Here’s the second installment to last week’s recap of The Capital Spectator’s short list of titles from 2013 that deserve another look. Each of the following reviews and summaries appeared earlier in the year on these pages. And now for an encore presentation….

● Balance: The Economics of Great Powers from Ancient Rome to Modern America
By Glenn Hubbard and Tim Kane
Review via Publishers Weekly
Political paralysis leading to fiscal collapse is the “existential threat” facing America, argues this stimulating, contentious economic history. Economists Hubbard (dean of Columbia University’s Graduate School of Business) and Kane (chief economist of the Hudson Institute), both one-time advisers to the 2012 Romney-Ryan campaign, conduct a loose, engaging tour through history, pinpointing the economic failings of states from ancient Rome (debased currency, expensive bread and circuses, totalitarian labor controls) and Ming China (squabbling between court mandarins and eunuchs that scotched trade initiatives) to contemporary Europe and the United States (unsustainable government entitlements and debt). They frame the perennial debate over national decline in novel economic terms, ranking countries by a metric of “economic power”—GDP times productivity times the square root of growth—that puts America still uneasily on top.

● Keeping Up with the Quants: Your Guide to Understanding and Using Analytics
By Thomas H. Davenport and Jinho Kim
Summary via publisher, Harvard Business Press
Welcome to the age of data. No matter your interests (sports, movies, politics), your industry (finance, marketing, technology, manufacturing), or the type of organization you work for (big company, nonprofit, small start-up)–your world is awash with data. As a successful manager today, you must be able to make sense of all this information. You need to be conversant with analytical terminology and methods and able to work with quantitative information. This book promises to become your “quantitative literacy” guide–helping you develop the analytical skills you need right now in order to summarize data, find the meaning in it, and extract its value. In “Keeping Up with the Quants,” authors, professors, and analytics experts Thomas Davenport and Jinho Kim offer practical tools to improve your understanding of data analytics and enhance your thinking and decision making.

● When the Money Runs Out: The End of Western Affluence
By Stephen D. King
Summary via publisher, Yale University Press
The Western world has experienced extraordinary economic progress throughout the last six decades, a prosperous period so extended that continuous economic growth has come to seem normal. But such an era of continuously rising living standards is a historical anomaly, economist Stephen D. King warns, and the current stagnation of Western economies threatens to reach crisis proportions in the not-so-distant future. Praised for the “dose of realism” he provided in his book Losing Control, King follows up in this volume with a plain-spoken assessment of where the West stands today. It’s not just the end of an age of affluence, he shows. We have made promises to ourselves that are achievable only through ongoing economic expansion. The future benefits we expect—pensions, healthcare, and social security, for example—may be larger than tomorrow’s resources.

● Exodus: How Migration is Changing Our World
By Paul Collier
Summary via publisher, Oxford University Press
In Exodus, Paul Collier, the world-renowned economist and bestselling author of The Bottom Billion, clearly and concisely lays out the effects of encouraging or restricting migration. Drawing on original research and case studies, he explores this volatile issue from three perspectives: that of the migrants themselves, that of the people they leave behind, and that of the host societies where they relocate. As Collier shows, emigrants from the poorest countries of the world tend to be the best educated and most ambitious. And while these people often benefit economically by leaving their home countries, they also drain these countries of the skills they so desperately need. In the absence of controls, emigration would accelerate: the poorest countries would face nothing less than a mass exodus. Ultimately the danger is that both host and countries of origin may lose their national identities — an outcome that would be disastrous, Collier argues, as national identity remains a powerful force for good. Migration must be restricted to ensure that it benefits both those countries left behind and those opening their doors.

● Fortune Tellers: The Story of America’s First Economic Forecasters
By Walter A. Friedman
Summary via publisher, Princeton University Press
The period leading up to the Great Depression witnessed the rise of the economic forecasters, pioneers who sought to use the tools of science to predict the future, with the aim of profiting from their forecasts. This book chronicles the lives and careers of the men who defined this first wave of economic fortune tellers, men such as Roger Babson, Irving Fisher, John Moody, C. J. Bullock, and Warren Persons. They competed to sell their distinctive methods of prediction to investors and businesses, and thrived in the boom years that followed World War I. Yet, almost to a man, they failed to predict the devastating crash of 1929.

