The Treasury market’s 10-year inflation forecast slipped last week, and more of the same looks likely for today. The yield spread between the conventional and inflation-indexed 10-year Treasuries dropped to 1.71% on Friday, down 10 basis points from the week before and well below late-April’s 2.45%–the previous peak. The debate about deflation—is the risk rising?—is likely to be front and center this week. That’s likely to fuel more buying in Treasuries.
Monthly Archives: July 2010
FUNNY PAPER & THE FUNNY PAPERS…
What happens when Austrian economics meets Monopoly? One possibility…
MONETARY POLICY GETS NO RESPECT
The cover story in Time’s current issue summarizes what everyone already knows. The economic rebound has lost strength recently. The story goes on to report that the policy responses at this late date aren’t encouraging, largely because political support for more fiscal stimulus is weakening faster than the economy. Strangely, the article makes no reference to the possibilities for additional monetary stimulus. The not-so-subtle suggestion is that if the economy needs additional help, new government spending programs are the only game in town and this door is closing fast because of political considerations.
STILL WONDERING ABOUT DEFLATION
John Makin, a visiting scholar at the American Enterprise Institute, recommends in today’s Financial Times that the Federal Reserve and other major central banks “announce firm price level targets that imply rapid money creation through more aggressive asset purchases.” The counsel follows his essay published earlier this month that warns of the “rising threat of deflation.”
GLOBAL INFLATION EXPECTATIONS
U.S. inflation expectations have tumbled recently (see here, for example). Is this an isolated American trend? No, unfortunately. It’s global, as Rebecca Wilder reports. (HT: David Beckworth).
IS THE DIP REAL?
Today’s weekly update on initial jobless claims suggests that the labor market is finally turning (or will soon turn) for the better. Maybe. For the first time in nearly two years, seasonally adjusted new filings for jobless benefits totaled less than 430,000. We’ve seen this movie before only to end up with disappointment, as we’ve been discussing (such as here, for instance). Will it be any different this time? For today, at least, it’s easier to answer “yes.”
THE PARADOX OF DISMISSING MARKET EFFICIENCY
The efficient market hypothesis (EMH) is one of the most contentious topics in all of financial economics. You could spend years reviewing the mountain of literature, both pro and con, that dissects the subject into ever finer slices without reading the same paper twice. As a practical matter, EMH has been helpful for investors, namely, making the case for indexing. Indexing isn’t perfect and some investors can do better, but passive investing has a history of more or less working as advertised: delivering middling performance over time relative to a wide range of actively managed results, and at low cost.
RETAIL SALES & THE ECONOMIC TREND
Today’s update of retail sales for June doesn’t look good, but it’s still not so bad in terms of the broader trend. That doesn’t mean that there’s nothing to worry about, but for the moment the annual pace of retail sales is still comfortably in positive territory. But given the current climate, more downshifting may be coming. At what point does a return to trend signal something worse? It’d be foolish to underestimate the hazards these days, but the economy’s fate is not yet doomed, or so the trend in retail sales imply.
CHOOSING INDEX FUNDS: PRICE IS ONLY PART OF THE ANALYSIS
Indexing offers many advantages for investing, but not all index funds are created equal. For the leading index products, low cost is a big attraction. But in a world where indexing choices have exploded, caveat emptor applies. “Most investors assume, however, that indexing automatically means getting a cheap fund and certainly one that’s cheaper than an actively managed fund, Morningstar’s John Coumarianos advises. “However, this isn’t necessarily the case.”
IS THERE ANY THERE THERE IN HEDGE FUND BETA?
Hedge funds are supposed to be the ultimate diversification tool. The idea is that the returns post low/negative correlation with broad measures of conventional investing strategies and yet somehow manage to deliver positive returns when the standard strategies tumble. That’s certainly true some of the time for some of the managers. But expecting hedge funds writ large to deliver satisfaction is too often dashed on the rocks of reality. The notion of a hedge fund beta, in other words, isn’t all that attractive.