If you’re not impressed by the ongoing strength in retail sales, you should be. Or maybe you’re just perplexed. In any case, consumption rose a strong 0.8% in March on a seasonally adjusted basis, the Census Bureau reports. Although that’s down a bit from February’s 1.0% jump, there’s nary a sign in the latest numbers that the consumer is stressed or poised to give up shopping any time soon.
The High Cost Of Searching For Investing Talent
The evidence in favor of indexing is convincing, perhaps overwhelming. But finance is conspicuously light on definitive laws and so it’s not surprising that research on active management continues to offer encouragement for those who think they can beat the odds and generate alpha through time. But there are two ways to read these pro-active management studies. One interpretation (probably the more popular view) is using these papers to rationalize alpha’s charms as widely available for those who are committed to working harder. The alternative view, which animates my thinking, is to see these studies as evidence that chasing alpha demands a lot of extra time and effort for an uncertain payoff that’s probably out of reach for most of us in the long run.
Book Bits | 4.14.2012
● Breakout Nations: In Pursuit of the Next Economic Miracles
By Ruchir Sharma
Review via Kirkus Reviews
The head of Morgan Stanley’s emerging markets division conducts a brisk worldwide tour in search of new markets ready for takeoff. No first-book jitters for Sharma, longtime columnist for the likes of Newsweek and the Wall Street Journal. His smooth, almost chummy style suits him ideally for guiding civilians through the sometimes-arcane thicket of the dismal science, looking for those emerging markets likely to disappoint or exceed expectations in the coming years. Sharma insists on the importance of on-the-ground observations, and he’s recently visited all the countries discussed here. While recognizing that factors explaining growth change continually, he divulges some helpful, broad rules of the road. We learn, for example, why a particular nation’s form of government counts less than the economic understanding and vision of its leaders, why the size and growth of a nation’s second city is important and why the list of top-ten billionaires matters.
Financial Advice Can Be Dangerous Too
It’s widely recognized that actively managed investing strategies generally face an uphill battle vs. indexing. The evidence at this late date, after countless studies of real world track records, is persausive if not overwhelming. And the empirical clues keep adding up, as The Wall Street Journal reminds. What’s true for individual asset classes tends to apply with multi-asset class strategies too. That alone is enough consider indexing in a strategic context, but there are other incentives. Looking for financial guidance from certain professionals can also eat away at your wealth, warns a study that analyzed recommendations by advisors
Are Seasonal Factors Behind Last Week’s Jump In Jobless Claims?
Last week’s sharp increase in new jobless claims implies that the labor market’s recovery momentum is fading. Initial filings for unemployment benefits jumped a hefty 13,000 to a seasonally adjusted 380,000 for the week through April 7, the Labor Department reports. That’s discouraging for several reasons. First, it’s the biggest weekly increase in over three months. Second, new claims are now at the highest since late-January. Third, the upward deviation from the trend—defined as difference in the latest weekly claims number vs. its four-week moving average—is the most in nearly a year.
Is Commercial Loan Growth A Positive Sign For The Economy?
Lending activity is generally considered a lagging indicator of the business cycle, and rightly so. A look at a long-term chart of business loans, for instance, shows that this series has been known to rise well after the start of a new recession. But is the value of this indicator more timely in the current climate, in which the pain of the credit crunch is seared into the collective memory?
Research Review | 4.11.12 | Equity Risk Premium
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2012 Edition
Aswath Damodaran (NYU Stern School of Business) | March 2012
Equity risk premiums are a central component of every risk and return model in finance and are a key input into estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating equity risk premiums, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. We also look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.
Asset Allocation Can’t Save Us, But It’s Still Crucial For Portfolio Results
Is asset allocation unimportant after all in the grand scheme of managing wealth? Yes, according to a new study the Center for Retirement Research at Boston College. “The focus on asset allocation is misplaced,” advises “How Important Is Asset Allocation To Financial Security In Retirement?” On first glance this finding sounds like a knock-out blow to all the studies through the years that tell us that asset allocation is a critical variable for portfolio management. Should we now abandon the idea? In a word, no.
A Bit Of Humility Is Still Required For Predicting The Business Cycle
Was Friday’s disappointing news on job growth the death knell for the recent run of economic growth? Some analysts think that the macro jig is up and that the sharp slowdown in the expansion of payrolls for March represents the point of no return. The truth is that no one knows for sure if last month’s downshift was a sign of things to come or just a temporary weak patch in an otherwise reviving labor market. In contrast to the far more widely followed establishment profile, the so-called household survey of the labor market in March certainly paints a more encouraging picture, as Scott Grannis explains. In any case, for now it’s a mystery that can only be solved with more data. That doesn’t mean we should ignore the potential for trouble–the latest establishment survey numbers are certainly disturbing at a time when growth overall remains fragile. The risk for a slowdown or worse suddenly looks higher. But it’s premature to argue with a high degree of confidence that a new recession is unavoidable.
Book Bits | 4.7.2012
● White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You
By Simon Johnson and James Kwak
Blog post by co-author (Johnson) via Economix (NY Times)
Debt has surged, relative to G.D.P., six times in American history, during the War of Independence, the War of 1812, the Civil War, World War I, World War II and since 2000. In the first five instances, debt rose as the government scrambled to raise resources to pay for a war effort. After each of those wars, debt was steadily reduced relative to the size of the economy – over decades, not over months or even years. The debt surge since 2000 is different – a point that James Kwak and I explain in detail in our book, published this week. To be sure, we have the two expensive wars, in Iraq and Afghanistan. But much more of the increase in the deficit was because of tax cuts under George W. Bush, Medicare Part D (which expanded coverage for prescription medicines) and – most of all – the financial crisis that brought down the economy and sharply reduced tax revenue starting in September 2008. Our modern debt surge is much more about declining federal government revenue than it is about runaway spending. If you believe strongly that our fiscal issues are primarily about “runaway spending,” please read our book. The smart approach is to begin the long and not-so-nice work of controlling deficits while allowing the economy to grow.