Treasury 10-Year Yield Rises to 3% on Fed Policy, Recovery Signs
Bloomberg | Dec 27
“The pace of the U.S. economic recovery means there’s room for the 10-year yield to rise further, perhaps towards 3.25 percent in 2014,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “I don’t think it will go much higher from there. We expect the Fed to keep official interest rates low for another 18 to 24 months.”

US Treasury yields top 3% after Fed taper
Financial Times | Dec 27
But the recent rise in yields has come when economic data, particularly for housing, has been solid, seen as validating the decison of the Fed to taper QE.
“At this point it seems clear that the fear of higher interest rates hurting housing is overblown,” said Ajay Rajadhyaksha, co-head of FICC research at Barclays.
Also, in contrast with September, the bond market is not pricing in aggressive rate hikes. The December 2015 federal funds contract currently suggests the central bank’s overnight borrowing rate will be around 0.75 per cent at that date, well shy of its 1.50 per cent peak seen as recently in September when the market believed that a taper would be followed by a rapid pace of monetary policy being tightened.
“It’s difficult to make a case that 10-year yields will rise from here unless the market accelerates the tightening cycle,” said Mr Rajadhyaksha.

10-Year Treasury Yield Touches 3%
The Wall Street Journal | Dec 26
“The bond market will be fine if the rise in yields is orderly and slowly rising, with limited inflation,” said Kevin Giddis, head of fixed income at Raymond James in Memphis, Tenn. “The problems begin when you combine velocity and a spike in consumer prices.”

Treasury 10-Year Note Yields Reach Highest Level Since September
Bloomberg | Dec 26
“The economy is gaining strength; rates will go higher,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “We are in holiday mode right now, so markets are extremely thin.”

10-year Treasury hits key 3% level
USA Today | Dec 26
“If long-term interest rates rise too rapidly, we could see stronger headwinds develop in housing, autos and business spending, (which) could temper our optimistic economic outlook,” says Anderson. “Gradual rate increases that are matched by stronger sales, and improved investment opportunities are not as concerning as interest rates that are on the rise because the Fed is no longer a major buyer in the U.S. Treasury market.”

U.S. 10-year yield edges up near 3 pct on light trade
Reuters | Dec 26
If the 10-year Treasury yield, a benchmark for mortgage rates and investment returns, were to rise much above 3 percent, it might be a negative for stocks and other risky assets. A further rise in bond yields would push up long-term borrowing costs, taking steam out of the economic recovery — similar to what happened this past summer, analysts said.
“Other markets will take notice if we establish a foothold above 3 percent,” said Rob Zukowski, senior technical analyst at 4Cast Ltd in New York.

The US economic trend has remained relatively stable and positive in recent weeks, based on a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 13.7% on Thursday, Dec. 26, a level that suggests that business cycle risk remains low. The current 13.7% value is well above the lowest reading for the year to date—7.5% in mid-September—and well above the 0% danger zone. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.

MMRI represents a subset of the Economic Trend & Momentum indices, a pair benchmarks that track the economy’s broad trend for signs of major turning points in the business cycle via a diversified set of indicators. Analyzing the market-price components separately offers a real-time approximation of macro conditions, according to the “wisdom of the crowd.” By contrast, conventional economic reports are published with a time lag. MMRI is intended for use as a supplement for developing perspective on the current month’s economic profile until a complete data set is published.

MMRI measures the daily median change of four indicators based on the following calculations:

• US stocks (S&P 500), 250-trading day % change, plotted daily
• Credit spread (BofA ML US High Yield Master II Option-Adjusted Spread), inverted 250-trading day % change, plotted daily
• Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield), no transformation, plotted daily
• Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change, plotted daily

Here’s how MMRI compares on a daily basis since August 2007:

Here’s a closer review of how MMRI stacks up so far this year:

The encouraging economic numbers for the US in recent weeks have been marred by two sore spots: a sharp rise in new jobless claims and a worrisome deceleration in the growth rate for disposable personal income (DPI). But today’s release on new filings for unemployment benefits suggests that we have one less threat to worry about.

Jobless claims dropped by a hefty 42,000 last week to a seasonally adjusted 338,000. And not a moment too soon. Claims have surged recently, reaching the highest level since March for the week through December 14. But quite a lot of the increase was reduced in today’s report. As a result, claims have slipped to the lowest level since late-September. It’s still unclear if this leading indicator will resume the downward trajectory that was in force until a few months ago. But for today at least we have a new reason to think that the economy’s capacity for creating jobs at a modest pace is intact.

