“The biggest pitfall [for all investors who decide on an asset mix and invest accordingly] is behavioral, when people don’t want to rebalance,” Brad McMillan, chief investment officer at Commonwealth Financial Network, tells The Wall Street Journal. What’s the solution? The Journal article makes a case for simplicity in asset allocation, perhaps as few as three funds targeting US stocks, foreign stocks, and US bonds.
Book Bits | 7.6.13
● The Great Degeneration: How Institutions Decay and Economies Die
By Niall Ferguson
Excerpt via MSNBC
The voguish explanation for the Western slowdown is ‘deleveraging’: the painful process of debt reduction (or balance sheet repair). Certainly, there are few precedents for the scale of debt in the West today. This is only the second time in American history that combined public and private debt has exceeded 250 per cent of GDP. In a survey of fifty countries, the McKinsey Global Institute identifies forty-five episodes of deleveraging since 1930. In only eight was the initial debt/GDP ratio above 250 per cent, as it is today not only in the US but also in all the major English-speaking countries (including Australia and Canada), all the major continental European countries (including Germany), plus Japan and South Korea. The deleveraging argument is that households and banks are struggling to reduce their debts, having gambled foolishly on ever rising property prices. But as they have sought to spend less and save more, aggregate demand has slumped. To prevent this process from generating a lethal debt deflation, governments and central banks have stepped in with fiscal and monetary stimulus unparalleled in time of peace. Public sector deficits have helped to mitigate the contraction, but they risk transforming a crisis of excess private debt into a crisis of excess public debt. In the same way, the expansion of central bank balance sheets (the monetary base) prevented a cascade of bank failures, but now appears to have diminishing returns in terms of reflation and growth.
June Private Payrolls: +202k
Today’s payrolls report for June looks quite good—for several reasons. First, the private sector created a net 202,000 jobs last month, well above expectations. Second, payrolls increased by quite a bit more in April and May than initially estimated, the Labor Department reports today. May’s initially reported private-sector advance of 178,000 jobs, for instance, is now estimated as an increase of 207,000. Thirdly, the year-over-year pace of private payrolls growth is rising, which suggests that the positive momentum in the labor market is strengthening and will roll on for the near term.
Research Review | 7.5.13 | Portfolio Management
End the Charade: Replacing the Efficient Frontier with the Efficient Range
Meir Statman (Santa Clara University) and Joni Clark | July 2013
● Imprecise estimates are one source of gaps between optimized mean-variance portfolios and portfolios that investors prefer. Investor preferences beyond high mean and low variance is the other source. Both sources of gaps call for investor judgment.
● Harry Markowitz, who introduced mean-variance portfolio theory and its optimizer, noted that judgment plays an essential role in the proper application of mean-variance analysis.
● The charade of the efficient frontier involves “massaging” the estimates of the mean-variance parameters until they yield the efficient frontier and portfolios we prefer.
● This paper offers the “efficient range,” the location of portfolios that acknowledge imprecise estimates of mean-variance parameters and accommodate investor preferences beyond high mean and low variance, as a replacement for the “efficient frontier.”
US Nonfarm Private Payrolls: June 2013 Preview
Private nonfarm payrolls are expected to increase by 162,000 in tomorrow’s June update from the Labor Department, according to The Capital Spectator’s average econometric point forecast. The projected gain is moderately lower than the reported increase for May. The June projection is also slightly below a pair of consensus forecasts, based on two surveys of economists.
ADP Says US Private Payrolls Up 188k In June
Private-sector payrolls increased by a net 188,000 last month, according to the June update of the ADP Employment Report. That’s a decent improvement over May’s tepid 134,000 advance. Today’s release implies that Friday’s official estimate on the state of the June labor market from the government will turn in a respectable gain.
Macro-Markets Risk Index | 7.3.2013
US economic conditions have stabilized in recent days, according to a markets-based profile of the macro trend. The deterioration that persisted through most of June has, for the moment, subsided. Even after the sharp decline in the Macro-Markets Risk Index (MMRI) in recent weeks, this benchmark closed yesterday (July 2) at 7.0%–a level that suggests that business cycle risk remains low. Although MMRI is now at its lowest value since last August, it’s still well above the danger zone of 0%. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply economic growth.
The Rise Of Real Yields
It was obvious as far back as this past April that the positive connection between stocks and the Treasury market’s inflation forecast in recent years was coming apart. As the weeks rolled on and the divergence persisted, it was also clear that the break signaled a substantial change in the macro-market outlook. Exactly what was changing wasn’t conspicous early on, but it now appears that we’re finally at the point of transitioning to something approximating normality. It’s been a long time coming. It looks like the end of the world to some, but the apocalyptic narrative in this case is one more overbaked view of the future until the numbers tell us differently.
Major Asset Classes | June 2013 | Performance Review
The correction rolled on in June for the major asset classes, echoing May’s widespread retreat. Everything suffered a loss last month, with a steep 6.4% decline for emerging market equities leading the way down. With no place to hide among risky assets, the Global Market Index took another hit in June and tumbled 2.0%–its first run of back-to-back monthly losses in a bit more than a year.
The Capital Spectator: On Holiday
It’s the first day of summer and your editor is slipping out the back door for a week-long vacation. France, to be precise, starting with a few days in Paris and then down to Montpellier, on the coast near Spain. Given the scenic and gastronomic distractions (not to mention the wine), it’s best to assume that blogging will be light to non-existent (with an emphasis on the latter) for the week ahead. I’ll be back with the usual fare, starting Monday, July 1, kicking off my (hopefully) triumphant return with an update to the monthly profile of the major asset classes. Meanwhile, until further notice, it’s summertime and the livin’ is easy…