Predicting is hard—especially about the future, runs the old joke. But there’s no escaping forecasting in finance and economics. Even a passive investor has an assumption—a forecast! If you own an S&P 500 index fund, you’re assuming that you’ll earn an equity risk premium. Where did you get that idea? There are a thousand possibilities for thinking positively, but the key point here is that you’re anticipating a premium will come your way simply by holding risky assets.
Tactical ETF Review: 7.25.2011
The budget talks in Washington are suffering from “gridlock” and so the risk of default still lurks. Meanwhile, the crisis facing the euro remains an evolving situation. But asset markets around the world don’t appear worried, at least as of Friday’s close. As our review below of ETF proxies for the major asset classes shows, buyers have had the upper hand recently. That’s a bit unnerving. Even in the best of times, a broad sweep higher in everything suggests there’s a correction brewing somewhere. That certainly looks like the case for U.S. stocks this morning: futures are reportedly “set to drop.” Meanwhile, here’s how the major asset classes stack up via representative ETFs through July 22…
Book Bits For Saturday: 7.23.2011
● The Man and the Statesman: The Correspondence and Articles on Politics
By Frédéric Bastiat
Review via The Wall Street Journal
Bastiat’s short essays, which he grouped under the title “Economic Sophisms,” are beloved by friends of laissez-faire. Late in the 19th century, small-government Democrats quoted him on the floor of the House against the high-tariff schemes of the GOP. The Republicans groaned when they heard Bastiat’s name. Unable to answer his arguments against government economic intervention, they charged him with being French. Familiar though Bastiat’s economic writings may be, his letters, until now, have been available only in their original language. “The Man and the Statesman,” the first in a projected English-language edition of Bastiat’s collected works, encompasses 209 letters as well as a sampler of his political essays and notes and a helpful glossary from the editors (Jacques de Guenin, Jean-Claude Paul-Dejean and David M. Hart). But the letters are the thing. Through them shines the most charming economist you have ever met.
Will Commercial Lending’s Revival Survive The Summer Slump?
The rebound in commercial and industrial (C&I) lending rolls on, but for how long? Recent history suggests a case for thinking positively. The value of C&I loans has risen in each of the last eight months through June. That’s the longest stretch of monthly increases since the recession formally ended in June 2009 and so it’s an encouraging sign that lending—a key indicator of future economic activity—has entered a period of sustained growth.
Jobless Claims Rise 10k: Biggest Jump In 8 Weeks
The message in today’s update on initial jobless claims is that the labor market recovery has stalled. The crowd has more or less suspected as much these last several months, but today’s numbers drive home the point. It’s clear from looking at the trend that we’re stuck in an elevated range. It could be worse, of course. New weekly claims could be rising. Instead, they’re treading water, albeit at levels that leave little room for comfort in thinking positively about what happens next for job creation and therefore the economy. True, overall growth still has the upper hand and there’s a number of reasons to expect more of the same. But the economy’s flying closer to stall speed.
A Long US Holiday For The Bond Vigilantes
Bond vigilantes are driving yields higher for certain European countries, but there’s little sign of stress in the U.S. Treasury market. The dollar is hardly perfect, but it’s still the world’s reserve currency and it claims a number of benefits over the euro. Even so, the low yields on Treasuries is surprising to some considering the surge of predictions that the fiscal and monetary stimulus in recent years would eventually drive yields skyward. In 2009, for instance, The Wall Street Journal argued that the vigilantes “appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.” Two years on, the benchmark 10-year Treasury yield is roughly 2.9% as of yesterday, or about 50 basis points lower than when the Journal expressed its concerns about the blowback from vigilantes on May 29, 2009.
One More For The Road…
Just as I’m heading out the door for a week-long holiday, I see that Financial Advisor has published my latest piece on a new generation of research focused on the eternal search for excess returns born of skilled trading, a.k.a. alpha. As per the article’s title, it’s an old debate with some new twists. For the details, read on here…
The Capital Spectator Takes A Holiday…
I’ll be traveling for the next week and so posting will be light to nonexistent until I return to the usual affairs on July 20 or thereabouts. To wit, man cannot live by economics and finance alone.
The Final Frontier Of Investing
Financial researchers have had great success over the years in deciphering some of the mysteries of asset pricing. Much of it boils down to recognizing that the source of excess returns—risk premiums—can be traced to various betas, or specific types of market risks, or factors or investment anomalies or whatever term you prefer. As productive as this effort has been, it’s only half the battle. The next phase of deciphering Mr. Market’s secrets—indeed, the critical phase—has only just begun. Figuring out how to efficiently manage risk factors–dynamic asset allocation—is still in its infancy. Nonetheless, this is the holy grail of investment strategy.
Book Bits For Saturday: 7.9.2011
● The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . and Are Ready to Do It Again
By Nicholas Dunbar
Summary via publisher, Harvard Business Press
“The Devil’s Derivatives” charts the untold story of modern financial innovation–how investment banks invented new financial products, how investors across the world were wooed into buying them, how regulators were seduced by the political rewards of easy credit, and how speculators made a killing from the near-meltdown of the financial system. Author Nicholas Dunbar demystifies the revolution that briefly gave finance the same intellectual respectability as theoretical physics. He explains how bankers created a secret trillion-dollar machine that delivered cheap mortgages to the masses and riches beyond dreams to the financial innovators. Fundamental to this saga is how “the people who hated to lose” were persuaded to accept risk by “the people who loved to win.” Why did people come to trust and respect arcane financial tools? Who were the bankers competing to assemble the basic components into increasingly intricate machines? How did this process achieve its own unstoppable momentum, ending in collapse, bailouts, and a public outcry against the stars of finance? Provocative and intriguing, “The Devil’s Derivatives” sheds much-needed light on the forces that fueled the most brutal economic downturn since the Great Depression.
