There’s nothing new under the sun in the money game, but there’s always a fresh perspective. Sometimes that makes all the difference. Sometimes that’s all there is.
In the quest to offer something productive, let’s imagine that reviewing the whys and wherefores of risk premia can help sober us up about what’s necessary to keep the red ink at bay and maybe, just maybe, turn a profit with a multi-asset class portfolio.
For those who are interested in the details, including a broad review of the academic literature and the empirical record, you’re in luck. Your intrepid editor has a book coming out next month from Bloomberg Press—Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
As readers of these digital pages know, we begin with the market portfolio, broadly defined. A reasonable proxy for most investors can be modeled on a global mix of stocks, bonds, REITs and commodities, weighted by their respective market values. In fact, we do just that by calculating our Global Market Index, the benchmark for The Beta Investment Report.
Author Archives: James Picerno
2010’s BIG TEST
No one should doubt that an economic recovery is underway. But no one should assume that the rebound is robust or destined to quickly bring economic healing on a broad scale. It’s different this time.
The trend, at least, remains positive on a number of metrics, including the latest numbers on workers filing unemployment claims last week for the first time. New jobless claims rose 11,000 last week to 444,000, the Labor Department reports. But as our chart below suggests, the latest data point is statistical noise. The declining trend, in short, remains intact.
Since peaking in March 2009, weekly jobless claims have been on a steady downshift. As we’ve written many times, starting with this piece from early last year, a sustained decline in this measure bodes well for an upturn in the economic cycle. We’ve been arguing for some time now that the downshift in jobless claims has legs and so the natural forces of recovery are set to grow stronger. The latest report on this front offers no reason to change our view for the near-term future.
FED’S BEIGE BOOK: THE RECOVERY REMAINS SLOW & SLUGGISH
The U.S. economy is recovering, but slowly, the Fed advised yesterday in its latest “beige book” report. That’s no great surprise and in fact we’d have fallen off our chair if the central bank said anything different. Indeed, we’ve been forecasting no less for some time on these pages, such as our view from last June, when we worried that “the past and current ills weighing on the economy will remain a heavy burden for many quarters and, to some extent, several years.”
WHAT ARE TREASURIES TELLING US?
Inflation isn’t a concern these days, affording the Federal Reserve elbow room to keep interest rates at, well, virtually zero.
The futures market doesn’t expect the free-money train to end any time soon. Even looking a year out, Fed funds futures are still pricing the central bank’s target rate at under 1%. The FOMC hasn’t done anything to disabuse the crowd from that view. Last month’s official monetary confab press release advised that “the Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent…for an extended period.”
IT’S ALL ABOUT JOBS…AND INTEREST RATES
After Friday’s disappointing update on the labor market in December, the debate about how to boost employment will take on an even greater import, if that’s possible, in the months to come. All the more so as this is a mid-term election year.
Inextricably intertwined in the debate over jobs is the question of when to raise interest rates. The two primary goals: nipping any future inflationary pressures in the bud without derailing the economy’s still-weak capacity for minting new jobs.
LIFE DURING DOWNTIME
Today’s jobs report for December reminds (as if we needed reminding) that the economic “recovery” will be slow, sluggish and prone to setback from time to time.
Nonfarm payrolls were lighter by 85,000 last month, according to this morning’s monthly employment update from the Department of Labor. That’s a blow for quite a number of economic projections, some of which predicted a small gain. MarketWatch.com, for instance, reported that a poll of economists had predicted a rise of 15000 in the December nonfarm payrolls number.
There is some good news in today’s report: the slight retreat in November jobs that was originally reported (-11,000) was revised upward to a feeble gain of 4,000. Of course, in a labor force of 130 million, such changes are insignificant. Indeed, nothing short of potent growth in the labor market over an extended multi-year period is required to repair the damage from the Great Recession. Even a sustained rise of 300,000 new jobs a month would take more than 2 years simply to return the labor force to its pre-recession high. Unfortunately, almost no one is predicting such a rosy scenario and there’s nothing in today’s numbers to suggest such a positive turn of events any time soon.
WHAT WENT WRONG WITH MONETARY POLICY?
Economist Stefan Karlsson has an interesting critique of Fed Chairman Ben Bernanke’s defense of the central bank’s monetary policy in the 21st century.
THE PRICE TAG FOR DAMAGE CONTROL
The monetary and fiscal stimulus dispensed by governments around the world was arguably effective in containing a recession and staving off depression. But if so, the question becomes: At what price?
Nothing is free in economics and so the world must grapple with the mountain of debt that now weighs on the global economy. In effect, policy makers have traded the acute for the chronic. Was it a worthwhile tradeoff? Perhaps, although the true answer won’t be known for some time, perhaps as long as a generation.
Meanwhile, no one should underestimate the potential risks. A new research paper by professors Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard) bluntly lays out the stakes and the hazards that may be lurking. A working version of “Growth in a Time of Debt,” forthcoming in American Economic Review, makes three key points. Quoting the paper, the authors advise:
PASSING (AND PRINTING) THE BUCK, PART II
On Sunday, we discussed Fed Chairman Ben Bernanke’s view that monetary policy played no role in the extraordinary bull market in real estate during 2002-2007. The operative quote from his speech: “Monetary policy during that period [2002-2006] — though certainly accommodative — does not appear to have been inappropriate, given the state of the economy and policymakers’ medium-term objectives.”
A number of monetary economists beg to differ. Among the smoking guns: a negative inflation-adjusted Fed funds rate for three years from late-2002 onward.
ARE THE EASY GAINS BEHIND US?
December was a mixed bag of performance for the major asset classes, mainly because fixed-income was weak. Foreign developed-market government bonds were particularly hard hit last month, shedding nearly 6%, as the table below shows. But that’s not necessarily a recurring offence, since a fair slice of the loss is due to a strong 4% rally in the U.S. Dollar Index, a rare jump in the buck and its biggest monthly gain since January 2009.
Meanwhile, REITs led in the winners circle for December, rising by nearly 7%. And equities the world over showed handsome gains as well. But thanks to the selling in most of the world’s bond markets, our Global Market Index (a passive mix of all the major asset classes and the benchmark for The Beta Investment Report) slipped a bit in the last month of 2009.