It’s especially reassuring to see the year-over-year trend in claims again reflect a decline after two straight weeks of increases. The change suggests that the jump in claims numbers of late have been tortured by short-term volatility of minimal relevance for reading the business cycle’s tea leaves.

But that leaves us to ponder the troubling weakness in the rate of growth for DPI. As I noted on Monday with regards to the November income report: “DPI’s annual change continues to slump, rising only 1.5% last month vs. a year ago. That’s a sharp deceleration from October’s 2.6% year-over-year rate. It’s also the second-slowest pace of growth this year.”

It’s unclear if this too is noise, or the start of something darker. Exhibit A for leaning toward the former assumption is the wide array of robust numbers across the macro spectrum. Indeed, the economic trend continues to reflect a low level of business cycle risk through November. The generally bubbly overview implies that DPI will again join the party. But that’s a purely speculative projection at this stage, and will remain so until we see more data on income, starting with the next update: the December report, scheduled for release on January 31.

‘Tis the season for predictions and all the usual caveats apply. But amid the din of forecasts as the year winds down is one outlook that’s worth a closer a look for what it says about the UK, the Eurozone, and the price tag for embracing a deeply flawed monetary policy inside a misguided currency union.

“The UK is forecast to be the second most successful of the Western economies after the US,” advises the Centre for Economics and Business Research (CEBR) in a new report published today. “Positive demographics with continuing immigration, rather less exposure to the problems of the Eurozone than other European economies combine with relatively low taxes by European standards to encourage faster growth than in most Western economies.” As it travels along the road to recovery, Britain will edge out France to become the fifth-largest economy on the planet in five years, pushing aside Germany to become Europe’s leading economy by 2030, CEBR projects. It seems that the sun is no longer setting on the British Empire in macro terms.

A lot can change between now and five years, to say nothing of what will unfold over the next three decades. But CEBR’s forecast certainly sounds plausible based on what we know about Britain’s economy this year. If you’ve been following the macro news for the UK, you know that it’s been posting encouraging numbers for months. There’s a fierce debate about why Britain’s economy is recovering. There’s also plenty of skepticism about whether the rebound is sustainable or even healthy—some analysts say that it’s overly reliant on a housing boom, for instance.

But there’s no denying that the UK’s generating numbers that stand in sharp relief with the Eurozone—particularly for the Eurozone ex-Germany. If you consider the upbeat economic numbers of late for the US and Japan, Europe’s troubles stand out even more. What explains the difference? Surely monetary policy is a big part of the answer, as Ambrose Evans-Pritchard of The Telegraph explains:

The crippled eurozone alone has chosen to stagger on defiantly without monetary crutches. The result has been a double-dip recession of nine quarters, the longest since the Second World War. The austerity regime has been self-defeating even on its own crude terms. Debt ratios have ratcheted up even faster.

It doesn’t help that the euro has been imposed in a region that falls short of Robert Mundell’s standards for defining an optimal currency area. But the euro isn’t going away, at least not for the immediate future. So, what could change? Perhaps the European Central Bank will embrace monetary stimulus in a more aggressive form in 2014, although it’s clear that policy choices to date have been far too modest to make a dent in the lingering troubles that continue to afflict France, Italy and Spain.

In absolute terms, Britain’s ascendancy of late can be attributed to internal economic momentum, supported by the simple fact that the UK still has its own currency and therefore has dodged the macro headwinds that weigh on countries tethered to the euro. In relative terms vis-à-vis the Eurozone, however, Britain’s strength speaks volumes about the self-inflicted problems on the Continent.

“The UK’s rebound is not because fiscal cuts have been milder than in Europe,” observes Evans-Pritchard. “The squeeze has been roughly comparable over the past three years. The difference is monetary policy. Kudos to the Bank of England, rising to a historic challenge once again.”

