The link between asset allocation and rebalancing is widely recognized, but it’s not always widely respected. This is a subtle point, but it has major implications for risk management and earning a respectable risk premium through time. Most investors understand this, at least intuitively. But in practice, it’s not unusual to see portfolio designs that are victimized by what I call subjective neglect.
Monthly Archives: October 2013
Asset Allocation & Rebalancing Review | 23 Oct 2013
If there’s reason to worry about the global economy, it’s not obvious in asset prices these days. Positive momentum seems to have the upper hand, at least for the moment. The winners keep winning and the losers are trimming their losses.
September Employment Growth Slows
Today’s nonfarm payrolls report finally arrived, but it wasn’t worth the wait. Private-sector employment increased by a net 126,000 jobs last month on a seasonally adjusted basis, according to the US Labor Department. That’s not the slowest pace this year, but it’s close. Only July’s meager 100,000 rise is lower so far in 2013. There’s nothing to cheer about in today’s employment release, but it’s still not obvious that the jig is up for the business cycle. True, the latest monthly perspective looks discouraging, but that’s not the only statistical lens at our disposal. Consider that the year-over-year percentage change for private-sector employment continued to expand by just over 2% through last month. That rate is unchanged from the previous month and is in line with the annual pace of growth we’ve seen so far this year.
Why This Year’s Nobel Award In Economics Makes Perfect Sense
Last week’s news on the choice of this year’s winners of the Nobel prize in economics perplexed and even disturbed some pundits. How could two economists—Eugene Fama and Robert Shiller—with such diametrically opposed ideas on asset pricing be awarded a Nobel at once? (A third winner, Lars Peter Hansen, shared the prize for his work in econometrics.) By some accounts, elevating the two names, and their respective bodies of work, in one Nobel award is misguided at best because it mistakenly suggests a degree of equality in the underlying methodologies for evaluating markets. I’ve heard some people argue over the past week that one or the other name should be stricken from the list. But that’s a foolish read on this year’s award. Giving the prize jointly to Fama and Shiller makes perfect sense because it reminds us that no one theory can tell us everything we need to know in the money game.
US Economic Profile | 10.21.13
The missing economic reports due to the government shutdown will start arriving this week and beyond, beginning with tomorrow’s employment report for September. Meanwhile, let’s consider what the available numbers tell us about the state of the US business cycle. Based on the latest data, economic risk remains low through last month. This profile comes with an unusual caveat, of course: several key indicators are still MIA. At this point in the month we should have already seen September numbers on payrolls, retail sales, industrial production, and new housing starts. Those updates are coming, but for now we’re clueless. Nonetheless, let’s kick the macro tires for an update look at the trend, albeit one that’s impaired by limited data.
Book Bits | 10.19.13
● The Confidence Trap: A History of Democracy in Crisis from World War I to the Present
By David Runciman
Summary via publisher, Princeton University Press
Why do democracies keep lurching from success to failure? The current financial crisis is just the latest example of how things continue to go wrong, just when it looked like they were going right. In this wide-ranging, original, and compelling book, David Runciman tells the story of modern democracy through the history of moments of crisis, from the First World War to the economic crash of 2008.
A global history with a special focus on the United States, The Confidence Trap examines how democracy survived threats ranging from the Great Depression to the Cuban missile crisis, and from Watergate to the collapse of Lehman Brothers. It also looks at the confusion and uncertainty created by unexpected victories, from the defeat of German autocracy in 1918 to the defeat of communism in 1989. Throughout, the book pays close attention to the politicians and thinkers who grappled with these crises: from Woodrow Wilson, Nehru, and Adenauer to Fukuyama and Obama.
Chicago Fed Nat’l Activity Index: September 2013 Preview
Monday’s update of the Chicago Fed National Activity Index (CFNAI) has been postponed due to the recent government shutdown. When the data is released, September’s three-month CFNAI average is expected to rise slightly to -0.14, according to The Capital Spectator’s average econometric forecast. (The four underlying models for this projection, by the way, use data through August and so the government shutdown that delayed publication of September economic data doesn’t currently affect the CFNAI projections. For details on the models, see the summaries below.) In the previous release for August, the three-month average was reported as -0.18. Values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate, CFNAI’s three-month average is projected to remain at a level that’s historically associated with economic expansion, albeit at a below-trend rate.
Here Comes The Data…
Now that the government has re-opened and the insanity has passed (at least until early next year, when the budget debate begins anew), it’s time to begin climbing out of the data hole. That includes publishing the missing employment report for September, which has been rescheduled for release next Tuesday, Oct. 22, according to the Bureau of Labor Statistics.
A Small But Positive Bit Of Progress In Jobless Claims
The jobless claims data is still choking on the backlog blowback, or so it seems based on today’s weekly update on new filings for unemployment benefits. The modest dip in claims for the week through October 12—down 15,000 to a seasonally adjusted 358,000—is a step in the right direction after the previous surge skyward, which is also attributed to the after-effect of computer glitches. But the latest slide falls well short of convincing evidence that the trend is headed lower once more.
Macro-Markets Risk Index: 10.4% | 10.17.2013
The shutdown showdown is over, the government has re-opened, and the imminent threat of a Treasury default has been averted. Now the damage assessment can begin in earnest. Estimating the economic price tag for the fiscal war in Congress will take time, a process that will be hampered due to the missing updates on key economic indicators that became victims of the political stalemate in Washington. It’s unclear if these numbers, including September’s retail sales, will be published anytime soon, if at all. Meantime, let’s take a fresh look at what we do know via the latest macro profile based on market data. For the moment, a slight rebound appears to be underway. The Macro-Markets Risk Index (MMRI) closed yesterday, October 16, at 10.4%–a level that suggests that business cycle risk remains low. Yesterday’s close is MMRI’s highest reading since mid-September. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.