The capital markets and the global economy are caught between the rock and the hard place. Misguided policy choices in Europe and deadlocked budget negotiations in Washington are threatening to crush the meager economic growth in the developed world. The toxic environment is starting to infect emerging markets too. For contrarian investors with a long-term view, the possibilities may be looking up. But earning higher risk premiums than the crowd isn’t going to come easily. Turbulence looks like a safe bet for the near term, and perhaps longer. Everything else is open for debate as the world sorts through the mystery of how we get from here to there without (hopefully) shooting ourselves in the head. The thankless job of discounting the unknown unknowns is now job one. The blunt response is now roiling markets, as you’ll see in the following review of the major asset classes via our usual list of ETF proxies…
Book Bits For Saturday: 11.26.2011
● Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy
By Yalman Onaran
Q&A with author via PLFNews
Everyone is afraid that the world economy is about to go into a second recession. Why are we heading in that direction?
That’s because we haven’t fixed the problems that had caused the one in 2008. Leaders in the U.S. and Europe patched up the troubled spots, printed lots of money and avoided the underlying issues. Especially the banking system, which blew up to bring the world economy down a few years ago, is still fragile, too wounded to support a recovery and filled with even more risk. That’s why I call the banks zombies. They will make the next blowup more spectacular.
Playing With Fire
The only thing worse than an economy headed for a recession is an economy headed for recession with rising interest rates. That appears to be Europe’s fate, and it’s a fate that increasingly looks like a self-inflicted wound. The stakes could hardly be higher. The blowback from Europe threaten the feeble growth in the U.S., which in turn carries dire implications for the global economy, starting with China. But, hey, the political “leadership” in Germany, which in many ways is directing this horror show, doesn’t see any reason to change its plans.
Let’s Talk Turkey
Happy Thanksgiving to everyone. As a brief interlude from the usual fare, here are some worthy passages to promote the holiday spirit. Enjoy. All the best to you and yours!
The Desolate Wilderness
Thanksgiving’s history goes beyond 1621
History of Thanksgiving and Its Customs
The First Thanksgiving at Plymouth
Five Little-Known Thanksgiving Facts
A Mixed Bag Of Economic News For October
Because of the Thanksgiving holiday tomorrow, the government released three major economic reports today: income & spending, initial jobless claims, and new orders for durable goods. Overall, the numbers show an economy that continues to struggle. There’s just enough growth in the latest data points to keep the debate open about what happens next, but the macro trend still looks precarious no matter how you spin the numbers.
Research Review | 11.23.2011 | Managing Asset Allocation
Testing Rebalancing Strategies for Stock-Bond Portfolios: Where is the Value Added of a Rebalancing Strategy?
Hubert Dichtl (Alpha Portfolio Advisors), et al. | September 15, 2011
This study addresses the question why institutional investors prefer rebalancing even though these strategies require the selling of a fraction of the better-performing assets and investing the proceeds in the less-performing assets. Analyzing the value added of rebalancing strategies for investors, we document that the return effect is negligible, and hence it is primarily a risk management argument which justifies the widespread use of these strategies. Minimizing risk (defined as return volatility) with respect to a given asset allocation seems to be the primary objective of any rebalancing strategy.
Will The Barricades Fall?
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.