Running to the window, he opened it, and put out his head. No fog, no mist; clear, bright, jovial, stirring, cold; cold, piping for the blood to dance to; Golden sunlight; Heavenly sky; sweet fresh air; merry bells. Oh, glorious! Glorious!
‘What’s to-day?’ cried Scrooge, calling downward to a boy in Sunday clothes, who perhaps had loitered in to look about him.
‘Eh?’ returned the boy, with all his might of wonder.
‘What’s to-day, my fine fellow?’ said Scrooge.
‘To-day?’ replied the boy. ‘Why, Christmas Day.’
‘It’s Christmas Day!’ said Scrooge to himself. ‘I haven’t missed it. The Spirits have done it all in one night. They can do anything they like. Of course they can. Of course they can. Hallo, my fine fellow!’

        “A Christmas Carol”
        Charles Dickens

I heard the bells on Christmas Day
Their old, familiar carols play,
     And wild and sweet
     The words repeat
Of peace on earth, good-will to men!

                        “Christmas Bells”
                        Henry Wadsworth Longfellow

First, the good news. The big-picture trend for the US economy continues to look encouraging. The three-month average of the Chicago Fed National Activity Index rose to +0.25 in November—the highest since February 2012. As a result, US economic growth is running at its strongest pace in nearly two years.

Consumer spending was also bubbly in November. Personal consumption expenditures (PCE) increased 0.5% last month over October, the best monthly comparison since June and the seventh straight month of higher spending.

“Jobs are growing, confidence is growing, households and asset values are climbing,” notes Paul Edelstein, director of financial economics at IHS. “There appears to be some sort of gathering momentum in the economy.”

So it’s all peaches and cream? Not quite. There’s always something to worry about and the sluggish trend in income growth is at the top of the list these days. Disposable personal income (DPI) increased a light 0.1% in November, which falls short of making up the lost ground in October’s 0.2% decline.

Monthly data is noisy and so it’s best to focus on the year-over-year comparisons for a clearer look at the trend. Unfortunately, the numbers for income don’t look encouraging on this front either. DPI’s annual change continues to slump, rising only 1.5% last month vs. a year ago. That’s a sharp deceleration from October’s 2.6% year-over-year rate. It’s also the second-slowest pace of growth this year.

If income growth continues to slow (or perhaps turn negative in the near future?), that will be a dark sign for consumer spending. For the moment, the two indicators are moving in opposite directions, but the divergence will soon be corrected. The only question: will spending slow or income rise?

The outcome will be favorable if the labor market continues to post improving numbers, as it has in recent months. More jobs, after all, translate into more income. Recent updates have brought modestly better news. The three-month average gain for private payrolls, for instance, has been running at 190,000-plus through October and November. That’s higher than the sluggish 158,000-to-167,000-three-month range during the July-through-September period.

The question is whether this lagging data will soon give way to the darker clouds implied by this month’s worrisome trend in initial jobless claims? New filings for unemployment benefits have surged recently: reaching the highest level since March for the week through December 14. Is this leading indicator dropping bearish clues for 2014? It’s too soon to say. Indeed, claims data is notoriously volatile in the short term. But in the wake of today’s deceleration in personal income, we can’t dismiss the potential, however remote at this stage, that the labor market may hit a new round of turbulence in the months to come. We’ll know morevafter Thursday’s update on jobless claims. The crowd’s expecting some good news: the consensus forecast sees claims dropping by more than a trivial degree, according to Briefing.com.

Meantime, consumers are spending more and economic growth has strengthened. The slowdown in income, however, looks like a speed bump. Perhaps Thursday’s jobless claims data will tell us if we should (or shouldn’t) worry.

Let’s begin by recognizing the US dollar has strengthened over the last two years. The idea that the currency was headed for the ash heap of forex history looks foolish at the moment. The trade-weighted measure of the greenback against the major currencies has been trending higher since 2011 and is roughly unchanged from the months preceding the start of the Great Recession. So much for debasement.

Meanwhile, inflation risk continues to look unusually low. The Fed’s preferred measure—personal consumption expenditures less food and energy, aka core PCE—is rising at just over 1% a year lately, or well below the central bank’s 2% target.

So what might alter inflation’s trend and move us closer to the dark fears of the hard money crowd? The sky’s the limit when it comes to possibilities. If you’re looking for colorful narratives on how inflation will threaten these United States, the world is awash in hazardous potential. Reasonable narratives, on the other hand, are another matter. In any case, the future’s still uncertain but one of the more intriguing outlines of what may happen is bound up with how the Fed will reduce its balance sheet in the months and years ahead. It remains to be seen if the reversal of monetary stimulus will be handled smoothly, in which case inflation’s inevitable rise will be a relatively low-risk affair. But there’s no guarantee. So what should we expect for inflation? On that question, one dismal scientist outlined a framework that’s worthy of attention.

