The Republicans took control of the House of Representatives in yesterday’s election and made progress but fell short of a majority in the Senate. The GOP, in other words, now has co-responsibility for the economy. Deciding if this is a political boon, or the equivalent of walking into a business cycle trap, will take time to assess. Meanwhile, this much is clear: the sluggish economy is no less sluggish now that the Republicans have a formal stake in the macro outcome. The only question is how the new party in power will influence policy in Washington and what that will mean, if anything, for the labor market, GDP, government debt levels, and all the rest.
THE CRUX OF THE QE2 BISCUIT…
It’s all about expectations. A nebulous concept, to be sure, but one that’s not beyond influencing macro outcomes with some control via monetary policy. To what extent? To what end? Ideally, it runs like this, as per Professor David Beckworth: “Here is why I think QE will pack an economic punch, if done correctly. The expectation of permanently higher prices will cause cash-flushed firms, households, and other entities to start spending more today. Right now there is an excess money demand problem that could be stemmed by meaningfully changing the inflation outlook.”
ANOTHER LOOK AT REBALANCING…
Is rebalancing a tool for managing risk? Or maybe it’s a source for minting benchmark-beating returns. No, wait–it might be both. Really? In the new issue of Financial Advisor magazine, I take a fresh look at rebalancing in: Rethinking Rebalancing.
QE2’s SUCCESS SO FAR…
Critics of the anticipated launch of the Fed’s new round of quantitative easing (QE2) to lower medium and long-term interest rates have fallen into two broad camps. One says that the policy won’t work. The second argues that QE2 threatens to create new problems for the economy, ranging from higher inflation that spirals out of control to asset bubbles and other negative consequences. And, of course, some attacks incorporate both of these points.
PERSONAL INCOME SLIPS, SPENDING RISES FOR SEPTEMBER
Disposable personal income (DPI) slipped last month while personal consumption expenditures (PCE) rose, the U.S. Bureau of Economic Analysis reports. The mixed profile for September isn’t surprising these days, although it does offer one more piece of statistical evidence for keeping optimism in check about the near-term prospects for economic growth.
THE BRAVE NEW (AND EVOLVING) WORLD OF ALTERNATIVE BETAS
PowerShares is planning to launch five factor ETFs based on the S&P 500, according to an SEC filing. It’s one more sign that a new era is dawning for alternative betas and enhanced asset allocation opportunities.
MORE OF THE SAME IN Q3 GDP: SLUGGISH GROWTH
The U.S. economy expanded at an annualized 2% in the third quarter, the Bureau of Economic Analysis reports. The rate of GDP increase for July through September is up slightly from Q2’s 1.7% pace, but still well below the 3.7% logged in this year’s first quarter or the robust 5.0% reading from last year’s final three-month stretch. In other words, the economy’s continuing to muddle along with enough forward momentum to keep another recession at bay. At the same time, today’s GDP report isn’t likely to inspire confidence that economic growth is sufficient to cure the sluggish trend in the labor market—the primary macro challenge these days.
CAN WE BELIEVE THE DIP IN JOBLESS CLAIMS THIS TIME?
Today’s update on weekly jobless claims delivered a wallop—in the right direction for a change. It may be another head fake, but on its face this morning’s report is the best news in months for this measure of the job market. It’s only one number, of course, and so all the usual caveats apply. All the more so given the volatility in this data series and the fact that we’ve been hoodwinked many times before in thinking that the stat du jour on this front was a sign of improvement in the labor market only to find that, well, it wasn’t. But for the moment, there’s a new talking point on Wall Street and it’s a refreshing change of pace from the usual gloomy news.
THE STRANGE WORLD OF MONETARY ECONOMICS IN 2010
GMO’s Jeremy Grantham, surely one of the finest investment strategists of our time, is no fan of the Federal Reserve’s track record over the past decade or so. In fact, he’s gone on record with sharp criticisms of the central bank. This is an institution, after all, that’s made mistakes, to say the least. But how to proceed? In his latest quarterly missive, Grantham remains skeptical that the Fed has a silver bullet solution up its sleeve for the various problems that ail the economy at the moment. He did, however, suggest in so many words that Bernanke and company should adopt an inflation target. A reasonable idea, but one that comes with some assumptions on the mechanics–assumptions that complicate the analysis at the moment on what the Fed should, and shouldn’t do, for those of a particular world view.
LET A THOUSAND INDEXES BLOOM
Choosing an index to represent a particular beta is almost as difficult these days as deciding how to design and manage asset allocation. It wasn’t that long ago when there was generally one choice: capitalization weighted indices. Now there’s a growing mix of so-called alternative weighted benchmarks, and more are on the way.