The next major clue about the state of the U.S. economy arrives on Tuesday with the October update for retail sales. When we lasted checked in with this metric, consumption had rebounded sharply in September, chasing away a fair amount of the recession blues. The year-over-year pace in retail sales remained encouraging as well, suggesting that the business cycle wasn’t set to take a tumble. But income growth hasn’t kept pace, which raises questions about spending’s staying power. Meantime, the European currency crisis has deepened, casting a shadow over expectations here and abroad.
Book Bits For Saturday: 11.12.2011
● The End of the Euro: The Uneasy Future of the European Union
By Johan Van Overtveldt
Summary via publisher, Agate B2
Van Overtveldt makes a convincing case that the end-scenario of Germany’s retraction from the euro and a general dissolution of the entire European monetary union, is more likely than a solution in which EU policymakers develop a plan that would preclude the death of the euro. The implications for the future of the world economy—and theeconomies of different countries across Europe—are dramatic.
A Precarious Optimism
The euro crisis is no garden variety hazard for the financial system, or even the global economy, but market sentiment in the U.S. seems to be holding up quite well in the face of the latest round of the ill winds via Italy.Yesterday’s rally in stocks is one inspiring data point. Another is the staying power of inflation expectations via the yield spread on the 10-year Treasury less its inflation-indexed counterpart. It could all evaporate in the twinkling of an eye, but for now there’s a view that the glass is still half full in these United States.
A Round Trip For Euro Yields
Ed Yardeni has a great graph of European sovereign yield history. It’s interesting to note that yields have basically rebounded to levels that prevailed before the euro was launched. Of course, some of the rebounding has moved faster and climbed higher in certain countries.
US Jobless Claims Drop To 390k As Euro Crisis Deepens
The drop of 10,000 in new jobless claims last week to a seasonally adjusted 390,000 provides a bit of a shock absorber for sentiment in the wake of the new wave of euro turmoil via Italy. Yes, even last week’s numbers may be out of date as the Continent’s woes worsen. But for the moment, at least, we know that the labor market was continuing to heal on the margins, as suggested by other metrics, such as the Monster Employment Index or the payrolls report for October. The progress has been slow, but at least there’s been some progress. The optimistic view with the number du jour is that the tepid installment of the latest virtuous cycle is spilling over into November. The big mystery is whether the tenuous revival will survive the new bout of euro darkness? Questions, questions, always fresh questions.
The Italy Factor Gets Ugly
Is the euro Toast? Maybe not, but if you thought the currency was under pressure before, well, you ain’t seen nothin’ yet.
Will Slowing Income Growth Spoil The Party?
Job openings on the last business day of September rose to 3.4 million, the Labor Department reports. That’s up from 3.1 million in August. Here’s one more statistic for thinking that the U.S. economy continues to grow. Coupled with moderately positive job creation in the private sector for October,, one might reason that the recession risk is falling. The higher “churn” rate in the job market echoes the sentiment, Catherine Rampell explains. But let’s not forget that there are still plenty of risks lurking, including the disconnect in consumer spending and income.
Predicting GDP With ARIMA Forecasts
Is the U.S. economy headed for a new recession? The risk is clearly elevated these days, in part because the euro crisis rolls on. The sluggish growth rate in the U.S. isn’t helping either. But with ongoing job growth, albeit at a slow rate, it’s not yet clear that we’ve reached a tipping point. Given all the mixed signals, however, forecasting is unusually tough at the moment. It’s never easy, of course, but it’s always necessary just the same. But how to proceed? The possibilities are endless, but one useful way to begin is with so-called autoregressive integrated moving averages (ARIMA). It sounds rather intimidating, but the basic calculation is straightforward and it’s easily performed in a spreadsheet, which helps explain why ARIMA models are so popular in econometrics. A more compelling reason for this technique’s widespread use: a number of studies report that ARIMA models have a history of making relatively accurate forecasts compared with the more sophisticated competition.
Looking For Bubbles
Bubble talk is a hardy perennial. The latest installment comes in a recent column by Jason Zweig, who provocatively inquires: “Can you spot a bubble?”
Research Review | 11.7.2011 | Asset Allocation
Strategic Allocation to Premiums in the Equity Market
David Blitz (Robeco Asset Management) | Oct 2011
Investors tend to focus on harvesting the risk premiums offered by traditional asset classes when making their strategic investment decisions. Some recent papers, however, argue that investors should also consider various other premiums for possible inclusion in the strategic asset allocation. Examples of such premiums that have been documented for the equity market are the size, value, momentum and low-volatility effects. In this paper we show that the theoretically optimal strategic allocation to these premiums is sizable, even when using highly conservative assumptions regarding their future expected magnitudes. We also discuss the pros and cons of two ways of obtaining the implied exposures in practice, specifically passively managed index funds versus actively managed quant funds.