David Beckworth observes that the annual rate of change in the Fed’s holdings of Treasuries lately has a tendency to lead the core inflation by roughly six to nine months, as the chart below shows. Note that the year-over-year rate in Treasury holdings (red line) has been trending higher since late-2012, rising more than 30% recently vs. the same period a year ago. Year-over-year core PCE inflation, however, has yet to react (blue line). But with recent economic data looking relatively upbeat—including last week’s upward revision in third-quarter GDP–one can only wonder if inflation is poised to trend higher.

It’s getting easier to imagine a world with firmer pricing pressures. But first let’s see what happens with this week’s jobless claims update on Thursday. New filings for unemployment benefits have jumped sharply lately. For now, this warning is the outlier relative to most macro data. But if the dark trend in new claims rolls on, the case for assuming that inflation will perk up will look unconvincing, in part because we should expect the Fed to rethink its tapering program that started last week. One the other hand, if this Thursday’s claims report looks encouraging, maybe inflation is headed higher in 2014 after all.

● Successful Investing Is a Process: Structuring Efficient Portfolios for Outperformance
By Jacques Lussier
Summary via publisher, Bloomberg/Wiley
What do you pay for when you hire a portfolio manager? Is it his or her unique experience and expertise, a set of specialized analytical skills possessed by only a few? The truth, according to industry insider Jacques Lussier, is that, despite their often grandiose claims, most successful investment managers, themselves, can’t properly explain their successes. In this book Lussier argues convincingly that most of the gains achieved by professional portfolio managers can be accounted for not by special knowledge or arcane analytical methodologies, but proper portfolio management processes whether they are aware of this or not. More importantly, Lussier lays out a formal process-oriented approach proven to consistently garner most of the excess gains generated by traditional analysis-intensive approaches, but at a fraction of the cost since it could be fully implemented internally.

● After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
By Alan Blinder
Interview with author via The New York Times
Q: You write, “Our best hope is to minimize the consequences when bubbles go splat — and they inevitably will.” How much confidence do you have that when the next bubble goes splat, we will be ready, willing and able to contain the damage?
A: Less than I wish I had. But I’m at least hopeful that some of the lessons we’ve learned, and some of the actions we’ve taken, will make the next bubble less damaging than the last ones. For example, we now understand better the dangers that lurk in high leverage, overly complex financial instruments, and lax (or nonexistent) regulation.

● Skating Where the Puck Was: The Correlation Game in a Flat World
By William Bernstein
Review via The Chicago Tribune
This time of year, many investors begin to reflect on the past 12 months in the market. Did stocks sail higher than bonds? Was it better to own Apple or Google? Did some mutual funds outperform others?
It’s certainly OK to do this type of review, but if it tempts you to make drastic changes in your portfolio, experts say to watch out. You may be doing more harm than good.
That was one of the conclusions that William Bernstein, a financial adviser and author, made in his new e-book, “Skating Where the Puck Was: The Correlation Game in a Flat World.”Bernstein found that even among institutional investors — the pros who manage university endowments and public pension funds — there is a tendency to chase after the next “big idea.”

● Naked Statistics: Stripping the Dread from the Data
By Charles Wheelan
Review via The Economist
Data are everywhere these days; the problem is making sense of them. That is the role of statistics, the university course that so many people dodge or forget. Charles Wheelan, a professor at Dartmouth College (and a former Chicago correspondent for The Economist), does something unique here: he makes statistics interesting and fun. His book strips the subject of its complexity to expose the sexy stuff underneath.

● Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics
By Mark Buchanan
Column by author via Bloomberg
In the not-too-distant future, it’s easy to imagine a U.S. or European Center for Financial Forecasting. Thousands of researchers would oversee massive simulations probing the developing network of interactions among the world’s largest financial players, following the vast web of loans, ownership stakes and other legal claims that link banks, governments, hedge funds, insurance companies and ratings companies.
The computers would test scenarios and calculate hundreds of indicators of systemic leverage, the density of interconnections, or the concentration of risk at single institutions. Experts would probe models of the financial system, looking for weak points and testing resilience, much as engineers now do with models of the electrical grid or other complex systems.