Japan’s stock market is on a roll, largely because expectations have dramatically changed this year about the underlying state of macro for the planet’s third-largest economy. The iShares MSCI Japan Index ETF (EWJ) is up a potent 24% year-to-date. That’s a substantial premium over the 18% gain for US stocks (SPDR S&P 500 (SPY)), for instance. An aggressive new round of monetary and fiscal stimulus that’s weakened the yen and revived animal spirits explains most of the rally. So-called Abenomics seems to be working. Is Japan’s two-decade stretch of disappointing economic performance finally at an end? Possibly, although a few months of improvement vs. 20 years of stagnation is hardly definitive proof. But let’s leave all that aside and consider the larger point of relevance for investing, namely: the surprise factor.
The Standard Advice (That’s Often Ignored)
Greg Mankiw has a talent for cutting to the chase when it comes to observations of macro and finance and he doesn’t disappoint in his latest NY Times column, which summarizes his view on how to answer the question: What stocks should I buy? The Harvard professor explains that the best response is not to answer at all, at least not directly. An “evasive” explanation, however, is worth a lot in this case. He advises that “the market processes information quickly”, “price moves are often inexplicable”, and “diversification is essential”. Agreed. Mankiw’s writing about stocks, but his succinct guidelines on equities apply to asset allocation too. For all the reasons that holding a low-cost basket of stocks (i.e., an index fund) is appealing from empirical and theoretical perspectives, the same is true for a multi-asset class portfolio. This is old news, of course, but Mankiw’s column reminds that it’s also forever new in the otherwise hazardous business of dispensing investment advice.
Book Bits | 5.18.13
● From a Market Economy to a Finance Economy: The Most Dangerous American Journey
By A. Coskun Samli
Summary via publisher, Palgrave Macmillan
Dwindling innovation and deteriorating economic conditions are caused by a major force, a systemic shift in the American economy. In this gripping book, Dr. Samli makes the case that the US economy is shifting for the worse, tilting towards a finance-driven economy, and argues that investing in innovation will bring us out of the recession and back to a successful, market-driven economy.
Chicago Fed Nat’l Activity Index: Apr 2013 Preview
The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rebound moderately to +0.20 in the April report, according to The Capital Spectator’s average econometric forecast. That compares with CFNAI’s -0.01 three-month average for March. A value below -0.70 indicates an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimates, CFNAI’s three-month average is projected to remain at levels that historically are associated with growth in the update for April, which is scheduled for release on Monday, May 20.
US Economic Profile | 5.17.13
Economic updates in recent weeks suggest that the economy is facing new headwinds. Notably, Industrial production and housing starts slumped in April. The latest data points may imply trouble down the road, but the case is still weak for arguing that the economy’s suffering in the here and now. Indeed, a big picture review of the business cycle betrays few signs of stress, based on today’s update of The Capital Spectator’s Economic Trend Index (ETI) and Economic Momentum Index (EMI). In other words, the odds are low that the NBER will eventually declare April as the start of a new recession, based on the current data sets available.
April’s Pinch Gets A Bit Tighter
It’s a rough morning for US economic news. Initial jobless claims jumped sharply last week and housing starts in April suffered the biggest monthly decline in six years. Overall, it’s pretty ugly, but it’s not yet fatal for the business cycle, or so a broad review of indicators still suggests. We could be slipping over the edge, but we could just as easily be stuck in another one of the temporary slow patches that’s plagued the recovery from time to time since the Great Recession ended. Clarity is coming, even if it’s tempting to assume the worst in the wake of today’s updates. But before we do anything, let’s take a closer look at the data.
Now It’s Really Time For A Flat Tax
If the scandal over monitoring political groups that forced the acting commissioner of the IRS to resign this week doesn’t inspire dismantling the tax-collecting agency and introducing a flat tax, nothing will. It won’t happen, of course. But it should. There are easier, more efficient ways to collect taxes than allowing bloated bureaucracies to act with near impunity as a quasi-government within a government. If that’s not painfully clear at this stage, if it’s not obvious that the IRS is too big, too powerful, and oversees an impossibly convoluted set of tax laws, it’s hard to imagine that we’ll ever engage in meaningful reform of the US tax system, which is in dire need of reforming.
Industrial Output In April Slumps The Most In Eight Months
Industrial production fell more than expected last month, sliding 0.5% in April. That’s a bit deeper than economists projected, and it’s an even bigger drop relative to the modest gain that my econometric modeling suggested. But based on today’s release, it’s obvious that April was a rough month for the industrial sector. The worst, in fact, since last August. The manufacturing component of industrial activity didn’t fare much better, slipping 0.4% last month. That’s the second consecutive monthly retreat for manufacturing, according to this series. It’s also the first time that manufacturing in this data set slumped for two months running since 2009.
US Housing Starts: April 2013 Preview
Housing starts are expected to total 1.013 million in April in tomorrow’s update, based on The Capital Spectator’s average econometric forecast (seasonally adjusted annual rate). That’s a modest decline vs. the previously reported total of 1.036 million for March. Meanwhile, The Capital Spectator’s projected gain for April is well above the numbers in several consensus forecasts drawn from surveys of economists.
Surprising Asset Allocation Results That Really Aren’t Surprising
Monday’s article on the average to above-average results that usually describe a passive allocation to all the major asset classes brought charges of foul play from some quarters. A few critics said I was cherry picking the data; one claimed that I was intentionally manipulating the numbers so as to engineer a favorable result for a benchmark of broad asset allocation vs. the universe of its actively managed equivalent. How, they wondered, could a passive strategy that holds everything compare so favorably on a regular basis? In fact, it would be surprising—impossible, in fact—if the results were otherwise.