Manufacturing activity in the state of New York “improved in May, but at a slower pace than in April,” according to this morning’s update of the Empire State Manufacturing Survey from the New York Fed. Meanwhile, the outlook for U.S. economic growth softened a bit according to economists surveyed by the National Association for Business Economics. “NABE panelists revised their projections for economic growth in 2011 downward compared with their February projections,” says Richard Wobbekind, NABE president in a statement. “Real GDP is expected to grow at a moderate pace of roughly 3 percent in the current year and only slightly faster in 2012.”
Strategic Briefing | 5.16.2011 | US Debt Ceiling
Debt ceiling drama starts today
CNNMoney | May 16
Monday’s the day: The federal debt will hit its legal limit and Congress doesn’t plan to do anything about it. That leaves Treasury Secretary Timothy Geithner in a bit of a pickle. It now falls to him to jump through hoops every day to keep the world’s largest economy from defaulting on its legal obligations. Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so. But then he said that’s it. If lawmakers don’t get it together by Aug. 2, the United States will no longer be able to pay its bills in full.
Book Bits For Saturday: 5.14.2011
● The Next Convergence: The Future of Economic Growth in a Multispeed World
By Michael Spence
Review in The Economist
Never before have so many people grown rich so quickly. Japan was the first country to achieve sustained, high-speed growth, in the post-war years, but it did so alone. A handful of smallish Asian tigers followed. Mr Spence wonders whether that formula can work when 60% of humanity, led by India and China, try the same thing. Globalisation, he notes, has been critical to the rapid growth of emerging markets. But it has also led to rising inequality in the rich countries, and they may now well respond by raising protectionist barriers. Or maybe not. Mr Spence is not sure about this nor, unfortunately, of many of the other issues he tackles. “The Next Convergence” feels less like a book than a transcript of the author thinking out loud about a hotch-potch of contemporary economic issues.
Looking For Demons In Consumer Price Inflation
Headline consumer price inflation (CPI) rose 0.4% last month on a seasonally adjusted basis, or slightly lower than March’s 0.5% increase, the Labor Department reports. That translates into a 3.1% rise over the past year. Inflationary pressures, at least by the government’s reckoning, remain modest. Ditto for the outlook on economic growth, which suggests that inflation isn’t likely to be a major problem for the foreseeable future. The usual suspects will nonetheless scream otherwise, but it’s hard to make that case based on the Labor Department’s numbers.
Jobless Claims Remain Elevated Despite Last Week’s Sharp Decline
Initial jobless claims dropped sharply last week, the Labor Department reports, but we’re still not out of the woods. The recent jump in new filings for jobless benefits went into reverse, but no one can ignore the still-elevated levels for this series. And until we see more reports like this morning’s, there’s going to be some awkward questions.
Inflation Expectations Retreat
Commodity prices have tumbled recently, and inflation expectations have been pared too, albeit only modestly. Is there a connection? Yes, or so it appears. But for the same reason that we should be cautious in reading too much into the inflation outlook based on a surge in prices of raw materials, the caveat applies when prices fall. Short-term commodity prices are too volatile to use as a lone source for gauging prospective inflation. Nonetheless, it’s hard to overlook the recent shift in the Treasury market’s forecast.
Research Review | 5.11.2011 | Equal Weighted Portfolios
Update on MSCI Equal Weighted Indices
MSCI Research Bulletin | Dec. 2010
This paper illustrates the effect of equal weighting an index relative to a capitalization weighted index. An equal weighted index exhibits a small cap and value tilt, lower index concentration, and more stable sector weights. However, an equal weighted index has higher index turnover and lower investment capacity relative to a capitalization weighted index. Over the last twelve years (December 1998 to October 2010) the MSCI Equal Weighted Indices outperformed their capitalization weighted counterparts in the major countries and regions analyzed. This outperformance appears to be mainly driven by the small cap and value tilt, which are well-documented sources of excess return in financial literature.
Average Is Boring (And Competitive)
Jeff Troutner of Equius Partners laments that too many investment advisors too often succumb to the temptations of extreme and overly active portfolio strategies despite the rise of indexing. Indeed, he suggests that indexing has been hijacked and perverted. “Thousands of advisors, who long ago convinced themselves and their ever-changing clientele of their intellectual superiority over ‘the market’—only to be consistently humbled by it—have shifted their strategies from individual stock picking to ETF picking with a market timing overlay.”
What Are Econ Bloggers Thinking?
The Kauffman Foundation’s released its new quarterly review of economic bloggers, which includes the two cents from yours truly. As a preview, the survey reports:
“Economics bloggers seem more pessimistic in their outlook on the U.S. economy than they were at the beginning of 2011, though 85 percent believe overall conditions are mixed, facing recession, or in recession. For an economy in which growth is the norm, 32 percent of respondents think that the U.S. economy is worse than official statistics indicate, and only 5 percent believe it is better. When asked to describe the economy using five adjectives, ‘uncertain’ remains the most frequently used term to describe the economy.”
Back To The Rock & The Hard Place?
The stock market has been famously described as a discounting machine. The machine isn’t flawless and so there’s always a risk that the forecast du jour is misleading. But it’s been right enough of the time to inspire monitoring Mr. Market’s real-time outlook, if only as one of several tools for looking ahead. The first challenge is filtering out the noise in the short term. We can start by reviewing rolling 12-month percentage changes in equities and comparing that with the equivalent for the economic trend.