In my previous post, I wrote that the case for a second round of quantitative easing (QE2) is warranted, given the current economic climate. Why should we expect QE2 to help more than it hurts? The answer is based in part on interpreting recommendations by Milton Friedman in the late-1990s regarding Japan’s struggle with deflation as it relates to current conditions. Of course, Japan never really conquered its deflationary problems, but that’s due in no small degree to the fact that Japan never really embraced Friedman’s advice wholeheartedly. Without going into detail here, let’s just say that Japan’s focus was on price stability rather than engineering a dose of inflation to correct for the deflationary bite. The distinction was and remains a critical factor for assessing what’s happened in the Japanese economy, and why, ever since.
REVISITING FRIEDMAN’S ADVICE
Economist Scott Sumner makes a good point: “For decades the Fed has steered the economy along a path of two to three percent inflation. The policy has not been controversial. Sometimes they ease, and sometimes they tighten.” But the policy has become controversial these days. What’s changed? Again quoting Sumner: “Recently inflation has run closer to 1%, and Bernanke has suggested pushing the rate back up to 2%.” Those are fighting words in some circles.
SUPERBOWL OF INDEXING CONFERENCE
I’ll be speaking at the 15th annual Superbowl of Indexing conference in Phoenix on Monday, Dec. 6. In particular, I’ll be one of several panelists on the asset allocation seminar at 2:30pm. If you’re also attending, please drop by and say hello. For more information about the conference, which runs Dec. 5-8, you can find all the details here.
THE TRENDLESS TREND IN JOBLESS CLAIMS ROLLS ON
If you’re feeling the sting of statistical whiplash from watching the trendless trend for weekly jobless claims, you’re not alone. Whenever this crucial measure of the labor market show signs of progress, it doesn’t take long to reverse the good news with a fresh round of discouraging numbers. But just when you’re set to throw in the towel and accept a darker fate on this measure, it surprises on the upside. That frustrating state of affairs summarizes what’s been unfolding with initial jobless claims in 2010, and there’s no reason to think anything’s changed with this morning’s news that new filings for jobless benefits dipped last week.
BUFFETT RECOMMENDS INDEXING…AGAIN
He said it again. Yes, Warren Buffett, one of the greatest active investors of all time, thinks indexing is a good idea for most folks. The Oracle of Omaha gave index funds a plug in a new article in Fortune.
READING ROUNDUP FOR WEDNESDAY: 10.20.2010
►Britain to slash welfare in austerity gamble
Sumeet Desai/Reuters/Oct 20
Britain will on Wednesday take an axe to its welfare state as part of an 80 billion-pound cut in public spending that could seal the fate of both the economy and the coalition government…Economists are split between those who say the drastic action is needed and those who argue it will tip Britain back into recession. Almost all agree, however, that growth will slow and the Bank of England will have to keep monetary policy super-loose for the foreseeable future.
THE MONETARY ROCK & THE HARD PLACE
China’s central bank raised its benchmark interest rate by 25 basis points yesterday in a bid to slow inflation’s momentum. The country’s inflation rate in August was reported at 3.5%, higher than the government’s 3% target, and the September update is likely to report a rise. Meanwhile, the Chinese economy is reportedly growing at 9%-plus.
UP & DOWN WITH HOUSING STARTS & PERMITS IN SEPTEMBER
Waiting for the housing recovery is like waiting for paint to dry. It’ll happen, but not any time soon. The best we can say is that the market appears to be stabilizing, although it’s a stability at a greatly diminished level from the glory days, a.k.a., the years before 2007.
ALPHAS, BETAS & ASSET ALLOCATION
Morningstar yesterday advised that “deciding whether to buy or keep a fund that was once a top performer can be tricky.” In fact, that’s understating the challenge if you consider that managing a portfolio of active managers requires two skills: predicting when market-beating returns are likely to prevail and deciding when the bloom has fallen from the rose.
READING ROUNDUP FOR MONDAY: 10.18.2010
►Bernanke caution gives markets pause, as US dollar rebounds
Michael Hewson/ShareCast/Oct 18
For the last six weeks the US dollar has slid lower relentlessly on speculation that the Federal Reserve will embark on a further stimulus program to shore up the flagging US economy. Bernanke’s comments on Friday more or less confirmed the inevitability of such a move, and yet the US dollar index despite making new 8 month lows actually finished the day higher than when it started, which perfectly illustrates the dichotomy that can exist in currency markets between expectation and reality.
The fact is the Fed chairman’s comments about the difficulties in determining the pace, size and costs of any purchases are weighing on the FOMC committee with respect to how aggressive they should be at their November meeting. This has given the markets pause for thought and may give the US dollar some respite. Bernanke’s views on the prospects of the US economy are likely to be further analysed when he gives another speech on Tuesday night.