Today’s update on September consumer price inflation suggests that the worries about deflation in recent months weren’t misguided. Although consumer prices overall are still rising, the increase is slight. More worrisome is the trend. The annual pace of consumer inflation continues to fade. It’s not a rapid decline, although it’s fairly persistent. Given the macroeconomic backdrop these days (lots of debt and sluggish growth hobbling the economy and labor market), the disinflation trend can’t be dismissed. Until and unless it’s stopped, we know how this movie ends, and it’s not going to be pretty. Fortunately, the central bank still has the power to alter the outcome, but the clock is ticking.
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READING ROUNDUP FOR FRIDAY: 10.15.2010
►Emerging-Market Currencies Soar
David Wessel/Wall Street Journal
Currency markets, seeing few signs global financial officials made progress in defusing tensions in last weekend’s talks in Washington, Thursday resumed their seemingly relentless determination to push down the U.S. dollar, particularly against currencies of emerging markets.
►Dollar Weakens Near 15-Year Low Against Yen Before Bernanke Policy Speech
Keith Jenkins and Candice Zachariahs/Bloomberg
The dollar traded near its weakest level in 15 years against the yen before a speech by Federal Reserve Chairman Ben S. Bernanke that may indicate whether the central bank will ease monetary policy further…Bernanke will speak later today at the Boston Fed conference.
ETF FUND OF FUNDS: CHOOSE CAREFULLY
The explosion in ETFs enhances investment strategy options on a number of levels. One is that ETFs that hold a mix of other ETFs is now a growth industry. Indeed, as the population of strategy-specific ETFs rises, so too do the possibilties with ETF fund of funds. But as with any other ETF decision, picking a fund of fund ETF requires attention to detail. There’s already quite a few of these products trading, and more are coming. The strategies range from the exotic to the simple. Predictably, some are worthwhile, some aren’t. The first question for all of these funds: Is there any possibility for value-added management alpha? If the answer is “yes,” then the second question: Is the fee reasonable?
THE GREAT EXPERIMENT ROLLS ON
The Treasury market’s inflation expectations have bounced higher since the end of August, reversing the summer downturn that was driven by worries that deflationary pressures were on the march. Given the precarious nature of the economic rebound, it’s premature to declare the deflationary scare over. But the evidence is certainly looking stronger (or less discouraging) for arguing that the Federal Reserve is ahead of the curve these days rather than behind it.
WHAT’S UP WITH AMERICA’S GOLD?
Inquiring minds want to know. Gold is certainly topical these days. A roaring bull market tends to have that effect. What does the Federal government plan on doing with its stash? Official U.S. reserves are by far the world’s largest. The combination of record prices and a massive 8,000-ton national nest egg inspire a number of questions, some of which I explore in a new article published in the November issue of The Atlantic magazine. Here’s the online version of Uncle Sam’s Mysterious Hoard.
THE NOBEL PRIZE IN ECONOMICS & A FED NOMINEE
It’s not often that an economist is nominated to the Fed, with Senate confirmation still up in the air, and the nominee becomes the co-recipient of the Nobel Prize for Economics. In fact, it’s never happened. It remains to be seen whether winning the Nobel helps or hurts in terms of joining the Fed. But there it is: MIT professor Peter Diamond is awaiting the Senate’s yea or nay. While he’s wondering if the government will be his next employer, he’s picked up what would appear to be a career-boosting prize. Diamond, along with Dale Mortensen (Northwestern University) and Christopher Pissarides (London School of Economics), yesterday were awarded the Nobel in economics for their research on the labor market.
Yesterday’s New York Times story about a huge Minneapolis Ponzi scheme involving currency trading provides some familiar lessons about investing and the finer points of protecting yourself against scams:
BOOK BITS FOR SATURDAY: 10.9.2010
● King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Review via Basil and Spice
“King of Capital” describes how Blackstone went from two guys and a secretary to being one of Wall Street’s most powerful institutions, far outgrowing its much older rival KKR; and how Steve Schwarzman, with a pay packet one year of $398 million and $684 million from the Blackstone IPO (which came later in 2007), came to epitomize the spectacular new financial fortunes amassed in the 2000s. Along the way, private equity firms tried — and largely succeeded — in improving their image from predatory “grave dancers” that “stripped” — sold off the assets — of companies they bought and “flipped” — quickly resold the companies, often to foreign companies that closed plants, laid off workers and beggared whole communities.
PRIVATE JOB CREATION INCHES HIGHER AS GOV’T LAYOFFS CONTINUE
Nonfarm payrolls dropped 95,000 last month and the unemployment rate was unchanged at 9.6%, the Labor Department reports. That’s bad. But it’s not as bad as it seems because the trouble was due primarily to the government, which laid off workers—159,000 fewer government jobs overall last month. So much for employment stimulus from big brother. But if we focus on private-sector jobs, the net change in September reveals a rise of 64,000. That’s good. It’s not great, and in the grand scheme of the business cycle it’s disappointing. But it could be worse. In fact, it might turn worse in the months ahead for all we know. But the trend in job growth for corporate America is still up at the moment.
READING ROUNDUP FOR FRIDAY: 10.8.2010
►Unemployment claims drop, while job openings rise
Christopher Rugaber/AP
Applications for unemployment benefits fell last week for the fourth time in five weeks, a sign that layoffs are declining.
The Labor Department said Thursday that initial claims for jobless aid dropped by 11,000 to a seasonally adjusted 445,000. It’s the lowest level since the week ending July 10 and down from 504,000 initial claims in mid-August — the high point for the year.
Economists were mildly encouraged by the drop. But they also pointed out that claims remain at an elevated level consistent with weak job growth. Employers aren’t hiring enough to bring down the 9.6 percent unemployment rate.
►China must fix the global currency crisis
George Soros/Financial Times
I share the growing concern about the misalignment of currencies. Brazil’s finance minister speaks of a latent currency war, and he is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash.
The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.