`In the wake of yesterday’s Federal Reserve press conference, at which Fed chairman Bernanke lowered growth expectations for the U.S., the Treasury market’s inflation outlook slipped to roughly the lowest level so far this year. Neither the Fed’s forecast for GDP or the latest inflation outlook was radically different, but the trend is worrisome. The implication is that while a recession isn’t imminent, the economy appears to be headed for a murky period of growth that’s sufficient to keep us out of a new cataclysm yet too slow to offer much in the way of repair and recovery.
Strategic Briefing | 6.22.2011 | The End of QE2
Economy’s ‘training wheels’ to come off
CNNMoney | June 22
The Federal Reserve’s latest round of stimulus ends on June 30, but economists think it’s no big deal. The policy, known as the second round of quantitative easing, or QE2 for short, is likely to have little effect on financial markets or the pace of the recovery, they say. “I don’t think the end of QE2 will have any significant immediate impact on interest rates, stock prices, jobs or the broader economy,” said Mark Zandi, chief economist with Moody’s Analytics.
Bernanke May Try to Spur U.S. Economic Growth by Extending Record Stimulus
Bloomberg | June 21
Federal Reserve Chairman Ben S. Bernanke will probably delay the central bank’s exit from record stimulus, economists said in a survey, giving the flagging economy a boost without resorting to additional asset purchases. Seventy-nine percent of 58 economists expect Bernanke to sustain the Fed balance sheet at current levels until October or later, compared with 52 percent who held that view before the Fed’s last policy meeting in April, according to a Bloomberg News survey conducted last week. Ninety percent of those surveyed predict the Fed will wait until the fourth quarter before dropping its pledge to hold interest rates low for an “extended period.”
Defending MPT… Again
Modern portfolio theory (MPT) has become the whipping boy in recent years, and rightly so. Too many investors and financial advisors put it on a pedestal and assumed it had powers it could never achieve. Couple that with a global financial crisis and you have the groundwork for disappointment.
Like every theory, MPT is flawed and makes simplifying assumptions about the real world. That’s the nature of theories. But while it’s easy to pick apart MPT, assumption by assumption, at its core is a simple but effective foundation for investing. The fact that the historical record offers support for MPT-inspired real-world portfolios sweetens the deal. That’s not always obvious in a world that favors looking at one market at a time, or emphasizing the short term. But a careful look at how MPT performs over time suggests there’s value here.
Tactical ETF Review: 6.20.2011
With the last days of spring dwindling, the equity market is playing defense and bonds are again taking wing. The proximate causes include fresh worries that a rough patch or worse has descended on the economy and that the debt crisis in Greece threatens wider trouble. One sign of distress is the S&P 500, which is trading just above its 200-day moving average as of Friday. A thin 1% buffer now prevails, the smallest margin since last September. “If you feel you’ve seen this before, well, you have,” Laszlo Birinyi of Birinyi Associates tells The New York Times. “The market is in a correction — but so what? We’ve had about five corrections of one kind or another in this bull market. It’s not the end of the world.” Survival, however, is getting complicated. The Economist warns that’s it’s still premature to underestimate politicians’ capacity for turning “a temporary softening of the global recovery into something worse.” Meantime, here’s a broad summary of how the major asset classes are faring recently amid all the uncertainty via proxy ETFs through Friday’s close:
Book Bits For Saturday: 6.18.2011
● America’s Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream-and How We Can Turn the Tide Before It’s Too Late
By Peter Ferrara
Summary via publisher, HarperCollins
In America’s Ticking Bankruptcy Bomb, conservative policy expert Peter Ferrara explores the issue that will be THE hot-button topic from now until the 2012 presidential election: the looming bankruptcy of the federal government of the United States of America. Providing indisputable evidence that the American welfare state, aggressively expanded by Barack Obama and the Democrats in Congress, is on the verge of rapid and total collapse, Ferrara offers concrete proposals for reforming entitlement programs along free market lines that will shift responsibility from centralized bureaucracies to individual Americans. For every concerned citizen, America’s Ticking Bankruptcy Bomb is a must-read—a blueprint for avoiding the impending catastrophe before it’s too late.
IMF’s Revised GDP Forecast: Down, But Not Out
The IMF cut its forecast for global economic growth today, albeit slightly. The organization expects global GDP to rise this year by 4.3%, down from its previous 4.4% estimate. “The global economy, hit by slowdowns in Japan and the United States, is expected to reaccelerate in the second half of the year, but growth remains unbalanced and concerted policy action by major economies is needed to avoid lurking dangers,” the IMF advises.
Strategic Briefing | 6.17.2011 | The Greek Debt Crisis
Worries Grow About Breadth of Debt Crisis
The New York Times | June 17
Two Deutsche Bank strategists, Jim Reid and Colin Tan, warned in a report on Thursday that this Greek crisis had echoes of the collapse of the Lehman Brothers investment bank in September 2008, an event that plunged the financial system into chaos and required the commitment of trillions of dollars in government support to stave off another Great Depression. “Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” they wrote. “The period is resembling the buildup to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.” One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. The European Central Bank, too, is a big holder of debt, and analysts said in the event of a default it might need to be recapitalized, another blow to confidence.Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day.
Jobless Claims Fall To 4-Week Low
With each new data point on weekly jobless claims, the theory that the recent jump in filings is temporary grows stronger. Last week’s claims fell 16,000 to a seasonally adjusted 414,000, the lowest in a month and well below the recent peak of 478,000. That’s still too high to inspire much confidence about economic growth or the future of job creation, but it’s getting tougher to argue that a new recession is here based solely on this data series. True, this is just one number, but it’s an important leading indicator. If the economy is contracting, or set to contract, it’s likely that there’d be a clear sign in jobless claims. For now, the worst you can say is that the numbers in new claims are ambiguous.
A Recession Or A Rough Patch?
Chatter about a new recession ticked up yesterday after the Greek debt crisis took another turn for the worse. Yale economist Robert Shiller, author of Irrational Exuberance
Mixed News On Inflation
Today’s inflation update for May was ripe with conflicting signals. There’s enough here for inflation hawks as well as doves to keep the debate bubbling until the next round of numbers. Headline inflation slowed last month to a 0.2% rise on a seasonally adjusted basis, down from 0.4% in April. But core inflation, which excludes food and energy, accelerated, rising 0.3% in May—the fastest monthly pace in nearly three years. That’s still well within the Fed’s 1%-to-2% target range, but the fact that core’s rate delivered a rare increase above headline’s pace raises warning flags by some accounts.