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.
Book Bits For Saturday: 11.5.2011
● Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy
By Tony Crescenzi
Summary via publisher, FT Press
Since the 1930s, governments have overcome recessions by borrowing and spending to temporarily replace lost consumer and business spending. What happens when they can’t do it anymore? In Beyond the Keynesian Endpoint, PIMCO Executive VP Tony Crescenzi offers a sobering tour of today’s unprecedented global sovereign debt crisis. Crescenzi shows how exhausted national balance sheets have stripped policymakers of their ability to bolster growth… how investors are finding it increasingly difficult to navigate debt-ridden markets… how increased spending intended to cure the financial crisis is instead worsening it. He dissects each scenario for the future, and reveals the crisis’ profound long-term implications for governments, investors, and the global economy.
Sluggish Job Growth Prevails… Again
There’s (relatively) good news and (more of the same) bad news in today’s employment report. First the good news, such as it is. Private-sector job creation continues to chug along at a mediocre pace. Last month witnessed a net gain of 104,000 for private nonfarm payrolls, the Labor Department reports. That’s nothing to get excited about, but it’s obviously better than a loss and so it offers yet another bit of statistical evidence for thinking that the economy isn’t poised to slip into a new recession. There’s also encouraging news in the latest batch of revisions to previous payroll reports. In particular, September’s initial estimate of a 137,000 net rise in private payrolls has been substantially revised higher to 191,000. Even August’s originally dismal rise has been revised higher to a slightly less dismal gain of 42,000 vs. the earlier 30,000 advance.
One Small Cut In Interest Rates, One Giant Step For Macro Perspective
The newly installed head of the European Central Bank, Mario Draghi, broke with his predecessor and cut the benchmark interest rate to 1.25% from 1.5%. In one fell swoop Jean-Claude Trichet’s misguided austerity policy has evaporated. And not a moment too soon, given the signs of rising recession risk for the Continent. But there’s more to the story than just another rate cut.
Analyzing Obama’s Economic/Political Troubles
Nate Silver, a new breed of statistically oriented political analysts, boils down President’s Obama’s macro baggage in an article for this weekend’s edition of The New York Times Magazine. Silver’s impressive record in forecasting elections puts him on the short list of must-reads in political calculus circles these days and his latest foray into the dark art of looking ahead doesn’t disappoint for intriguing evaluations of the national political mindset. Think politics in a Moneyball
Jobless Claims Drop Below 400k
Initial jobless claims dipped below the 400,000 mark last week, signaling that the odds of a new recession aren’t rising and may very well be falling. New claims for unemployment benefits dipped to a seasonally adjusted 397,000 last week. That’s the lowest since touching 395,000 for the week through September 24. Yes, we’ve seen this movie before only to get burned with letting optimism carry us away. But a bit of good news never hurts these days and so we’ll take a bit of statistical sunshine wherever (and whenever) we can get it.
Abnormal Expectations
The Federal Reserve yesterday told us what we already suspected was coming. Economic growth will remain sluggish, according to the Fed’s new core projection. Real GDP for all of 2011 will rise by 1.6% to 1.7%, the central bank predicts, down from its June estimate of 2.7% to 2.9%. Next year’s real GDP is expected to deliver slightly better results in the 2.5% to 2.9% range, but that estimate has also been trimmed from June’s 3.3% to 3.7% guess.
Employment Expectations
Every monthly employment report is crucial these days, but Friday’s update may be the first among equals. When we last checked in with the nation’s payrolls report, there was a collective sigh of relief that private-sector job creation avoided a descent into darkness in August. A repeat performance is essential if there’s any hope for sidestepping a new recession.