U.S. inflation expectations have tumbled recently (see here, for example). Is this an isolated American trend? No, unfortunately. It’s global, as Rebecca Wilder reports. (HT: David Beckworth).
IS THE DIP REAL?
Today’s weekly update on initial jobless claims suggests that the labor market is finally turning (or will soon turn) for the better. Maybe. For the first time in nearly two years, seasonally adjusted new filings for jobless benefits totaled less than 430,000. We’ve seen this movie before only to end up with disappointment, as we’ve been discussing (such as here, for instance). Will it be any different this time? For today, at least, it’s easier to answer “yes.”
THE PARADOX OF DISMISSING MARKET EFFICIENCY
The efficient market hypothesis (EMH) is one of the most contentious topics in all of financial economics. You could spend years reviewing the mountain of literature, both pro and con, that dissects the subject into ever finer slices without reading the same paper twice. As a practical matter, EMH has been helpful for investors, namely, making the case for indexing. Indexing isn’t perfect and some investors can do better, but passive investing has a history of more or less working as advertised: delivering middling performance over time relative to a wide range of actively managed results, and at low cost.
RETAIL SALES & THE ECONOMIC TREND
Today’s update of retail sales for June doesn’t look good, but it’s still not so bad in terms of the broader trend. That doesn’t mean that there’s nothing to worry about, but for the moment the annual pace of retail sales is still comfortably in positive territory. But given the current climate, more downshifting may be coming. At what point does a return to trend signal something worse? It’d be foolish to underestimate the hazards these days, but the economy’s fate is not yet doomed, or so the trend in retail sales imply.
CHOOSING INDEX FUNDS: PRICE IS ONLY PART OF THE ANALYSIS
Indexing offers many advantages for investing, but not all index funds are created equal. For the leading index products, low cost is a big attraction. But in a world where indexing choices have exploded, caveat emptor applies. “Most investors assume, however, that indexing automatically means getting a cheap fund and certainly one that’s cheaper than an actively managed fund, Morningstar’s John Coumarianos advises. “However, this isn’t necessarily the case.”
IS THERE ANY THERE THERE IN HEDGE FUND BETA?
Hedge funds are supposed to be the ultimate diversification tool. The idea is that the returns post low/negative correlation with broad measures of conventional investing strategies and yet somehow manage to deliver positive returns when the standard strategies tumble. That’s certainly true some of the time for some of the managers. But expecting hedge funds writ large to deliver satisfaction is too often dashed on the rocks of reality. The notion of a hedge fund beta, in other words, isn’t all that attractive.
MONDAY MORNING CHATTER: 7.12.10
The economic news this week focuses on retail sales (Wednesday), wholesale inflation, new jobless claims and industrial production (Thursday), and consumer price inflation and consumer sentiment (Friday). For a bit of context, here are some links that caught our attention…
TALKING UP DEFLATION
The market’s falling inflation forecast over the last two months took a breather yesterday, but the subject of monetary policy and the heightened risk of deflation is hotter than ever, as we’ve been discussing (here and here, for example). It wasn’t obvious that the central bank was prepared to act, but now it appears that the Fed is starting to recognize the problem, or so recent news reports suggest.
STATISTICAL REFRESHMENT…FOR NOW
The case for deflation retreated a bit today with this morning’s update of weekly jobless claims. New filings for unemployment benefits slumped by a tidy 21,000 last week to 454,000, the government reported. That’s the biggest weekly drop since mid-April and the decline represents a tactical victory for the bulls. But until and if the trend rolls on it’s only marginally encouraging. The strategic outlook, in other words, is still up for grabs.
THE MAIN EVENT
Yesterday’s sharp rally in the stock market takes the edge off of deflation concerns…for the moment. But let’s not forget that the Treasury market’s implied 10-year inflation forecast is still bouncing around at the lowest levels since last October. In other words, yesterday’s revival of bullish spirits in equities didn’t pare deflationary anxiety, at least not yet.