The markets told us that there were problems in May, and as the economic data rolls in there’s no reason to think otherwise. Today’s numbers on housing starts and new building permits certainly suggest that the economic recovery struggled last month. The question is whether the change is temporary, or the sign of more trouble ahead?
Author Archives: James Picerno
STILL WORRYING ABOUT DEFLATION
If a wave of deflationary threatens the global economy’s rebound, will Japan be the canary in the coal mine. Probably. It’s certainly a high risk country, in part because it’s already loaded to the gills with debt from efforts at fighting deflation over the past 20 years. There are no guarantees in macroeconomic analysis, but if Japan’s already cheerless outlook takes a turn for the worse, it may signal that deflationary winds are set to blow harder in the rest of the world.
THE MARKET PORTFOLIO & YOUR “PERSONAL BETA”
Moshe Milevsky, a professor at York University, recommends thinking strategically about your “personal beta” for managing risk. That begins by evaluating your human capital, he advises in today’s Wall Street Journal. “It’s a measure of your future earnings, a product of what you’ve invested in yourself.” Good advice. In fact, evaluating your career risk is job one when considering how to modify the broad market portfolio. But even before you do that, you need a good definition of the market, and the usual suspects just won’t do.
RETAIL SALES DROP IN MAY
Retail sales dropped 1.2% last month on a seasonally adjusted basis, the Census Bureau reported today. That’s the biggest monthly decline since last September’s 2.2% fall and the first retreat since December’s mild 0.2% loss. The latest drop in retail expenditures, coming at a time of rising deflationary worries, suggests that the worst fears about the economic recovery are confirmed. But while it’s too soon to dismiss such concerns, today’s retail sales update for May isn’t the smoking gun it appears to be.
JOBLESS CLAIMS CONTINUE TO MOVE SIDEWAYS
New filings for jobless benefits dropped a bit last week, the Labor Department reported today. But the trend is still stuck in a rut. For most of this year, initial weekly jobless claims on a seasonally adjusted basis have been in a range of roughly 450,000 to 500,000. Last week’s tally of 456,000 is a slight improvement over the previous week’s 459,000, but there’s still no sign in the data that a dramatic decline is imminent for this series.
THEY POP BUBBLES, DON’T THEY?
They’re everywhere. In that market, in this country. The bubble detectors are out and about and productivity is up. If you don’t see the bubbles, well, you’re just not looking hard enough…or reading the right columnists.
MONETARY THEORY IN ONE PARAGRAPH….
Don’t try this at home, at least not without a dismal scientist as a chaperone. But if you could only read one paragraph about monetary policy (I know, I know), here’s a possibility to consider. It comes courtesy of Scott Sumner’s The Money Illusion. I’m reasonably sure that excerpting the following and trying to pass it off as a silver bullet for understanding, defining or otherwise explaining the fundamental laws of monetary policy is hopelessly misguided. Still, it’s hard not to admire one economist’s view of how the ebb and flow of money supply influences prices and market preferences (even if my editing runs the risk of running off the literary road into reductio ad absurdum). Enough…judge for yourself. For unexpurgated context, here’s the full essay. Meantime, here’s the laconic excerpt…
I want you to imagine that everyone understands and believes in the QTM. Imagine you live in a country where a typical 3 bedroom ranch house sells for $200,000. Also assume the money supply has been stable for years. Now the Fed suddenly doubles the money supply. What will happen to the price of that house? Keynesians will say “nothing”; prices are sticky. If they are right, I plan to buy up as many houses as I can, right after the money supply doubles. And then sell them again when the house prices double later on. But I actually think it more likely that the sellers will also understand this implication of the doubled money supply, and won’t hand me a $200,000 profit on a silver platter. They’ll immediately demand higher prices. The Keynesians are right that in the real world many prices rise more slowly, but in any case they do eventually rise.
IS THE DEFLATION RISK DEFUSED?
The jump in deflationary risk last month is still a real and present danger, if only marginally. But given the market reaction of late, it would be shortsighted to dismiss the threat. Yet there are reasons for optimism. One is that the inflation forecast in the Treasury market has stopped falling. Two, the money supply growth rate is no longer dropping like a rock.
ANOTHER FINE MESS
How did we get into this mess? More precisely, how did the United States, a bastion of financial insight and innovation, manage to wind up between the economic rock and the hard place at the opening of the second decade of the 21st century?
SATURDAY LINK LIST: 6.5.2010
Yesterday’s disappointing news on the pace of private-sector job creation sent the stock market tumbling. The S&P 500 lost more than 3.4% on the day and capital flowed into Treasuries, pushing the yield on the 10-year down to 3.2%. The risk-aversion trade is alive and kicking…again. That didn’t stop President Obama from declaring on Friday that “the economy is getting stronger by the day.” Mr. Market thought otherwise. But all’s not lost, explained one dismal scientist, who argues that the crowd simply needs an attitude adjustment. “Nothing in [the May employment report] suggests that the recovery is in trouble — the markets need to get a grip,” Bernard Baumohl, chief global economist at the Economic Outlook Group, said via The New York Times. Nonetheless, optimism is in short supply in the wake of the latest labor market update. Here’s a sampling of the chatter on the jobs front from various corners of the punditocracy…