● The Man Who Knew: The Life and Times of Alan Greenspan
By Sebastian Mallaby
Review via The Economist
The former chairman of the Federal Reserve was once a hero. Now he is being called a villain. Yet it is too soon to be sure what history will say about him. In a superb new book, the product of more than five years’ research, Sebastian Mallaby helps history make up its mind about Alan Greenspan, the man hailed in 2000 by Phil Gramm, a former senator, as “the best central banker we have ever had”, but now blamed for the financial crisis of 2007-08. Even today, Mr Greenspan, who famously once told Congress that “If I seem unduly clear to you, you must have misunderstood what I said”, remains a paradoxical figure.
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US spending in retail establishments rebounded in September, rising 0.6% vs. the previous month—the strongest monthly gain since June, according to this morning’s release from the Census Bureau. The rise more than reverses the 0.2% decline in August. Meanwhile, the upbeat data lifted the year-over-year gain to 2.7%, a three-month high. In short, the worrisome profile of the retail sector in August pulled back from the brink.
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The third installment of analyzing equal weighting for asset allocation reviews the results for maintaining identical weights for funds and asset classes. In the previous posts in this series (here and here), the equal weighting was applied to the funds but not the asset classes. As we’ll see, imposing a higher level of equality isn’t encouraging for an equal-weighted asset allocation.
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The prospect for a rate hike is resonating in the Treasury market. Is this another head fake? Or is the Federal Reserve truly ready to embrace another round of policy tightening? No one knows for sure at this point, including the Fed’s voting members. Much depends on how the economic reports fare between now and the December 13-14 FOMC meeting, when the central bank is expected to raise rates, based on Fed funds futures. No change is expected at the Nov. 1-2 meeting, however.
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Yesterday’s post on equal weighting for asset allocation motivated a reader to point out that equal weighting’s tendency to outperform in equity portfolios is due to frequent rebalancing events. A passively managed market-cap-weighted portfolio, by contrast, is allowed to drift, with weights evolving based on Mr. Market’s whims. But unrebalanced benchmarks were missing. Let’s correct that oversight and rerun the numbers.
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Equal weighting has an encouraging record as a design choice for earning a moderately higher premium in the stock market compared with the conventional weighting system of holding shares in proportion to their market-capitalization weight. A leading real-world example: the Guggenheim S&P 500 Equal Weight ETF (RSP) has earned a 7.9% annualized total return for the past 10 years through Oct. 10. That’s a handsome edge over a standard market-cap-weighted S&P fund: the SPDR S&P 500 (SPY) earned a moderately lower 7.0% over the same period, according to Morningstar.com. Does equal weighting also lift asset allocation results over a conventional portfolio design?
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The major asset classes dispensed a wide range of performances last week, based on a set of proxy ETFs. Although losses dominated the five trading days through Oct. 7, a handful of markets bucked the trend, led by equities in emerging markets. But the week was overshadowed by the red ink brigade, with US real estate investment trusts (REITs) suffering the biggest setback.
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● Messy: The Power of Disorder to Transform Our Lives
By Tim Harford
Review via Publishers Weekly
Journalist Harford (The Undercover Economist) explores the counterintuitive theory that disorder is at the heart of innovation. His evidence includes the creative genius inspired by the randomness of record producer Brian Eno’s Oblique Strategies and the rich history of MIT’s hastily assembled Building 20. In the business world, Amazon’s Jeff Bezos is extolled for the risk taking that carried the company through the dot-com bust. The book also examines what goes wrong in a system that is too organized.
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US companies added new jobs at a slightly lower rate than expected in September, according to this morning’s update form the Labor Department. Private payrolls increased by 167,000 last month, a touch below the consensus forecast. The moderate increase is below the 192,000 average gain for the past year, which suggests that today’s release will leave the crowd guessing about the timing of the next interest rate hike by the Federal Reserve. But while the latest report reflects a moderate increase at best, the year-over-year gain for private payrolls held steady at a healthy 1.9% rate for the fifth month in a row.
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The formerly high-flying utility sector has stumbled in recent weeks, shifting the leadership baton to the technology sector, based on a set of proxy ETFs. Expectations that the Federal Reserve could raise interest rates before the year is out is weighing on yield-sensitive utility stocks. Meantime, the tech sector continues to trade near record highs.
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