Housing is the weak link in an otherwise upbeat trend for the US economy. Deciding if this is a temporary soft patch for real estate or the start of something darker is still a work in progress. The potential for trouble is certainly lurking, as the recent run of weak data in residential sales and construction show. Given the influential link between housing and economic activity generally, watching this sector closely is critical these days. The truth will out eventually, but a clearer picture based on the hard data for several key metrics will take months. It doesn’t help that several reports are published with a significant lag. For example, we won’t see numbers on April’s housing starts until May 16. Fortunately, there are more timely numbers to watch to supplement the analysis—numbers that may drop relatively early clues on where housing’s headed. For example, here are three data sets that deserve close attention for tracking conditions in the housing market on a real-time or quasi-real-time basis.
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The US economic trend has decelerated to the slowest pace of growth since last September, according to a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 7.8% on Wednesday, May 7. Although MMRI has been trending lower lately, the positive reading still suggests that business cycle risk remains low. Further declines in MMRI that push the index below 0% would indicate that recession risk is elevated. By comparison, readings above 0% imply that the economy will expand in the near-term future.
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The answer depends on your definition of “bubble”… and the market under the microscope. “House prices differ widely across OECD countries, both with respect to recent changes and to valuation levels,” the OECD advises in a report on residential real estate around the world.
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Michael Edesess questions the notion of a “rebalancing bonus,” wondering if it’s a ghost in money management’s machine. The concept, he recaps, was formalized in Bill Bernstein’s influential 1996 study—“The Rebalancing Bonus: Theory and Practice”, which found that “the actual return of a rebalanced portfolio usually exceeds the expected return calculated from the weighted sum of the component expected returns.” Edesess points out, apparently with Bernstein’s support, that the 1996 analysis is slightly misleading in the sense that the underlying assumptions aren’t as practical as they could or should be. Although Edesess’s number crunching is yet another reminder that you can’t count on rebalancing to boost return, that’s still not an argument for shunning rebalancing as a risk-management tool.
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Small- and micro-cap stocks have had a good run lately, but the bullish momentum is now fading. In the long run, finance theory tells us that these corners of the equity market will generate a risk premium over and above the broad stock-market benchmarks. In the short run, however, gravity can and does intrude on the party if performance gets ahead of itself.
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Thanks to yesterday’s annual meeting for Berkshire Hathaway, it’s the high season once again for admiring Warren Buffett’s stellar investing record. The praise is certainly justified. The company’s stock has risen by roughly 20% a year over nearly five decades, convincingly outperforming the US stock market by a wide margin. As The Economist notes, “someone who invested $1000 at the outset would now have more than $10m, compared to around $100,000 if they had invested the same amount of money in the S&P 500.”
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● The Reckoning: Financial Accountability and the Rise and Fall of Nations
By Jacob Soll
Review by James Grant via The Wall Street Journal
It’s shirtsleeves to shirtsleeves for great empires, prosperous city-states and the member companies of the Dow Jones Industrial Average. Debt or sin or war or the tax man finally lays them low. Now comes Jacob Soll with a new theory of the decline and fall of earthly institutions. He fingers the accountants.
According to the author of “The Reckoning,” successful societies—while they last—are those that properly cast their figures. They confront their liabilities as well as their assets. In their enterprise and politics, accountability is the watchword—until one misfortune or another sets the red ink to overflowing.
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The private sector created a surprisingly high number of jobs last month, the Labor Department reports. Private payrolls increased 273,000, or well above the consensus forecast of 213,000 (according to Econoday.com) and substantially higher than March’s revised 202,000 advance. It’s good news, of course, but today’s upbeat release is primarily a clue for thinking that the labor market is again growing at the trend rate that prevailed before the harsh winter took a toll.
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The New York Times reminds us not to take today’s jobs report too seriously. Why? The standard glitch will likely infect the data: statistical noise. “Even when the economy is moving in a clear direction, the noise in month-to-month changes can be big enough to obscure any trend,” Neil Irwin and Kevin Quealy write on the paper’s Upshot blog. To drive home the point, the article includes a simulation of how short-term fluctuations could play havoc with our ability to interpret the data point du jour. What the article didn’t mention is that this caveat applies to every economic indicator.
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Private nonfarm payrolls in the US are projected to increase 210,000 (seasonally adjusted) in tomorrow’s April update from the Labor Department, according to The Capital Spectator’s median econometric point forecast. The expected monthly rise is moderately above the previously reported increase of 192,000 for March.
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