FEW NUGGETS
The first rule in the money game is recognizing that there are no silver bullets. Asset pricing is a black box. It’s become somewhat less of a black box after a half century of analysis by financial economists, but what we don’t know about how markets work still dominates by far.
Much of what we do know has come from reverse-engineering the system’s output. We can see prices and we can measure their fluctuations and linkages in countless ways. The trouble is that the financial gods forgot to give us the code that produces the output. That leaves us with the thankless ask of predicting returns indirectly. But even then we’re working with imperfect information. Ours is a world of ex post data. We know the past, but that’s a poor window into the future. We have the output but we’re forever debating the input. As a result, the link between ex post and ex ante data is shaky. That doesn’t mean we should ignore the historical record, but it should only be one of several layers of analysis for developing capital market assumptions.
Much of what we discuss on the pages of The Beta Investment Report is focused on developing equilibrium risk premiums and then integrating those long-range forecasts with our near-term outlook. To the extent there’s a divergence of some magnitude, and we’re reasonably confident in our assumptions, we have some basis for adjusting the asset allocation for the market portfolio, which we define broadly, as per finance theory. A global value-weighted mix of stocks, bonds, commodities and REITs is a reasonable definition, a.k.a. our proprietary Global Market Index.
THE RETURN OF MIXED RESULTS
A month ago, we surveyed the latest numbers for the major asset classes and wondered how long everything could continue rising. A month later, we have our answer. As our table below shows, divergence has returned to the world’s capital and commodity markets.
The switch to a wider array of results was inevitable. As we’ve been discussing for some time, the great snap-back period of 2009 was destined to be a temporary fling. When it became clear earlier this year that the world would not end, assets were repriced accordingly. But the first hint that something other than uniformity will prevail in performance trends arrived in October’s tally of asset class results.