Searching for a connection between asset prices and the business cycle is no spring chicken. The economist Irving Fisher, for example, theorized a link between short-term interest rates and economic expectations in his 1907 book The Rate of Interest. This was also the formative period for the Dow Theory. The strategy’s chief proponent, William Peter Hamilton, editor of The Wall Street Journal during the early 20th century, outlined the case for using the stock market as a proxy for measuring the ebb and flow of the economy. Reviewing the nexus between the broad trend and the market, Hamilton advised in his 1922 book The Stock Market Barometer: “What we need are soulless barometers, price indexes and averages to tell us where we are going and what we may expect. The best, because the most impartial, the most remorseless of these barometers, is the recorded average of prices in the stock exchange.”

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● First Principles: Five Keys to Restoring America’s Prosperity
By John Taylor
Summary via publisher, W.W. Norton
Leading economist John B. Taylor’s straightforward plan to rebuild America’s economic future by returning to its founding principles. America’s economic future is uncertain. Mired in a long crippling economic slump and hamstrung by bitter partisan debate over the growing debt and the role of government, the nation faces substantial challenges, exacerbated by a dearth of vision and common sense among its leaders. Prominent Stanford economist John B. Taylor brings his steady voice of reason to the discussion with a natural solution: start with the country’s founding principles of economic and political freedom-limited government, rule of law, strong incentives, reliance on markets, a predictable policy framework-and reconstruct its economic foundation from these proven principles.

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The dominant theme in the financial economics literature is that most relationships are dynamic. Everything from asset valuations to correlation and volatility fluctuate through time. This empirical fact applies within and across asset classes. Change, in other words, is a constant and it is the primary source of risk and opportunity. But there’s always an exception to the rule. Perhaps the leading example in finance is the persistence of average results by a representative index for an asset class or an asset allocation strategy.

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The folks expecting a new recession have a new statistical challenge today. Initial jobless claims fell sharply last week, dropping 50,000 to a seasonally adjusted 352,000. The last time new filings for unemployment benefits were this low was nearly four years ago—April 2008. Last week’s large 50,000 tumble is impressive as well relative to history. Indeed, we just saw the largest weekly drop in more than three years.

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Is Newt Gingrich now running on a hard money platform? During campaigning in South Carolina earlier this week for the state’s Republican primary on Saturday, January 21, the candidate recommended a “commission on gold to look at the whole concept of how do we get back to hard money,” CNNMoney reports. “We need to say to the Federal Reserve: Your only job is to maintain the stability of the dollar because we want a dollar to be worth thirty years from now what it is worth now,” he asserted. “Hard money is a discipline. It means you can’t inflate away your difficulties.”

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The academic case for using a multi-factor model to maximize the realized equity risk premium is old news, but documenting the empirical evidence is forever new. It’s been known since the 1970s that the single-factor model of CAPM doesn’t fully explain the risk-return relationship for stocks. The limitation of the one-beta model has inspired a range of nuanced approaches for modeling returns and looking for Mr. Market’s silver lining. The most popular framework is still the Fama-French 3-factor model that taps the broad market beta along with the small-cap and value factors. It’s useful every once in a while to ask: How’s the 3-factor recipe working out for ‘ya. As it turns out, quite well, or so recent history suggests.

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If you’re looking for a cheerleader on the outlook for the U.S. economy, Ed Yardeni’s your man. “The US economy may be on the verge of a big comeback,” this economist and founder of Yardeni Research predicts. “It could experience an unusual second recovery over the next three years following the weak initial recovery of the past three years. In the past, recessions were followed by one broad-based recovery in economic activity. The Naysayers have been predicting a ‘double dip’ recession for the US economy since it started to recover in 2009. I’m suggesting that a more likely scenario might be a double back-to-back recovery.”

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Oil Rises to Three-Day High as Saudi Arabia Is Seen Targeting $100 Crude
Bloomberg | Jan 17
Oil rose to the highest level in three days on speculation that China will intensify monetary stimulus, supporting fuel demand, and as France pushed for a ban on Iranian imports. France wants a European Union embargo delayed by no more than three months as members seek alternative supplies, an official with knowledge of the matter said yesterday. China’s economy expanded at the slowest pace in 10 quarters, sustaining pressure on Premier Wen Jiabao to ease monetary policy. Saudi Arabia aims to stabilize the average of crude prices worldwide at $100 a barrel in 2012, Oil Minister Ali al-Naimi said in an interview with CNN yesterday. “Everything is rising because of China,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “It’s general market sentiment.”

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In the current debate about recession risk, some commentators have rolled out the yield curve argument or variations thereof. On first glance, this line of analysis looks like a slam-dunk refutation of the forecast by some that another economic contraction is now fate. But such arguments based heavily (or exclusively) on the yield curve risk overplaying their hand. It’s true that the yield curve has been a reliable predictor of recessions for half a century, as many studies assert. Indeed, the literature on this topic is now quite extensive and persuasive. But in the dark art of developing macro forecasts, one can never assume that a predictor’s track record—even one as strong as the yield curve’s—seals its fate for repeat performances. It’d be wonderful if we could point to one indicator as a dependable predictor, but macro’s just not that simple.

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● Broke: How Debt Bankrupts the Middle Class
Edited by Katherine Porter
Summary via publisher, Stanford University Press
While the recession that began in mid-2007 has widened the scope of the financial pain caused by over-indebtedness, the problem predated that large-scale economic meltdown. And by all indicators, consumer debt will be a defining feature of middle-class families for years to come. The staples of middle-class life—going to college, buying a house, starting a small business—carry with them more financial risk than ever before, requiring more borrowing and new riskier forms of borrowing. This book reveals the people behind the statistics, looking closely at how people get to the point of serious financial distress, the hardships of dealing with overwhelming debt, and the difficulty of righting one’s financial life. In telling the stories of financial failures, this book exposes an all-too-real part of middle-class life that is often lost in the success stories that dominate the American economic narrative. Authored by experts in several disciplines, including economics, law, political science, psychology, and sociology, Broke presents analyses from an original, proprietary data set of unprecedented scope and detail, the 2007 Consumer Bankruptcy Project. Topics include class status, home ownership, educational attainment, impacts of self-employment, gender differences, economic security, and the emotional costs of bankruptcy. The book makes judicious use of illustrations to present key findings and concludes with a discussion of the implications of the data for contemporary policy debates.

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