Another day, another economic forecast. The 35 economists polled for the latest Livingston Survey via the Philadelphia Fed project that real GDP for the U.S. will grow at an annualized 2.5% rate for the second half of 2011. That’s down from June’s 3.2% second-half 2011 forecast. Down, but still not out.
Jobless Claims Drop To 9-Month Low
The numbers speak loud and clear in today’s weekly update of new jobless claims. New filings for unemployment benefits dropped a hefty 23,000 to a seasonally adjusted 381,000 last week. That’s just what’s needed at this juncture to keep cyclical optimism alive and humming.
Labor Market Data Revisions Look Encouraging
The case for seeing a new recession on the horizon for the U.S. looks a bit less compelling these days in the wake of moderately stronger economic reports, but some analysts remain unconvinced that growth will prevail. On the front line of this debate is the Conference Board’s leading indicator, which paints a relatively encouraging cyclical outlook, based on its latest monthly update. In the opposing camp is the Economic Cycle Research Institute, which continues to stand by its September 30 forecast that the U.S. is destined for a new downturn. The latest update to ECRI’s weekly leading indicator slipped again for the week through November 25, which leaves it roughly unchanged since the end of September.
Transition Worries
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.