June was a month of revival for most of the major asset classes. The hefty, wide-ranging losses in May gave way to handsome gains last month. Alas, the pop in June wasn’t strong enough to wipe away May’s red ink, but there’s no mistaking the rebound in the month just passed. Whether it’ll roll on in July is anyone’s guess, but for the moment the bulls have something to cheer about.

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Your editor will be at various undisclosed locations for the next week or so along the West Coast, traveling with no particular agenda, from LA to San Francisco. Blogging will be light to non-existent during this brief hiatus. What passes for normal around here will resume on Monday, July 2. Meantime, having recently re-read On the Road, I’ve got Kerouac on the brain. As I make my temporary escape from New Jersey, one of my favorite quotes from the book comes to mind: “Our battered suitcases were piled on the sidewalk again; we had longer ways to go. But no matter, the road is life.”

● Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System
By Scott Patterson
Summary via publisher, Crown Business
A news-breaking account of the global stock market’s subterranean battles, Dark Pools portrays the rise of the “bots”- artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who’ve created them. In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine created a computerized trading hub named Island where small traders swapped stocks, and over time his invention morphed into a global electronic stock market that sent trillions in capital through a vast jungle of fiber-optic cables. By then, the market that Levine had sought to fix had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters. Dark Pools is the fascinating story of how global markets have been hijacked by trading robots–many so self-directed that humans can’t predict what they’ll do next.

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Fed’s Lacker Says Operation Twist Won’t Help Growth, Jobs
Bloomberg | June 22
Federal Reserve Bank of Richmond President Jeffrey Lacker said he dissented from the Fed’s $267 billion extension of its Operation Twist program believing it would spur inflation and not significantly help the economy. “I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable,” Lacker said in a statement today from the Richmond Fed.

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Initial jobless claims slipped by 2,000 last week to a seasonally adjusted 387,000. That’s enough to put a lid on fears that the economy’s falling off a cliff now, today, this minute. But today’s update also falls well short of inspiring confidence that stronger, sustained growth will quickly resume. Nonetheless, it’s still hard to make a case that a new recession is imminent based on the latest numbers.

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Debate over the expected return on the stock market is a hardy perennial for two basic reasons. First, the true ex ante market return can never be known with certainty. Second, the true ex ante return is forever changing. The problem, of course, is that investors must make decisions, even with imperfect information about the future. Where to begin? One possibility is a simple Gordon growth model that equates equity market return with the sum of the growth rate of dividends plus the current dividend yield. It’s really an identify rather than a model, but it’s useful just the same.

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Is the rising economic anxiety taking a toll on the housing industry… again? The answer depends on the data set you’re looking at. Housing starts fell nearly 5% last month vs. April’s tally, the Census Bureau reports. But newly issued building permits jumped by almost 8% in May to the highest level since September 2008. That’s a sign that housing starts will stay firm if not rise in the months ahead. As economist Richard Yamarone writes in The Trader’s Guide to Key Economic Indicators: “Economists have found that privately-owned housing units authorized by building permits generally precede housing starts by about one month and sales by three.”

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Fiscal-Cliff Concerns Hurting Economy as Companies Hold Back
Bloomberg | June 19
Companies are starting to delay hiring and spending out of concern that Congress won’t reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the economy. Faced with a so-called fiscal cliff of more than $600 billion in higher taxes and reductions in defense and other government programs in 2013, U.S. companies are pulling back, though the deadline for congressional action is more than six months away.

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There are two basic ways to wrestle with recession risk. One is to forecast it, the other is to develop a high-confidence assessment of whether it’s stepping on the business cycle’s throat based on the data published so far. The world is awash with the former, and it comes with all the usual caveats, including a fair amount of error. That’s the nature of forecasting: accuracy is all over the place, and it’s up to the consumers of the outlooks to figure out who has the better prediction methodology. By contrast, calling the start of major downturns in the economy in the here and now, by using what we know rather than what we think will happen, is far less precarious (if the process is designed reasonably well).

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● 2052: A Global Forecast for the Next Forty Years
By Jorgen Randers
Summary via publisher, Chelsea Green
Forty years ago, The Limits to Growth study addressed the grand question of how humans would adapt to the physical limitations of planet Earth. It predicted that during the first half of the 21st century the ongoing growth in the human ecological footprint would stop—either through catastrophic “overshoot and collapse”—or through well-managed “peak and decline.” So, where are we now? And what does our future look like? In the book 2052, Jorgen Randers, one of the co-authors of Limits to Growth, issues a progress report and makes a forecast for the next forty years. To do this, he asked dozens of experts to weigh in with their best predictions on how our economies, energy supplies, natural resources, climate, food, fisheries, militaries, political divisions, cities, psyches, and more will take shape in the coming decades…. The good news: we will see impressive advances in resource efficiency, and an increasing focus on human well-being rather than on per capita income growth. But this change might not come as we expect.

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