Divergence. That’s a good description for the major asset classes so far this year. The spread between the best performers and the laggards is relatively wide on a year-to-date basis through April 26, offering a mix of opportunity and risk. Par for the course, perhaps, but the divergence is quite striking nonetheless.
Book Bits | 4.27.13
● Austerity: The History of a Dangerous Idea
By Mark Blyth
Summary via publisher, Oxford University Press
Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts–austerity–to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer. That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn’t work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy.
Q1 GDP Rebounds, But Falls Short Of Forecasts
US economic growth rebounded in the first quarter after stalling in last year’s final three months, the Bureau of Economic Analysis reports in today’s initial GDP estimate. But while Q1’s 2.5% advance (real seasonally adjusted annual rate) is a substantial improvement over last year’s slim 0.4% rise in Q4, today’s number is still well below expectations. The leading headwind in Q1: another hefty drop in the federal government’s spending on defense. By contrast, consumer spending rose the most in two years in the first quarter, although that still wasn’t enough to boost growth to match expectations. The Capital Spectator’s average econometric nowcast, for instance, anticipated a 3.2% rise in today’s GDP release.
Personal Consumption Expenditures: March 2013 Preview
Personal consumption spending in March is projected to rise 0.2% vs. the previous month in Monday’s update, based on The Capital Spectator’s average econometric forecast. That compares with a 0.7% rise previously reported for February. A consensus forecast based on a survey of economists also projects a 0.2% gain for March.
Jobless Claims Fell Last Week, Close To A 5-Year Low
Today’s update on jobless claims should dampen worries a bit over the outlook for the economy. New filings for unemployment dropped a healthy 16,000 last week to a seasonally adjusted 339,000. Once again, claims are moving close to the post-recession low of 330,000 reached back in January—a five year low. One number doesn’t mean much, of course, but today’s report certainly boosts the case for thinking positively when it comes to the labor market. In particular, the data du jour implies that the weak payrolls report for March was a one-off event. We’ll need to see more supporting evidence to embrace that notion with any confidence, of course, but today’s release is a move in the right direction.
Is The Recent Fall In Inflation Expectations A Warning Sign?
Earlier this month I noted that the relationship between US equities and the Treasury market’s implied inflation forecast was looking a bit unusual–unusual by recent standards, that is. Nothing’s changed a few weeks down the line, other than the relationship is a bit more unusual. But keep a close eye on this dance between markets for an early warning sign of trouble. Considering the wobbly economic data of late, including yesterday’s weak report on March durable goods orders, the recent slide in the market’s outlook for inflation isn’t productive at this stage… if it rolls on.
Growing Pains For The Housing Market
The modest decline in existing home sales in March in Monday’s update from the National Association of Realtors (NAR) prompted some pundits to wonder if the housing rebound is topping out. Anything’s possible, but the reason why sales slipped in March suggests that the market’s suffering from growing pains rather than facing a cyclical turn for the worse.
Macro-Markets Risk Index | 4.23.2013
A markets-based profile of US economic conditions suggests that business cycle risk remains low. The Macro-Markets Risk Index (MMRI) closed yesterday (April 22) at 13.7%–well above the danger zone of 0% and within the 10%-to-15% range that’s prevailed so far in 2013. When MMRI falls under 0%, recession risk is elevated; readings above 0% equate with economic growth.
Research Review | 4.23.13 | Asset Allocation Strategy
Fooled by Data-Mining: The Real-Life Performance of Market Timing with Moving Averages
Valeriy Zakamulin (University of Agder) | April 2013
In this paper we advocate that the reported performance of the simple moving average market timing strategy proposed by M. Faber (“A Quantitative Approach to Tactical Asset Allocation” (2007) published in the Journal of Wealth Management) is contaminated by data-mining. In order to deal with the data-mining bias, we perform an out-of-sample simulation of the simple moving average timing model over the period 1930 to 2012. We then examine the real-life performance of the market timing strategy and assess the extent of the data-mining bias. Finally we revisit the myths about the superior performance of the market timing strategy and provide an unbiased estimate of its future performance.
Chicago Fed: “Slower Economic Activity In March”
US economic growth slowed last month, expanding at a rate that’s moderately below the historical trend, according to the March release of the Chicago Fed National Activity Index, a weighted average of 85 indicators. But the index’s three-month moving average (CFNAI-MA3) posted a somewhat brighter reading: -0.01 for last month. That’s in line with expectations and a signal that the economy is still expanding on par with its historical trend. Nonetheless, CFNAI-MA3 slipped a bit from the revised February reading of +0.12, a change that reflects evidence that the pace of US economic growth slowed last month.