Unemployment is still high—9.6% as of last month. But is it structurally high? In other words, is the rise of joblessness due to fundamental changes in the economy? Or is the fallout from the recession the main problem? The answer matters. If structural unemployment dominates, the case for additional stimulus—monetary or fiscal—is weakened. A new round of quantitative easing, for instance, would be of little if any value if the economy is suffering from structural unemployment.
A CHANGE OF STRATEGY FOR BERNANKE & CO? MAYBE, BUT NOT YET
The Federal Reserve announced it would keep Fed funds at a target rate of zero to 0.25%. No surprise. The economy is weak and the central bank intends to hold nominal rates at virtually nada for the foreseeable future. Tell us something we didn’t know. How about detailing more of the internal thinking on the contentious issue of whether the Fed is set to roll out more quantitative easing (QE), such as buying Treasuries. QE, in its various forms, is the only policy option left at the zero bound and Bernanke and company appear to be laying the groundwork for rolling out a new round of this monetary medicine…maybe. Okay, that’s a bit more intriguing.
READING ROUNDUP FOR TUESDAY: 9.21.2010
►18-month recession ended in June 2009
Megan Woolhouse/Boston Globe
“The Great Recession officially began in December 2007 and ended in June 2009, making the 18-month-long recession the longest since the end of World War II, according to the National Bureau of Economic Research, the Cambridge nonprofit that declares the start and end of such downturns.”
►Why There’s No Joy Over the Recession’s End
Rick Newman/US News & World Report blog
“Maybe we need a new definition of ‘recession.'”
IT’S OFFICIAL: THE RECESSION ENDED IN JUNE 2009
They finally did it. The National Bureau of Economic Research today declared an official end to the Great Recession. The group announced that “a trough in business activity occurred in the U.S. economy in June 2009.” According to NBER, the recession lasted 18 months, the longest in the post-World War II period. The previous records–16 months–were set in 1973-75 and again in 1981-82.
FUND CHOICES & STRATEGIC PERSPECTIVE
Two ETFs bit the dust last week—deservedly so. What was Geary Advisors LLC thinking when it launched state-focused ETFs? One targeted Texas stocks, the other held Oklahoma companies. Whatever the investment merits (and they were spare, at best, in my opinion), the marketplace has rendered its verdict. Apparently there are some products that are over the top, even in finance.
BOOK BITS FOR SUNDAY: 9.19.2010
● The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble
by Eric Janszen
Excerpt via Street.com
“The bright side of the crisis we’re currently facing is that it could serve as a political forcing function for the United States to develop its competitive muscle and eliminate its dependence on foreign borrowing and oil — the main source of our current problems. To execute a true restructuring plan requires strong and uncompromising leaders who are willing to level with the American people, to explain the seriousness of our problems, the sacrifices we all must make to solve them, the new and better nation for ourselves and our children that we will enjoy if we do, and the disaster that awaits us if we fail to meet this challenge.
That sounds good, but how? I argue that we can nurture the seeds of a new American industrial economy — a productive economy that generates profits from technological industries such as computers, biology, medicine, and high-technology materials — by cultivating next-generation transportation, energy, and communications infrastructure. ”
READING ROUNDUP FOR SUNDAY: 9.19.2010
►Can the Fed Offer a Reason to Cheer?
Tyler Cowen/NY Times
The economy needs help, but monetary policy, which is the Fed’s responsibility, has not been very expansionary. This is true even though the Fed has increased the monetary base enormously since the onset of the financial crisis…If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year…
In failing to push harder for monetary expansion, is Mr. Bernanke a wise and prudent guardian of the limited discretionary powers of the Fed? Or is he acting like a too-hesitant bureaucrat, afraid to fail and take the blame when he should be gunning for success?
We still don’t know which narrative is more accurate, but the Fed is not receiving enough signals of support from Congress.
►US Inflation: What is the “Trimmed Mean” CPI and What Does It Tell Us?
Ed Dolan’s Econ Blog
Monthly inflation figures can sometimes signal a turning point in inflation, but those turning points are just as often masked by random noise. At present, the core CPI and trimmed mean CPI show that US inflation is still on a downward trend. Expect the Fed to stick to its easy-money policy until the trend shows a clear upward turn.
BENCHMARKS & MODEL PORTFOLIOS
The SEC is “looking into” model ETF portfolios offered by financial advisors, Investment News reports. “The practice has come to the attention of the staff and they are looking at various aspects,” an SEC spokesman wrote in an email to the publication. The article suggests that the catalyst for the inquiry is the abuse of promoting model portfolios. As the story notes “some industry experts worry… that many of the advisers offering these model portfolios aren’t sophisticated enough to do the proper due diligence on the underlying exchange-traded funds. In the long run, they say, investors could get hurt.”
STRATEGIC THINKING & MEAN REVERSION IN MARKETS
Contrarianism has a long history in investing, and quite a bit of success as well. Graham and Dodd’s Security Analysis
HOW TO THINK ABOUT ECONOMICS, PART II
Last week I wrote about an intriguing new book—The Puzzle of Modern Economics
