The consensus forecast for tomorrow’s update on consumer inflation is expected to show that prices rose by a slight 0.1% in November, according to Briefing.com. Inflation, in other words, remains a non-event, despite the ongoing howls of protest from the usual suspects.
Research Review | 12.14.2011 | Asset Pricing & The Business Cycle
Implied Risk Premium and the Business Cycle: You Can’t Always Get What You Want
Georg Bestelmeyer (University of Cologne), et al. | December 1, 2011
We analyze the link between investor’s risk premia demands and overall business conditions. In contrast to previous studies we focus on ex-ante risk premia expectations implied in market prices and earnings forecasts rather than ex-post realized excess returns. We find that implied risk premia are counter-cyclical and strongly driven by the economic environment. On average, implied risk premia are higher (lower) when the economy is contracting (expanding). In contrast, realized excess returns on a monthly frequency do not show this pattern over our sample period March 1983 to December 2009. In addition, implied risk premia are highly sensitive to macroeconomic risk factors such as term- and default spreads. Our findings emphasize that implied risk premia are time varying and strongly tied to the business cycle – much more than realized excess returns.
Golden Handcuffs
Since revisiting the Great Depression, its causes and consequences, seems to be in vogue again, it’s only fitting that David Glasner reviews what we learned about the gold standard and “the worst economic catastrophe since the Black Death of the 14th century.” It’s an old lesson, or at least it should be. But relearning lessons is what macroeconomics is all about, or so it seems.
Slower But Still Growing Retail Sales In November
The pace of growth in retail sales slowed in November, but the overall trend was still up. We can debate the details of whether a lesser rate of growth is a sign of things to come, but if you’re looking for a smoking gun that screams recession you won’t find it in today’s update on consumer spending.
Another Partial Solution: Conditional Sharpe Ratio
“What this country needs is a good five-cent cigar,” Thomas Marshall (Woodrow Wilson’s vice president) once remarked. Updating the quip for 21st century finance might run as follows: Investors need a good risk metric. Alas, what’s needed and what’s available isn’t usually, if ever, one and the same in the money game. The next best thing is tapping several flawed metrics that are flawed in different ways.
Another Trip Down The Macro Memory Hole?
Ryan Avent at The Economist links to a new research paper citing “a remarkable lecture by economist Gustav Cassel, who is quoted as saying that the world’s central banks should ‘come together and make an end of the depression simply by declaring that they intend, from this moment on, to supply the world so abundantly with means of payment that no further fall in prices will be possible.'”
The Irrepressible Scott Sumner Does It Again
There’s a reason why Scott Sumner is one of the most influential economists in the post-crisis era. Actually, there are many reasons, as his must-read blog posts in recent years demonstrate. No one does a better job of explaining monetary policy, or pointing out how so many otherwise intelligent folks stumble on this crucial subject. He has a knack for explaining what should be clear but isn’t. He soon remedies any confusion, and he pulls it off by making his observations appear like revelations. But often he’s simply telling it like it is. But sometimes the clear, unvarnished truth can be revolutionary and more than slightly refreshing. Judge for yourself. Here’s his latest… yet another classic:
Technical Messages From The S&P 500
Does the stock market have a momentum problem? Yes, according to a number of market technicians, the folks who study the price charts for signs of things to come. The primary clue is the S&P 500’s recent history vis-à-vis its 200-day moving average, which is widely monitored by professional chart readers.
Book Bits For Saturday: 12.10.2011
● The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis
By Pablo Triana
Excerpt via publisher, Wiley
In its very prominent role as market risk measure around trading floors and, especially, the tool behind the determination of bank regulatory capital requirements for trading positions, VaR [value at risk] decisively aided and abetted the massive buildup of high-stakes positions by investment banks. VaR said that those punts, together with many other trading plays, were negligibly risky thus excusing their accumulation (any skeptical voice inside the banks could be silenced by the very low loss estimates churned out from the glorified model) as well as making them permissibly affordable (as the model concluded that very little capital was needed to support those market plays). Without those unrealistically insignificant risk estimates, the securities that sank the banks and unleashed the crisis would most likely not have been accumulated in such a vicious fashion, as the gambles would not have been internally authorized and, most critically, would have been impossibly expensive capital-wise.
ECRI’s Weekly Leading Index Rises To 13-Week High
The Economic Cycle Research Institute’s weekly leading index jumped last week to its highest level since September 9, the consultancy reports. Nonetheless, the self-proclaimed “leading authority on business cycles” continues to forecast a recession for the U.S., as ECRI’s co-founder, Lakshman Achuthan, explained yesterday on Bloomberg TV.