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.
Job Growth Weakens Again In June
The number we’ve all been waiting for is a disappointment. Net private-sector job creation was a slim 57,000 in June, below even May’s dismal 73,000 rise, which was revised down from the initially reported 83,000, the Labor Department reports. There had been hope that May was an anomaly, a one-off affair that would quickly return to the stronger levels of job growth witnessed in February, March and April. Yesterday’s modestly encouraging employment report via ADP certainly inspired that optimism. But today’s update is a sobering reminder that the economy will continue to struggle through the summer. Granted, the employment report, grim as it is, isn’t fatal. But it’s a sign that the pace of growth has slowed considerably and, even worse, it suggests that a revival in economic momentum faces stronger headwinds.
Is The Labor Market Reviving?
Have we dodged a macro bullet? Today’s employment news offers two data points for thinking positively. New claims for jobless benefits dropped again last week and the ADP Employment Report for June reports a revival in private sector job growth after the sharp downshift in May. The numbers aren’t particularly impressive per se, especially for the new claims tally. But there’s enough juice in the latest updates for arguing that the recent stumble in the macro trend isn’t getting worse and may very well be giving way to a stronger rate of growth.
Early Economic Indicators For June Are Moderately Encouraging
The first clues about June’s economic activity are in and the numbers leave room for optimism, but not nearly enough to eliminate worry entirely. Today’s reading on the services sector via the ISM Non-Manufacturing Report reveals a slower rate of growth last month. Meanwhile, the June reading on manufacturing shows that a slight increase in activity. The good news is that in both cases growth still has the upper hand, albeit at a lesser pace for services companies, which constitute the lion’s share of the private sector. Nonetheless, the idea that the summer of 2011 isn’t destined to follow the previous year’s dismal downturn remains alive and kicking. But the week’s ahead will surely test this faith.
Running The Numbers On A Strong Asset Allocation Fund
Human nature being what it is, investors are forever looking for a magic mix of investments that will soar in good times and offer a safe harbor amid turmoil. Nirvana doesn’t exist, of course. If it did, the world would figure out the secret and pile in, arbitraging away any future value in the process. Different asset allocations do generate different results over time, of course, and so we should spend time thinking how to design and manage our portfolios. But there are limits to even the best-laid plans of mice and men. The question, then, is figuring out a prudent framework for considering out options and evaluating the potential rewards. What follows is an example of how we might proceed by looking at one asset allocation fund that’s actively managed and boasts a handsome record.
Book Bits For Saturday: 7.2.2011
● Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street
By Tomas Sedlacek
Summary via publisher, Oxford University Press
In The Economics of Good and Evil, Sedlacek radically rethinks his field, challenging our assumptions about the world. Economics is touted as a science, a value-free mathematical inquiry, he writes, but it’s actually a cultural phenomenon, a product of our civilization. It began within philosophy–Adam Smith himself not only wrote The Wealth of Nations, but also The Theory of Moral Sentiments–and economics, as Sedlacek shows, is woven out of history, myth, religion, and ethics. “Even the most sophisticated mathematical model,” Sedlacek writes, “is, de facto, a story, a parable, our effort to (rationally) grasp the world around us.” Economics not only describes the world, but establishes normative standards, identifying ideal conditions. Science, he claims, is a system of beliefs to which we are committed. To grasp the beliefs underlying economics, he breaks out of the field’s confines with a tour de force exploration of economic thinking, broadly defined, over the millennia. He ranges from the epic of Gilgamesh and the Old Testament to the emergence of Christianity, from Descartes and Adam Smith to the consumerism in Fight Club. Throughout, he asks searching meta-economic questions: What is the meaning and the point of economics? Can we do ethically all that we can do technically? Does it pay to be good?
Major Asset Classes | June 2011 Performance Update
June was a mixed bag of investment results. Emerging market bonds (Citigroup ESBI-C) led the pack among the major asset classes, advancing 1.1% last month. Commodities (DJ-UBS Commodity) were the big loser for the second straight month, shedding 5.0% in broad terms. Our passive market-value weighted mix of everything—the Global Market Index—suffered under the strain of the widespread selling. GMI fell 1.0% in June. GMI was off in May as well and so the index just had its first run of two straight monthly losses in a year.
The Road To Nowhere?
Today’s update on weekly jobless claims doesn’t tell us much. New filings for unemployment benefits inched lower last week by 1,000 to a seasonally adjusted 428,000, but that’s effectively no change. As a result, there’s still plenty of mystery about what the crucial July 8 employment report for June will reveal. There was some hope that today’s jobless number would offer some perspective, but the veil of uncertainty remains tightly drawn.