● The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life
By Uri Gneezy and John List
Review via Publishers Weekly
Gneezy and List, economists at U.C. San Diego and the University of Chicago, respectively, specialize in ingenious “field experiments” that elucidate the workings of social psychology and decision making: from a ball-tossing game that exposes the social pressures that make women shy away from competition, to role-playing skits that tease out the subtleties of discrimination at car dealerships. There are some less-groundbreaking findings—men, it seems, give more money to door-to-door fundraisers if they are attractive females—but also many counterintuitive insights: it’s possible to boost sales of a wine by raising its price; increase charitable giving by letting prospects opt out of solicitations; and even raise profits by letting customers pay whatever they want for a product. Writing in the Freakonomics vein of breezy pop-econ (Steven Levitt provides the foreword), Gneezy and List assert that “self-interest lies at the root of human motivation,” but it’s a self-interest broadly conceived to include the “warm glow” of philanthropic sacrifice and readily influenced by the unobtrusive policy nudges they suggest.
Pick Your Risk Factors… Carefully
Meb Faber reminds us that a buy-and-hold strategy is the first cousin to market-cap weighting. In fact, if you wait long enough, the two become virtually identical sans intervention. The problem, of course, as Faber notes, is that buy-and-hold/cap-weighting increasingly favors overvalued assets and, by implication, underweights assets that are trading at relatively inexpensive valuations, which presumably are linked with superior expected returns. “That, to me, is the biggest failing of buy and hold,” he writes. “It ignores common sense.”
Default Lines
There’s still no political agreement to avert a Treasury default and so the possibility, however remote, is inching closer. What are the risks? Well, the floor is wide open for discussion–no one’s really sure where we’re headed because we’re in uncharted waters when it comes to Treasury defaults. Sort of. Donald Marron at the Tax Policy Center writes: “Actually, the United States Has Defaulted” by way of a brief, limited episode of default in 1979 on some T-bills. Meantime, what are your biggest concerns for the crisis du jour? Unsure? Not to worry as pundits have assembled an abundance of doomsday scenarios. Should you be worried? Yes. Why? Well, consider what our so-called leaders have produced so far–an unnecessary and entirely avoidable crisis that puts the US economy at risk. How much confidence should we have for expecting enlightened leadership to suddenly return in the days ahead? When you’re in the back seat of a car with a drunk driver who’s managed to avoid running off the road so far, it’s wise to reserve judgment on the outcome of the trip. As for pondering the worst-case scenarios, here’s my short list for thinking about the future if the unthinkable becomes reality:
Jobless Claims Surge On The Blowback From The Backlog
Talk about a reversal of fortunes! Last week’s filings for new jobless claims soared 66,000 to a seasonally adjusted 374,000, which is the highest weekly total since March, according to a division of the Labor Department that’s still publishing economic reports. A substantial slice of the increase is reportedly due to playing catch-up with the data in the wake of a computer glitch that affected updates in several states. According to Bloomberg, “The issues in California accounted for about half the jump in applications last week and the dismissal of non-federal employees after Congress failed to compromise on a budget accounted for about another 15,000, a Labor Department spokesman said as the data was released to the press.”
US Retail Sales: September 2013 Preview
Tomorrow’s retail sales report for September will be postponed due to the government shutdown. When (if?) this update is published, US retail sales are expected to rise 0.3%, according to The Capital Spectator’s average econometric forecast. Keep in mind that this forecast is impaired because it doesn’t reflect an update of the R-2 model (see definition below), which relies in part on the latest payrolls data to project retail sales. Unfortunately, the September employment report from the government is still a mystery due to the budget impasse in Congress. Using the available numbers, the Capital Spectator’s average forecast of a 0.3% rise for September retail sales represents a slight rise from the previously reported 0.2% gain in August. Meanwhile, the Capital Spectator’s average projection for September is above several consensus forecasts based on recent surveys of economists.
The Wide, Wide World Of Bond ETFs
Bonds are in the news these days, and not necessarily for bullish reasons. Between the threat of rising interest rates and the possibility of a Treasury default in the US, the notion of fixed-income as a safe haven is under pressure. But while it’s tempting to lump all bonds into one category, the reality (as usual in the capital markets) is far more nuanced. Indeed, if someone gives you their view on the “bond market,” your first question should be: Which one?
Janet Yellen… In Her Own Words
President Obama today is expected to nominate Janet Yellen, who’s currently vice chair of the Federal Reserve, to succeed Fed chairman Ben Bernanke, whose term ends in January. The confirmation hearings in the Senate may prove to be rocky, given her critics among the hawks. In some respects, she’s more dovish than Bernanke. But her nomination, overall, would be a relatively safe choice, particularly at this point, given the uncertainty looming over the economy thanks to the budget battles in Washington and the potential for a Treasury default later this month if Congress doesn’t raise the debt ceiling. It doesn’t hurt that she topped the list for accuracy among Fed forecasters, according to a recent study by The Wall Street Journal (“Federal Reserve ‘Doves’ Beat ‘Hawks’ in Economic Prognosticating”).
Macro-Markets Risk Index: 8.7% | 10.8.2013
What’s the economic fallout from the ongoing budget battle in Washington? It’s hard to say at this point, although there are signs that the macro trend is wilting, according to a markets-based profile of US economic conditions. The Macro-Markets Risk Index (MMRI) closed at 8.7% yesterday, October 7. Although that’s still at a level that suggests that business cycle risk remains low, the declining trend is worrisome in the current climate. At yesterday’s close, MMRI is near the lowest level of the year. If the impasse in Congress rolls on, which may deteriorate into a Treasury default as well, it’s likely that we’ll see MMRI slip further. 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.
Asset Allocation & Rebalancing Review | 7 Oct 2013
The federal government’s partial shutdown is no closer to resolution, but so far the markets are shrugging off Washington’s fiscal stalemate. It remains to be seen if the indifference will endure if the deadlock in Congress continues and the threat of a self-inflicted default draws closer. “On [October] 17th, we run out of our ability to borrow, and Congress is playing with fire,” says Treasury Secretary Jacob Lew. “If they don’t extend the debt limit, we have a very, very short window of time before those scenarios start to be played out.”
Book Bits | 10.05.13
● The Fall of the Euro: Reinventing the Eurozone and the Future of Global Investing
By Jens Nordvig
Summary via publisher, McGraw-Hill
The euro started out with great promise, but it has seen major problems in the last few years. What will happen if Germany decides to drop the euro? Greece? Italy? Spain? How will your investments be affected? The financial crisis of 2007-2008 may have had its epicenter in the United States, but it exposed fault lines inherent in the euro. Some have given way, resulting in crises in Greece, Spain, Ireland, Cyprus, and other European nations. But if action isn’t taken soon, the whole European financial system might give way to a crisis the likes of which the world has never seen. Jens Nordvig describes the potential outcome as “financial anarchy.” The Fall of the Euro is a detailed exploration of this precarious situation. As Nomura’s global head of currency strategy, Jens Nordvig is among the world’s top experts on the euro, and he provides the information, insight, and authoritative analysis you need to make the wisest investment decisions possible.
