The bond vigilantes are MIA, observes Ronald McKinnon, a professor at Stanford. This is unusual, he advises. “In past decades, tense political disputes over actual or projected fiscal deficits induced sharp increases in interest rates—particularly on long-term bonds.” But as anyone who watches the Treasury market these days knows, rates have been falling, and for longer than many veteran market pundits and traders expected. To put it simply, these are extraordinary times… still. On that point, at least, there’s no debate.
The Slow Grind
The recent downshift in economic activity is grinding down consumer spending and income, according to this morning’s update from the Bureau of Economic Analysis. Disposable personal income slipped marginally in August vs. the previous month—the first decline in 11 months. After adjusting for inflation, however, DPI was down a considerable 0.3%, the second real monthly drop in a row. Personal consumption expenditures fared better, rising 0.2% in nominal terms, but that was a sharply slower rate from the July bounce and on an inflation-adjusted basis PCE was flat last month.
Jobless Claims Drop Sharply. Can We Believe It This Time?
New jobless claims dropped last week by a hefty 37,000 to a seasonally adjusted 391,000. That’s the biggest weekly tumble since May, pushing new filings for jobless benefits under the 400,000 mark for only the second time in 25 weeks. It looks good, and it surprised a lot of economists. But let’s refrain just yet from declaring this as the start of something big.
The Case For Monetary Cranks
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.