Forecasting risk premiums is a dirty business, but it’s necessary unless you’re truly a buy-and-hold investor with a very long time horizon. How many individuals fit into that category? Very few is probably a good estimate. For the rest of us, developing some intuition about expected risk premiums—the returns that are left after subtracting a risk-free rate a la Treasury bills—is useful, perhaps essential. It can be dangerous as well, but that’s the nature of toiling in risk.
The Real Yield: A Critical Factor In The Current Climate
Conventional wisdom says that gold prices are a reliable indicator of the prevailing inflation winds. At best, that’s only a half-truth. The relationship between the precious metal and inflation is a two-way street. Yes, gold tends to rise when inflation’s trending higher. The linkage inspires the belief that the commodity’s price rises are driven solely by rising inflation. But gold prices can also increase during periods of disinflation and deflation. The lesson is that the crucial factor for gold prices is the real (inflation-adjusted) interest rate, which ebbs and flows over time.
Book Bits For Saturday: 9.10.2011
● That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back
By Thomas L. Friedman and Michael Mandelbaum
Review via The New York Times
“That Used to Be Us” is a morality play, in which responsible and irresponsible leaders contend against one another: the senator willing to make compromises against the senator who cravenly signs a no-tax pledge; the C.E.O. rebuilding a manufacturing plant against the banker engaged in paper manipulations; the governor who persuades teachers to rewrite their contract to end tenure for the incompetent against the politicians who dismiss today’s deficits as tomorrow’s problem.
Macro Solutions, Practical And Otherwise
President Obama outlined a new plan to create jobs last night in his speech before a joint session of Congress, although the old debate about what’s keeping the economy from recovering in a meaningful way rolls on. But if the perspective appears fuzzy on cause and consequence, Paul Kasriel, chief economist at Northern Trust, insists that your perspective isn’t properly focused. As a solution, he dispatches a crisp review of what went wrong and what, in theory, could go right, assuming a certain institution headed by one Ben Bernanke acts decisively.
The Chronic Pain Of Jobless Claims
The risk of a new recession is higher, but it’s not obvious that it’s at the tipping point. A number of traditional indicators that have an encouraging history of dispensing early warning signs are still in the growth column, if only slightly. But there’s also a set of deteriorating numbers that counteract the positives, as today’s update on new jobless claims reminds. No wonder that some analysts say there’s a 50/50 chance of a downturn.
The Power Of Two Simple Investing Ideas
In theory, the recent increase in market volatility opens the door for superior results from active management. In practice, it’s still hard to beat relevant benchmarks. You wouldn’t know it from the promises from the usual suspects, but the numbers suggest another reality.
Another Look At Volatility Hedging
Can market volatility be tamed? Sure, but it comes at a price, usually in the form of reduced return. The real question is whether you can tame volatility without materially lowering expected return. Analysts have been dissecting this problem for years, although interest in the topic has exploded lately for obvious reasons. One of the more intriguing strategies is available through a new breed of hedging strategies designed by several large investment banks. A number of financial planners are using the products, which have been stress-tested during the recent market turmoil. How do these strategies hold up upon closer inspection? For some perspective, take a look at my article in the September issue of Financial Advisor.
Strategic Briefing | 9.7.2011 | The Crisis In Europe
In Euro Zone, Banking Fear Feeds on Itself
The New York Times | Sep 7
“This crisis has the potential to be a lot worse than Lehman Brothers,” said George Soros, the hedge fund investor, citing the lack of an authoritative pan-European body to handle a banking crisis of this severity. “That is why the problem is so serious. You need a crisis to create the political will for Europe to create such an authority, but there is still no understanding as to what the authority will do.”
German court gives MPs bigger say in euro bailouts
Reuters | Sep 7
Germany’s highest court said parliament must have a bigger say in euro zone rescue packages, a landmark ruling that may make it more difficult for Europe to respond swiftly in delivering aid to crisis-hit member states.
A Bit Of Good News For The Services Sector
The U.S. services sector grew at a moderately faster pace in August, but the crowd’s not paying attention. The better-than-expected rise in the ISM’s non-manufacturing index is taking a back seat to Friday’s news of flat job growth and renewed fears of mounting economic challenges in Europe and the Continent’s ongoing push for fiscal and monetary austerity. Focusing on the negative isn’t surprising, but today’s ISM report keeps hope alive, if only slightly, that the problems in the U.S. will bring a mixed bag of macro results rather than an outright recession.
The Trouble With Tax Cuts
Job growth stalled in August, manufacturing activity isn’t faring much better, the demand for liquidity and safety is on the march again, and the trend for U.S. exports may face new headwinds if economic growth in emerging markets suffers, as some analysts predict. What’s a politician to do these days? Lean on the tried-and-true policy response, of course.