The president of the Minneapolis Fed, Narayana Kocherlakota, explained in a speech yesterday how deflation is possible but unlikely. Near the end of his talk he provided the setup: “I mentioned earlier that inflation has been near 1 percent recently. These data have led some observers to worry about the possibility of a multiyear period of falling prices—that is, persistent deflation. I don’t see this possibility as likely. It would require the FOMC to make the surprising mistake of ignoring the long run in its desire to fix the short run.”
THE LIQUIDITY FACTOR
In a new interview with Morningstar, Roger Ibbotson explains why liquidity (or the lack thereof, to be precise) should be considered a distinct risk factor in equity investing.
MID-AUGUST PERFORMANCE UPDATE FOR THE MAJOR ASSET CLASSES
Economic anxiety is taking a toll on risky assets so far in August. The mid-month summary for the major asset classes boils down to: bonds are up, stocks, REITs and commodities are down. High-yield fixed income has lost ground on a price basis as well this month through August 16, based on representative ETFs listed in the table below.
A FUNDAMENTAL PROBLEM
Is the current wave of risk aversion a speculative affair? No, not at all. There are fundamental drivers that are creating new headwinds for the economic recovery. At the core of the problem is the decline in inflation expectations. In a number of posts back in May we wondered if the then-nascent warning signs were simply noise. Three months later, it’s clear that the economy is struggling anew, and for reasons that won’t quickly fade.
SATURDAY READING ROUNDUP: 8.14.2010
►Bank Loans: Still Contracting
Information from various sources suggests that the number of loans that banks are making to businesses continues to fall. The contraction appears to be driven by both supply and demand; banks are extending less credit, and businesses are asking for less. The restriction of credit may be one important factor that is constraining the current recovery, since businesses, especially small ones, rely on bank loans and access to credit to finance their operations, capital expenditures, and growth.
►In a sluggish economic summer, no easy fix ahead
“You can’t force people to take out a loan or spend money that they don’t want to spend,” says Alice Rivlin, who served as the Fed’s No. 2 official in the late 1990s.
A BIT OF GOOD NEWS IN RETAIL SALES, A.K.A. IT COULD HAVE BEEN WORSE
Retail sales posted a modest gain in July and consumer prices advanced as well, delivering some much-needed statistical counterpoints to the deflation-is-fate argument of late. But closer inspection of the numbers leaves plenty of room for debate about the economic outlook. Beggars, of course, can’t be choosy and so the numbers du jour are welcome if not exactly cause for celebration.
NEW JOBLESS CLAIMS TREND HIGHER
For months, it was treading water. That was bad enough. But now it’s rising, raising fears that it could go higher still. Today’s update on weekly jobless claims shows that new filings for unemployment benefits rose to 484,000 last week—the highest since February.
GROWTH & DEBT, THE CHICKEN & THE EGG
Is high debt a drag on economic growth? Or is a recession born of other catalysts the source for high debt? Inquiring minds want to know.
A QUICK REVIEW OF TARGET DATE FUNDS…
I recently wrote a short take on TDFs for BankRate.com. The moral of the story: these products may harbor more risk than it appears. You can read the story here.
BETTER LIVING WITH DERIVATIVES?
Yes, it’s possible. Unless the Dodd-Frank Wall Street Reform and Consumer Protection Act throws a wrench or two into the machine.