The tumble in stock prices lately has been accompanied by a so-far mild retreat in inflation expectations (the spread on the nominal 10-year Treasury yield less its inflation-indexed counterpart). This relationship deserves close attention… again. A weak stock market is one thing. But if the market’s outlook for inflation slides further, that’s another matter entirely and one that comes with bearish implications for the economy if it unfolds with dramatically lower stock prices.
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Private nonfarm payrolls in the US are projected to increase by 234,000 (seasonally adjusted) in tomorrow’s January release of the ADP Employment Report, based on the The Capital Spectator’s median econometric point forecast. The projected gain is slightly below the previously reported increase of 238,000 for December. Meanwhile, The Capital Spectator’s median projection for January is substantially above a pair of consensus forecasts based on surveys of economists.
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January was a rough month for many asset classes, stocks in particular. The weakest link: emerging markets, with equities in these countries retreating more than 6% last month, based on the MSCI Emerging Markets Index. The bias toward red ink weighed on the Global Market Index (GMI), which dropped 1.9%–the first monthly loss since last August. Despite the correction, GMI’s still comfortably in the black for the trailing one-year period, posting a 9.1% total return through last month, or moderately higher than the projected long-term performance for this passive benchmark of the major asset classes.
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● Unbalanced: The Codependency of America and China
By Stephen Roach
Q&A with author via Yale University Press
Q: How has the U.S. and China’s unbalanced relationship created a false sense of prosperity?
A: Beginning in the late 1990s, the income-strained U.S. economy drew increasing support from the so-called wealth effects of surging asset markets – first from equities, then from residential property and finally from cheap credit. The problem was that each of these asset-dependent underpinnings ended in bubbles – bubbles that ultimately drew support from Chinese purchases of dollar-denominated assets. Washington, Wall Street, and Main Street collectively deluded themselves into thinking this asset-dependent growth was a new recipe for economic prosperity. When the bubbles popped, however, it quickly became apparent that this was a dangerous false prosperity. To the extent that export-led growth in China was dependent on America’s asset and credit bubbles, it, too, went down a path of false prosperity. When the export underpinnings of China’s external demand collapsed in late 2008 in the depths of the Great Crisis, this, in fact, became painfully evident.
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Personal spending looks strong, but the personal income side of the ledger still looks troubling, according to today’s December report from the US Bureau of Economic Analysis. Indeed, the year-over-year growth rate for disposable personal income (DPI) turned negative last month for the first time in four years. Personal consumption expenditures, by contrast, rose 3.6% for the year through December—the best annual jump in a year. The optimistic spin on the weak income data is that it’s suffering from a temporary bout of various seasonal distortions and/or the end of jobless benefits for 1-million-plus jobless workers last month. Only time will tell if the sharp decline in income’s trend is noise or something darker. Clarity’s going to take a couple of months at the earliest. Meantime, let’s review the numbers in search of some perspective on how the data stacks up at the moment.
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The US economic trend has decelerated in late-January, based on a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 8.8% on Thursday, January 30. That’s still at a level that suggests that business cycle risk remains low, but the recent decline in MMRI leaves the index near its lowest level in four months. For the moment, however, it doesn’t appear that the latest decrease in MMRI is a sign of trouble for the economy. MMRI appears to be stabilizing around the 8% mark, which is still well above the 0% danger zone. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By contrast, readings above 0% imply that the markets are anticipating/forecasting economic growth.
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Tomorrow’s report on personal consumption spending for December is projected to show a gain of 0.3% vs. the previous month, based on The Capital Spectator’s median econometric forecast. That’s below the previously released 0.5% increase for November. Meanwhile, the Capital Spectator’s median forecast for December is slightly above three consensus predictions based on surveys of economists.
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Carl Richards takes a poke at tactical asset allocation (TAA) in a recent column in The New York Times. The financial planner reprises a familiar criticism of TAA, advising investors to “forget market timing, and stick to a balanced fund.” TAA, he asserts, is just market timing with a fresh coat of marketing paint. The reasoning behind his critique: it’s hard to beat the market (or a passive asset allocation mix) over time. Agreed. We should be wary of hubris when it comes to expectations of what we can achieve by outsmarting everyone else. But what Richards doesn’t discuss is the all-important gray area between the extremes of aggressive market timing and a quasi buy-and-hold strategy that purports to relieve you of the task of rebalancing, which some may call market timing.
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Fed taper will remain slow and steady: CNBC survey
CNBC | Jan 28
The Federal Reserve will continue to taper its stimulus of the U.S. economy by announcing a $10 billion reduction in its monthly asset purchases at each of its policymaking meetings scheduled this year, including the two-day session that starts Tuesday. That’s the consensus forecast from 45 of the nation’s top money managers, investment strategists and professional economists who responded to this month’s CNBC Fed Survey. An overwhelming 87 percent expect the Fed to taper by an average of $9.87 billion at this month’s meeting, roughly matching the $10 billion reduction, from $85 billion to $75 billion a month, announced after the the central bank’s December meeting.
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The recent news that Pimco’s Mohamed El-Erian is leaving the firm is yet another reminder that active money management comes with its own set of particular risks—risks that are easily dispatched with index funds. As The Telegraph observed earlier this month: “While the jury is out on what prompted Mr El-Erian’s sudden exit, one thing is certain: the world’s largest bond fund has just lost one of its most influential and formidable investors.”
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