The economy may be facing new headwinds, but the depth of the threat is still an open debate for those who worship at the altar of momentum and technical analysis. Representative ETFs for the major asset classes are no longer making new highs, but the selling so far has been modest. That’s no assurance that all’s well, of course, although the fact that prices have held up relatively well in the face of fresh macro worries is impressive. In fact, the latest round of anxiety has inspired the U.S. bond market to rally sharply, albeit for all the wrong reasons. Indeed, caution is in the air elsewhere. The week ahead may be a potent test for the crowd’s resiliency as updates arrive in the days to come for durable goods orders, initial jobless claims, and personal income and spending. Meantime, here’s a closer look at how the major asset classes stack up via proxy ETFs as of Friday’s close:
Book Bits For Saturday: 5.21.2011
● Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By Gretchen Morgenson and Joshua Rosner
Summary via publisher, Times Books
In Reckless Endangerment, Gretchen Morgenson, the star business columnist of The New York Times, exposes how the watchdogs who were supposed to protect the country from financial harm were actually complicit in the actions that finally blew up the American economy. Drawing on previously untapped sources and building on original research from coauthor Joshua Rosner—who himself raised early warnings with the public and investors, and kept detailed records—Morgenson connects the dots that led to this fiasco. Morgenson and Rosner draw back the curtain on Fannie Mae, the mortgage-finance giant that grew, with the support of the Clinton administration, through the 1990s, becoming a major opponent of government oversight even as it was benefiting from public subsidies. They expose the role played not only by Fannie Mae executives but also by enablers at Countrywide Financial, Goldman Sachs, the Federal Reserve, HUD, Congress, the FDIC, and the biggest players on Wall Street, to show how greed, aggression, and fear led countless officials to ignore warning signs of an imminent disaster.
Is The Treasury Market’s Inflation Forecast Flashing A Warning?
The outlook for inflation is dropping fast, according to the yield spread between the nominal and inflation-indexed 10-year Treasuries. That’s worrisome if the economy’s growth momentum is slowing. Although some pundits argue that higher inflation is a big risk, the Treasury market is telling us different. If the economy is downshifting, falling inflation expectations are a sign of trouble.
Do High Gasoline Prices Threaten Consumer Spending?
The rebound in retail sales is at the top of the list for thinking that the economy will weather any challenges to growth in the months ahead. Consumer spending, after all, accounts for roughly 70% of GDP, as we’ve so often been told. That implies that a robust rate of growth in retail sales is just what the doctor ordered to chase away the business cycle blues. The good news is that the headline number for retail sales certainly looks encouraging these days. But if we strip out sales at gasoline stations, the case for optimism suffers a bit.
Jobless Claims Fall For 2nd Week
You can almost hear the collective sigh of relief after reading this morning’s update on initial jobless claims. There really wasn’t much room for more bad news, which makes last week sizable fall in new filings for unemployment benefits all the sweeter. Yup, we dodged a bullet here–for the second week in a row. Jobless claims are still running too high to offer much comfort, but there’s a stronger argument today in favor of seeing the recent jump in this series as a statistical blip…maybe. One week at a time here… again.
Shift Risk
Barry Eichengreen on the risk from changes in global economic power and influence:
Shifts in global economic and financial power create unfamiliar circumstances, and unfamiliar circumstances create risks. In the 1960s and 1970s the rising powers, Europe and Japan, complained of destabilizing economic impulses emanating from the United States. This source of economic risks has been around for a long time, in other words, although its form continues to mutate. But now, in addition, the U.S. and other advanced economies must worry about the risk of adverse shocks arising out of events in China and other emerging markets. The day when the Chinese economy was too small and isolated to have a first-order impact on the rest of the world is long past, in other words. Policy analysts in the U.S. and other advanced countries need to worry about the impact on their own economy of a sharp economic slowdown in China, of a sudden drop in property prices in that country’s major cities, or of an outbreak of labor unrest. These are not matters on which U.S. policy planning has traditionally focused. It now should.
Workers Of The World Unite… And Spend
Dominique Strauss-Kahn has some explaining to do that goes beyond defending himself against sexual assault charges. Maybe it’s just me, but I’m having a hard time squaring DSK’s preference (and financial ability) for living large and his political alliance with socialism. It’s been a long road from the Paris Commune to Porsche, the 21st century symbol of socialism.
The Big Fade On The REIT Yield Premium
It’s been more than two years since the markets hit bottom after the financial crisis of late 2008/early 2009. What a long strange trip it’s been. It may get stranger still. But in the interest of finding some context, it’s useful to compare returns since the trough. Let’s arbitrarily call the end of February 2009 as the bottom. How have markets fared since?
Housing Activity Weakens In April & Industrial Production Is Flat
Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.
Slim Index Pickings In 401(k) Plans
Ron Lieber argues that 401(k) plans should offer index funds. “This shouldn’t be a controversial statement,” he writes in a recent New York Times article. “Yet it passes for one in Washington, where regulators and legislators are still mired in a never-ending debate over whether stockbrokers, certain insurance salespeople and others ought to meet that standard, known in legal circles as a fiduciary duty.”