Book Bits |12 November 2016

● An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
By Marc Levinson
Summary via publisher (Basic Books)
An acclaimed economic historian describes how the postwar boom abruptly ended in the early 1970s, launching an era of political and financial turmoil that we’re still living in today. The decades after World War II were a golden age across much of the world. It was a time of economic miracles, an era when steady jobs were easy to find and families could see their living standards improving year after year. And then, around 1973, the good times vanished. The world economy slumped badly, then settled into the slow, erratic growth that had been the norm before the war. The result was an era of anxiety, uncertainty, and political extremism that we are still grappling with today.
Continue reading →

10-Year Treasury Yield Leaps To 10-Month High

There’s a lot of uncertainty about what a Trump presidency means for the US economy over the medium- and long-term horizons, but for the moment there’s nothing fuzzy about sentiment in the Treasury market. The benchmark 10-year yield jumped to its highest level since January in the two trading days since a billionaire reality TV star won the keys to the White House.
Continue reading →

Model Failure: Election Forecasting vs. Recession Nowcasting

Donald Trump’s election as President of the United States on Tuesday coincides with a colossal failure of the data models that predicted the opposite. Some commentators have been quick to see parallels between the crash of quantitative political forecasting and efforts to estimate recession risk in real time. But the two efforts are very different animals, or at least they can be, depending on the model design. The devil’s always in the details, of course, although a well-designed macro model that focuses on estimating the probability of economic contraction can avoid many of the pitfalls that bedevil election forecasting.
Continue reading →

Trump Wins. Now What?

In a shocking upset that few political pundits expected, Donald J. Trump was elected as the 45th President of the United States. His populist victory negated forecasts from countless “experts”, polls, and political models that projected a loss for the real estate developer and reality TV celebrity.
Continue reading →

Is The Reflation Trade Reviving?

As the US prepares to elect a new President today, inflation chatter is bubbling anew. Although pricing pressure remains low, there are hints that the next occupant of the White House may oversee an economy that’s running a bit hotter in terms of the inflation trend. We’ve heard this forecast before, only to learn that the reflation trade crashed and burned. Is time different? Maybe, although it’s too soon to say for sure. Meantime, let’s look at some numbers for considering what the future may bring.
Continue reading →

Book Bits |5 November 2016

● The Econocracy: The Perils of Leaving Economics to the Experts
By Joe Earle, et al.
Summary via publisher (Manchester University Press)
One hundred years ago the idea of ‘the economy’ didn’t exist. Now, improving the economy has come to be seen as perhaps the most important task facing modern societies. Politics and policymaking are conducted in the language of economics and economic logic shapes how political issues are thought about and addressed. The result is that the majority of citizens, who cannot speak this language, are locked out of politics while political decisions are increasingly devolved to experts. The econocracy explains how economics came to be seen this way – and the damaging consequences. It opens up the discipline and demonstrates its inner workings to the wider public so that the task of reclaiming democracy can begin.
Continue reading →

US Private Job-Growth Trend Slips To 5-Year Low

Today’s report on US employment reaffirms that slow and slower growth has taken root in the labor market. Companies added a modest 142,000 workers in October, down from an upwardly revised increase of 188,000 in September, according to this morning’s update from the Bureau of Labor Statistics. But the main event in today’s release is the year-over-year advance, which slipped to the softest pace since 2011.
Continue reading →

Research Review | 4 Nov 2016 | Risk Factors & Return Premia

Measuring Factor Exposures: Uses and Abuses
Ronen Israel and Adrienne Ross (AQR Capital Management)
September 19, 2016
A growing number of investors have come to view their portfolios (especially equity portfolios) as a collection of exposures to risk factors. The most prevalent and widely harvested of these risk factors is the market (equity risk premium); but there are also others, such as value and momentum (style premia).
Measuring exposures to these factors can be a challenge. Investors need to understand how factors are constructed and implemented in their portfolios. They also need to know how statistical analysis may be best applied. Without the proper model, rewards for factor exposures may be misconstrued as alpha, and investors may be misinformed about the risks their portfolios truly face.
This paper should serve as a practical guide for investors looking to measure portfolio factor exposures. We discuss some of the pitfalls associated with regression analysis, and how factor design can matter a lot more than expected. Ultimately, investors with a clear understanding of the risk sources in an existing portfolio, as well as the risk exposures of other portfolios under consideration, may have an edge in building better diversified portfolios.
Continue reading →