The market’s implied inflation forecast continues to hover around the 2% mark, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries. That’s a sign that the crowd is feeling relatively optimistic about the economy’s prospects. In the New Abnormal, lower inflation expectations are a sign of trouble. The fact that inflation expectations appear to be stabilizing is an encouraging sign… if we can keep it.
Modified Sharpe Ratio: A Partial Solution?
The problem of fat tails is everywhere in risk analysis. It’s a big issue, but there’s no easy solution. There are, however, lots of partial solutions. Each comes with its own set of pros and cons, which implies that the practical strategy for dealing with the messy but essential issues related to measuring and managing risk starts with the iron rule to never, ever rely on one risk metric.
Research Review | 12.6.2011 | Market Timing & Risk Management
A Risk Based Approach to Tactical Asset Allocation
Stefano Colucci and Dario Brandolini (Symphonia Sgr) | November 28, 2011
Faber’s ‘A Quantitative Approach to Tactical Asset Allocation’ (2009) proposes the use of a very simple trading rule to improve the risk-adjusted returns across various asset classes. The purpose of this paper is to present an alternative and simple quantitative risk based portfolio management that improves the risk-adjusted portfolio returns across various asset classes. This approach, based on the conclusions of Brandolini D. – Colucci S. ‘Backtesting Value-at-Risk: A comparison between Filtered Bootstrap and Historical Simulation’, has been tested since 1974 for calibration and since 2000 in a real backtest. The asset allocation framework is using a combination of indices, including the Standard&Poors 500, Topix, Dax, MSCI United Kingdom, MSCI France, Italy Comit Globale, MSCI Canada, MSCI Emerging Markets , RJ/CRB, Merril Lynch U.S. Treasuries, 7-10 Yrs , and all indices are expressed in US Dollar. Since 2000 the empirical results present equity-like returns with lower volatility and drawdown and only one negative year both in gross and net of costs returns.
Putting A Price On Investment Strategies
How much should you pay for asset management? It’s a question that comes up routinely in my travels in finance. There’s no standard answer, but most investors (and institutions) should err on the side of caution when it comes to paying hefty fees. The world is awash in claims of success for adding value over investment benchmarks, but comparing audited results with passive indices and/or simple rebalancing strategies begs to differ. Even before adjusting for taxes and trading costs, truly superior active management is a rare bird.
Is There A Doctor In The House?
Contrary to conventional wisdom, the euro crisis was NOT triggered by runaway spending, Dean Baker reminds. It follows, then, that monetary policy—NOT fiscal policy—is the solution, as Ambrose Evans-Pritchard explains. Instead, the politicians are, of course, pushing for a political solution engineered by Germany. “For the third time in less than twenty years, Germany is trying to force down the throat of Europe a federal ‘political union’ which, in the eyes of too many European observers, eerily resembles a gentler, kinder Anschluss,” writes Tony Corn. You can’t always get what you want. The question is whether Europe will get something it needs before it’s too late? The jury’s still out.
Book Bits For Saturday: 12.3.2011
● Cannibal Capitalism: How Big Business and The Feds Are Ruining America
By Michael C. Hill
Summary via publisher, Wiley
Unlike in most other recent instances of financial turbulence, when this crisis hit, the country turned on itself economically, with the powerhouses—corporations, business leaders, and government—throwing the everyman under the bus. In an effort to avoid becoming slightly less rich, the super-rich effectively cannibalized the true engines of growth in the economy, in the process putting the bottom ninety-nine percent of the population at serious risk of losing everything. Cannibal Capitalism fights back, arguing that to really recover we need to educate our children, invest in our small businesses, use our inflated money to develop real things that build real wealth, and get back to exporting in a big way.
Labor Dept Says Private Payrolls Rose A Moderate 140,000 In November
Private nonfarm payrolls rose 140,000 last month, the Labor Department reports. That’s ok and it’s certainly far enough above zero to keep chatter about an imminent recession at bay. But today’s number is a bit of a disappointment after ADP’s strong report on Wednesday, which implied that the government’s estimate of employment growth would be much higher. Still, beggars can’t be choosy and a net gain of 140,000 private sector jobs is respectable given all the headwinds from Europe these days.
Will Manufacturing’s November Revival Last?
Yesterday’s update on the ISM Manufacturing Index offers another encouraging data point that builds on the acceleration in jobs creation via ADP’s November employment report. If it wasn’t for ongoing euro crisis and the potential for instability in the budget negotiations in Washington, optimism would be a no-brainer. But we live in interesting times, and so expectations must be managed carefully.
Jobless Claims Rise For 2nd Week In A Row
New jobless claims rose last week, taking some of the wind out of yesterday’s inspiring rebound in ADP’s November employment report. Filings for unemployment benefits increased 6,000 to a seasonally adjusted 402,000—the first time in a month that the numbers have settled above the 400k mark. But it’s too soon to argue that the labor market is headed for a reversal of fortunes.
Major Asset Classes | Nov 30, 2011 | Performance Update
November was a rough month for asset returns, but it would have been a lot rougher without yesterday’s buying frenzy in the wake of the news of a coordinated central bank intervention on behalf of the eurozone. Even so, most risky assets suffered hefty losses in November, reversing a large slice of October’s rally. Hardest hit in November: emerging market stocks, which sank 6.7%. The only winner among our broadly defined list of major asset classes: Inflation-indexed Treasuries, which advanced 0.8% last month.