Marketwatch.com noted earlier this week that “bonds are suddenly the hot investment.” Barron’s offered a similar analysis a few days earlier: “Bond prices have surged so far this, defying conventional expectations.” But deciding if the bond market is “hot” relies rather heavily on your definition of the asset class and choice of time period.
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Private payrolls increased by 175,000 last month (down from December’s 227,000 gain), according to this morning’s ADP Employment Report. That’s in line with the consensus forecasts from economists, although the advance is well below The Capital Spectator’s median econometric projection. (As a side note, today’s ADP number matched one of the forecasts that are used in CS’s median forecast: the triangular distribution prediction. The accuracy here isn’t unusual. I’ll have more to say about the intriguing possibilities for superior forecasting via triangular distributions in the days ahead. For now, let’s focus on the ADP data.)
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The tumble in stock prices lately has been accompanied by a so-far mild retreat in inflation expectations (the spread on the nominal 10-year Treasury yield less its inflation-indexed counterpart). This relationship deserves close attention… again. A weak stock market is one thing. But if the market’s outlook for inflation slides further, that’s another matter entirely and one that comes with bearish implications for the economy if it unfolds with dramatically lower stock prices.
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Private nonfarm payrolls in the US are projected to increase by 234,000 (seasonally adjusted) in tomorrow’s January release of the ADP Employment Report, based on the The Capital Spectator’s median econometric point forecast. The projected gain is slightly below the previously reported increase of 238,000 for December. Meanwhile, The Capital Spectator’s median projection for January is substantially above a pair of consensus forecasts based on surveys of economists.
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January was a rough month for many asset classes, stocks in particular. The weakest link: emerging markets, with equities in these countries retreating more than 6% last month, based on the MSCI Emerging Markets Index. The bias toward red ink weighed on the Global Market Index (GMI), which dropped 1.9%–the first monthly loss since last August. Despite the correction, GMI’s still comfortably in the black for the trailing one-year period, posting a 9.1% total return through last month, or moderately higher than the projected long-term performance for this passive benchmark of the major asset classes.
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● Unbalanced: The Codependency of America and China
By Stephen Roach
Q&A with author via Yale University Press
Q: How has the U.S. and China’s unbalanced relationship created a false sense of prosperity?
A: Beginning in the late 1990s, the income-strained U.S. economy drew increasing support from the so-called wealth effects of surging asset markets – first from equities, then from residential property and finally from cheap credit. The problem was that each of these asset-dependent underpinnings ended in bubbles – bubbles that ultimately drew support from Chinese purchases of dollar-denominated assets. Washington, Wall Street, and Main Street collectively deluded themselves into thinking this asset-dependent growth was a new recipe for economic prosperity. When the bubbles popped, however, it quickly became apparent that this was a dangerous false prosperity. To the extent that export-led growth in China was dependent on America’s asset and credit bubbles, it, too, went down a path of false prosperity. When the export underpinnings of China’s external demand collapsed in late 2008 in the depths of the Great Crisis, this, in fact, became painfully evident.
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