A new study from the Bank of International Settlements (BIS) raises doubts about the value of commodities as a tool for enhancing portfolio diversification. The paper’s smoking gun, so to speak, is that “the correlation between commodity and equity returns has substantially increased after the onset of the recent financial crisis.” Some pundits interpret the study as a rationale for avoiding commodities entirely for asset allocation purposes. But that’s too extreme.
Author Archives: James Picerno
PMI Data Shows That Mfg Sector Grew At A Faster Rate In July
The US manufacturing sector grew at a moderately faster pace in July, according to today’s initial estimate of Markit Economics purchasing managers index (PMI). “The U.S. manufacturing sector picked up momentum again in July, with output, order books and employment all growing,” says Markit’s chief economist, Chris Williamson, in a press release (pdf). “The goods-producing sector acts as a bellwether of the wider economy, and the upturn in July therefore bodes well for the pace of GDP growth to have picked up again in the third quarter after a likely easing in the second quarter.”
Macro-Markets Risk Index | 7.24.2013
US economic conditions continue to stabilize in July after a sharp but so far brief deterioration in June, according to a markets-based profile of the macro trend. The deterioration that persisted through most of last month for this index has faded in recent weeks, giving way to a comparatively stable trend. Even after the sharp fall in the Macro-Markets Risk Index (MMRI) in June, this benchmark closed yesterday (July 23) at 10.1%–a level that suggests that business cycle risk remains low. Although MMRI is still near its lowest value in a year, it remains well above the danger zone of 0%. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply economic growth.
Risk Management For Estimating Recession Risk
“The economy is showing signs of life,” advises David Malpass in today’s Wall Street Journal. “The U.S. economy may finally be in a position to accelerate above the so-called new normal—the painfully slow 2% average growth rate that has persisted since 2009,” the economist writes. His outlook is hardly unusual these days, but just 10 months ago in the same newspaper—in September 2012—he warned that “economic signals point to a 2013 recession.” He reasoned at the time that the then-current monthly declines in new durable goods orders and real personal income “waved bright red recession flags.” As we now know, the recession never came. In fact, as I’ve been discussing for quite a while now (including last week’s macro update), recession risk remains minimal. But how did Malpass (and, to be fair, a number of other economists) misread the macro signals late last year? Looking for an answer can help us decide what works, and what doesn’t, in the always-crucial task of estimating the odds for recession risk in real time.
Asset Allocation & Rebalancing Review | 23 July 2013
The rout in asset classes that took a bite out of prices in June has subsided in recent weeks. The losers on a year-to-date basis aren’t bleeding as much and the winners have mounted a modest revival this month. The range of returns is still fairly extreme, but the range is also a bit more skewed to the upside than we’ve seen recently, relatively speaking.
Chicago Fed: Economic Activity Picks Up A Bit In June
The US economy posted a slightly stronger pace of growth in June, “led by improvements in production-related indicators,” according to today’s release of the Chicago Fed National Activity Index, a weighted average of 85 economic data sets. The improvement boosted the three-month moving average (CFNAI-MA3) of the Chicago Fed Index to -0.26 last month, up modestly from the revised -0.37 for May. The increase in the three-month average is slightly better than my average econometric forecast for this benchmark.
Stocks, Inflation Expectations, & “High-Powered” Money Supply
Inflation expectations and the US stock market are again moving in the same direction, for the first time this year since early February. The new abnormal, as I like to call it, appears to have made its return after a roughly four-month hiatus that had investors and economists scratching their heads about the implications for markets and macro. It’s still early to write the final chapter on what it all means, but it looks like a return to form in recent weeks. That is, the stock market’s recent gains are again accompanied by rising inflation expectations, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries.
Book Bits | 7.20.13
● What Went Wrong: How the 1% Hijacked the American Middle Class . . . and What Other Countries Got Right
By George R. Tyler
Review via Publishers Weekly
In his first book, Tyler, a former Clinton administration deputy assistant Treasury secretary, slams popular acquiescence to low wages, imperious CEOs, and diminished national net worth. He contrasts the pursuit abroad of “family capitalism”—a doctrine of healthy compensation, job retraining, and productivity growth—with the increasing income disparities in the U.S. that destroy economic mobility and perpetuate poverty. Tyler identifies the Reagan era and its free-market dogma as the beginning of the reversal of middle-class growth, but sees little change since then. He argues that a first step toward recovery would be to boost the wages of lower-income households; he cites Australia and Europe as examples showing that prosperity and living wages are complementary, not contradictory. Whatever the merits of his proposals, the array of data he presents justifies popular apprehension about America’s future. The key issue is not big government vs. small government, he maintains, but rather the distribution of wealth.
Chicago Fed Nat’l Activity Index: June 2013 Preview
The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise incrementally to -0.39 in the June report, according to The Capital Spectator’s average econometric forecast. That compares with CFNAI’s previously reported three-month average of -0.43 for May. A value below -0.70 indicates 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, in the update for June, which is scheduled for release on Monday, July 22.
US Economic Profile | 7.19.13
Business cycle risk continues to remain low, according to the June update of the Economic Trend (ETI) and Momentum indexes (EMI). Both benchmarks, which measure the broad trend in the economy by way of 14 economic and financial indicators, are still well above their respective danger zones. As a result, the NBER is unlikely to declare June as the start of a new recession, as suggested by the current data sets available.