The Treasury market’s inflation forecast is slipping… again. If the descent rolls on, it’ll be a dark sign of things to come, just as it has been in the post-crisis mire of recent years. The battle isn’t lost yet, but the forces of inflation and deflation are clearly locked in a new round of conflict. For the moment, it’s unclear which side will win if we’re looking solely at the yield spread between the nominal less inflation-indexed 10-year Treasuries. But in a world once again flush with deflationary instincts, confidence is low that that defenders of prices can hold the line.
Draghi Isn’t Ready For His Closeup
Mario Draghi, the recently installed head of the European Central Bank, is in no mood for monetary salvation. Instead, it’s price stability all the way—inflation fighting, in other words. “Gaining credibility is a long and laborious process,” he says. “But losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs.”
Book Bits For Saturday: 11.19.2011
● Money in a Free Society: Keynes, Friedman, and the New Crisis in Capitalism
By Tim Congdon
Summary via publisher, Encounter Books
In the fifteen years leading to mid-2007 the world economy enjoyed unparalleled stability, with steady growth and low inflation. But the Great Recession has seen the worst economic turmoil since the 1930s. A dramatic plunge in trade, output, and employment in late 2008 and 2009 has been followed by an agonizingly weak recovery. What explains this crisis? What are the intellectual origins of the policy mistakes that led to the Great Recession? Which ideas on economic policy have proved right? And which have been wrong? Money in a Free Society contains eighteen provocative essays on these questions from Tim Congdon, an influential economic adviser to the Thatcher government in the UK and one of the world’s leading monetary commentators. Congdon argues that academic economists and policy-makers have betrayed the intellectual legacy of both John Maynard Keynes and Milton Friedman.
Separation Anxiety
If you’re feeling whipsawed lately, there’s a good reason. Make that a lot of good reasons. Everywhere you look there seems to be an surplus of contradiction in economics and finance. The trend in consumption, for intance, is encouraging while income growth is slowing. Meanwhile, the labor market is showing signs of renewal recently just as the euro crisis threatens to deepen.
Strategic Briefing | 11.18.2011 | The ECB’s Last Stand?
European Rift on Bank’s Role in Debt Relief
The New York Times | Nov 17
The financial stability of Europe has come down to one institution, the European Central Bank, which is now under heavy new pressure to rescue the euro — or possibly see it collapse…. “There is no solution to the crisis without the E.C.B.,” said Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. “The amounts we are talking about are too big for anybody but the E.C.B.”
Jobless Claims Fall Again As Euro Risk Festers
If the euro crisis represents a threat to the U.S. economy (and it does), it’s not putting upward pressure on new jobless claims–at least not yet. New filings for unemployment benefits dipped again last week to a seven-month low of 388,000 on a seasonally adjusted basis. We’re still not at the post-recession low reached in this cycle (375,000 in late-February), but the old trough is now within shouting distance.
Europe’s Central Banking Crisis
The optimists expect that the European Central Bank will do the right thing… eventually. Perhaps, but would a philosophy transplant at this late date make a difference? Year-over-year growth in euro monetary aggregates is growing at a snail’s pace of around 3%. That hardly comes close to what’s needed for an economy that’s suffering from a banking crisis, high unemployment (10% plus), rising bond yields, and the likelihood that the Continent is dipping into a new recession. The austerity-now movement is courting disaster.
The Ebb & Flow Of Style Analysis
Knowing what you own in order to get a handle on expected risk and return is essential for successful investing in the long run. No one accidentally generates attractive risk-adjusted results through time (well, almost no one). There are many ingredients for minimizing the mystery of what’s driving results, but for equity portfolios the capitalization factor is probably the first factor to review. Small stocks tend to behave differently than large caps. A close second, and perhaps the dominant factor at times is the value/growth distinction. Numerous studies remind that companies with low valuations have different expected return and risk characteristics compared with their highly valued counterparts. What’s more, the relationship is far from constant. That’s old news, of course, as are the implications for number crunching, a.k.a. style analysis. The details, however, can get messy, as a recent essay by investment consultant Ron Surz of PPCA, Inc. reminds.
Higher Retails Sales Inspire Cautious Optimism
The September surge in retail sales slowed in October, but there’s still no sign of recession in U.S. consumer spending. Total retail spending rose 0.5% last month on a seasonally adjusted basis. That’s a substantial deceleration from September’s 1.1% pop. But ignoring September’s unusual and unsustainable gain, October retail sales continue growing at a respectable clip. You can’t read too much into any one data point (or data series), but if you’re looking for clear-and-present signs of trouble for the business cycle you won’t find it here, at least not today.
The Triumph Of Austerity (And Its Consequences)
Europe’s slowing economy is a wake-up call for the austerity-now folks. Industrial production in the euro-zone fell 2% in September, a sharp drop from August’s 1.4% rise, EuroStat reports. The annual pace is still positive, but a slowdown is evident here as well with September’s year-over-year rise of 2.2% vs. 6.0% in August. Germany is still the exception these days, enjoying far stronger growth than its neighbors. What accounts for the divergence? There’s no single answer, but an obvious place to start: interest rates. The high and rising rates outside of Germany are conspicuous, whereas German rates are low and falling.