Kansas City President Thomas Hoenig is the Uriah Heep of central banking. “We ought to be very, very humble in our expectations of what we can do with this instrument we call monetary policy,” says Hoenig, who retires this week after racking up eight straight dissents last year as a voting member of the FOMC. But would tighter monetary policy imposed six months or a year earlier be paying macro dividends now? Let’s be generous and say that it’s debatable. Still, the prescription endures.
Durable Goods Orders Hold Their Ground In August
New orders for durables goods, considered a leading indicator for the business cycle, slipped 0.1% last month on a seasonally adjusted basis. The slight decline follows a strong 4.1% jump in July. Given all the recent worries about rising recession risk, it’s a wonder that new orders didn’t fall further. The fact that this critical measure of economic activity managed to hold on to virtually all of July’s gains implies that the economy may continue to struggle but it will avoid a recession. That relatively optimistic view is strengthened after learning of the 1.1% rise last month in business investment (a proxy for capital spending, as measured by nondefense capital goods orders excluding aircraft).
Research Review | 9.28.2011 | Volatility & Portfolio Management
Volatility-responsive asset allocation
Bob Collie, et al. (Russell Investments) | Aug 2011
The use of fixed weights in strategic asset allocation policy does not result in a stable risk/return pattern over time, but rather leads to greater risk at times of high market volatility and to lower risk in unusually stable markets. For investors who are sensitive to volatility, a more consistent outcome can be achieved – both in terms of the volatility of returns and in terms of how volatile that volatility itself is – by adopting a dynamic, or volatility-responsive, approach… The principle that underpins volatility-responsive asset allocation is to reduce exposure to risky assets when volatility is high, and to increase that exposure when volatility is low. This might result in a portfolio that averages, say, 50% exposure to the equity market, but which has more than that at times of market stability and less during volatile markets.
Too Much Of A Good Thing?
The gold bugs should be happy, but they’re not. Yet inflation expectations are falling, and it’s no short-term trend. The Cleveland Fed reports that expecting less on the inflation front has been intact for three decades. Matthew Yglesias suggests ours is an “era of ever-falling inflation expectations.”
Tactical ETF Review: 9.26.2011
September has been a cruel month for risky assets, although bonds continue to defy gravity. As uncertainty rises on a number of fronts, risk aversion has taken on a life of its own… again. But the search for a safe haven has narrowed recently to U.S. fixed income, Treasuries in particular. The greenback is popular once more, advancing in excess of 6% over the last month, based on the U.S. Dollar Index. The world’s reserve currency comes with a fair amount of baggage these days, but for the moment the buck is still considered the safest, or at least the safer paper port in a storm. It’s no trivial detail that the rising appetite for dollars comes at a time of heightened fears for the euro’s survival. It all adds up to crumbling prices for foreign bonds in broad terms for both developed- and emerging-market nations when measured in dollar terms. Here’s a closer look at how the bloodletting has been unfolding in the major asset classes via our usual list of ETF proxies…
Book Bits For Saturday: 9.24.2011
● The The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World
By Jeremy Rifkin
Review via Bloomberg
The world economy will face shocks and depressions, punctuated by ever-shorter and weaker recoveries, as long as it relies on outdated fossil fuels, says Jeremy Rifkin, author of “The Third Industrial Revolution.” “There will be cycles of growth, collapse, growth, collapse, every three years or so,” he said in an interview in Berlin, where he was scheduled to speak on a panel about sustainable growth introduced by Chancellor Angela Merkel. We are on the cusp of a major upheaval as the world switches to renewable energies and our power-distribution networks undergo a transition similar to that experienced by communications systems with the advent of the Internet, he said. Until the “third industrial revolution” is in full swing, debt crises such as those plaguing the euro area will recur, Rifkin said.
The Market Turns Red
After yesterday’s sharp 3% drop in the stock market, the S&P 500 is in the red on a year-over-year basis for the first time nearly two years. Just barely, but it’s a minor milestone just the same. As of September 22, the S&P is off fractionally, slipping by roughly 0.4% vs. a year ago on a price basis. Should we be worried? Of course. No one needs another excuse these days, but we’ve got another one to add to the list.
A 15-Year Review
John Bogle, the founder of Vanguard and the man who gave the masses the first index fund, was reminiscing recently. In a talk he gave earlier this month, Bogle reviewed the lessons in a 15-year-old bit of investment advice. “I thought it would be fun, interesting, and provocative to examine what’s happened over the exciting era since I made my policy recommendations.” In particular, he revisited his recommendations from the summer of 1996 and “how they compared with the actual results of the average endowment fund tracked by The National Association of College and University Business Officers,” aka NACUBO.
A Little Recognition Never Hurts
$avingsAccount.org thinks The Capital Spectator is among the top-50 investment blogs. Thank you very much. Unfortunately, I left my acceptance speech in my other suit. No matter–the real tribute is sharing a list with so many extraordinary blogs and web sites. Suffice to say, I’m humbled. Meanwhile, if you’re looking for an accounting of some of the leading analysts on economic and financial matters, the $avingsAccount.org roster is sure to please.
Jobless Claims Fell Last Week, But The Trend Still Looks Troubling
New jobless claims fell last week, but the drop doesn’t look all that convincing. It’s been clear for some time that filings for unemployment benefits have been trending higher, and for a fundamental reason: the economy has slowed. The surge in new claims back in the spring warned of no less, when the consensus outlook for the economy was still relatively bubbly. Once again, claims have proven their value as a forward-looking indicator. Alas, the current forecast in these numbers isn’t encouraging. In sum, it’s going to take a lot more than one modest down week to persuade the crowd that this series has returned to a virtuous cycle.