Are Springleaf Mortgage Loan Trust 2011-1 bonds safer than U.S. Treasuries? Yes, according to Standard & Poor’s. Bloomberg reports: “Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.”
Monthly Archives: August 2011
Stuck In Neutral
Private nonfarm employment growth slowed in August, according to ADP. “Today’s ADP National Employment Report suggests that the trend in employment moderated somewhat in August at a pace below what would be consistent with a stable unemployment rate.” That’s in keeping with the recent slippage in economic activity generally, and so it’s not terribly surprising. Today’s numbers suggest that we should moderate our expectations for this Friday’s employment report from the government.
Are Consumer Confidence Indices Useful As Leading Indicators?
Consumer confidence fell to its lowest level in more than two years, the Conference Board reports. That’s a discouraging sign for the economy. No one’s really surprised, given the various ills weighing on the economy, although some analysts doubt that such measures are all that valuable. “Consumer confidence usually is not a good indicator of spending,” Edward Meir, MF Global senior commodities analyst, tells AP. “People may say they don’t feel great but they still spend.”
Who Is Alan Krueger?
He’s a professor of economics and public affairs at Princeton University and President Obama’s choice to lead the White House Council of Economic Advisers. “I have nothing but confidence in Alan as he takes on this important role as one of the leaders of my economic team,” the President said yesterday when he announced Krueger’s appointment. “I rely on the Council of Economic Advisers to provide unvarnished analysis and recommendations, not based on politics, not based on narrow interests, but based on the best evidence — based on what’s going to do the most good for the most people in this country.”
Bubble Risk Is A Two-Way Street
Market bubbles are dangerous when they burst, but they’re no picnic for investors who make ill-timed bets that the party’s over. Just ask Pimco’s Bill Gross, manager of the Total Return Fund, the planet’s biggest bond fund. In February, he sold all the Treasuries in the fund and compounded the bet with derivatives. He now admits that it was a “mistake,” via The Wall Street Journal.
Personal Spending Rises Sharply In July
Today’s update on spending and income for July offers more support for thinking that the latest downshift in economic activity won’t deteriorate into a recession. Personal consumption expenditures (PCE) surged higher in July, rising by 0.8%–the biggest monthly gain in nearly two years and a sharp reversal from June’s slight retreat. If consumption is vulnerable, there’s no sign of it in the latest numbers. Even after adjusting for inflation, PCE was up a strong 0.5%. Disposable personal income (DPI) didn’t fare as well, but still managed a respectable performance by rising 0.3% last month vs. 0.2% in June. Never say never in macroeconomics, but contractions don’t begin with these numbers.
Research Review | 8.29.2011 | Asset Allocation
Seasonal Asset Allocation: Evidence from Mutual Fund Flows
Mark J. Kamstra, et al. | Working Paper | August 1, 2011
This paper explores U.S. mutual fund flows, finding strong evidence of seasonal reallocation across funds based on fund exposure to risk. We show that substantial money moves from U.S. equity to U.S. money market and government bond mutual funds in the fall, then back to equity funds in the spring, controlling for the influence of past performance, advertising, liquidity needs, capital gains overhang, and year-end influences on fund flows. We find a strong correlation between mutual fund net flows (and within-fund-family exchanges) and the onset of and recovery from seasonal depression, consistent with the hypothesis that investor risk aversion varies with the seasons. Further, we find stronger seasonality in Canadian fund flows (a more northerly location relative to the U.S., where seasonal depression is more severe), and a reverse seasonality in fund flows for Australia (where the seasons are reversed). While prior evidence regarding the influence of seasonal depression on financial markets relies on seasonal patterns in asset returns, we provide the first direct trade-related evidence.
Book Bits For Saturday: 8.27.2011
● The Euro: The Battle for the New Global Currency
By David Marsh
Review via Global Financial Strategy
With the euro saga playing out almost like a Shakespearean tragedy in Brussels, Berlin and Paris, it is good to get a clearer perspective on the origins, miscalculations and inherent problems at the heart of the eurozone’s birth. Fortunately enough, the Mutterer is now reading the second edition of a highly insightful account by David Marsh, co-chairman of Official Monetary and Financial Institutions Forum, ex-European editor for the FT, and GFS contributor. Financier George Soros has described the contents as “the stuff of a political thriller” no less. “When David Marsh first wrote his book, I thought that some of his theses were exaggerated. In fact, he foresaw many of the problems that have since befallen the euro,” says Soros.
Bernanke Speaks Without Saying Much
Fed Chairman Bernanke says he understands the nation’s economic pain. Speaking earlier at the Fed’s Jackson Hole conference, he also explains that “monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation.” But he downplays the prospects for additional stimulus. “Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view…” This despite his observation that “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” Quite true, but apparently those tools will be kept in the shed for the foreseeable future.
Inflation (And Bernanke) Expectations
The market’s inflation outlook is holding steady again, but for how long? The implied inflation forecast, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, was 2.1% yesterday. That’s roughly where it’s been for the past week. It’s also down from 2.6% in early April. But we’re still a long way from the 1.5% at this time last year. What might be the next catalyst that moves the current inflation forecast — up or down? Fed Chairman Ben Bernanke’s speech later today is first on the list.