Today’s update on retail sales for January shows that the annual change in consumer spending has returned to pre-crisis levels in terms of 12-month rolling changes. In fact, the 4.7% increase in retail sales over its year-ago level as of last month is quite a bit better compared with the trend in early 2008. But like so many other measures of economic and financial activity, the return to levels that pre-date that financial crisis that swept through the markets and the global economy starting in September 2008 is only half the battle, and arguably the lesser part.
HISTORY LESSONS ON DEBT, DEFAULT & INFLATION
The Wall Street Journal today has an interesting look at the troubles associated with red ink. Among the resources cited is new research from Morgan Stanley with a clever title that asks: The Return of Debtflation?
A TIMELY FALL IN JOBLESS CLAIMS
This morning’s update on initial jobless claims is a timely bit of good news. In fact, the markets probably couldn’t wait another week for this. For starters, the decline of 43,000 in new filings for jobless benefits last week is the biggest weekly drop since last summer. Even better, this fall comes at time of heightened anxiety for this data series and so the latest turn for the better is welcome for all the usual reasons, and more.
THE STRANGE WORLD OF INVESTMENT ADVICE
Jason Zweig’s latest investing column in The Wall Street Journal is disturbing, but not necessarily for the reasons he outlines.
Consider this passage: “…many investors who followed the best advice were punished the worst. Someone who held a total-stock-market index fund lost more than 58% from October 2007 through March 2009 and remains 31% behind even after last year’s recovery. ” Zweig goes on to note that “these people can’t blame themselves; they did as they had been told.”
BERNANKE SPEAKS OF EXITS & THINGS…
The snow didn’t stop Ben. Blizzard or not, there were no stormy surprses in Fed Chairman Bernanke’s testimony today in Congress. Yes, the central bank was contemplating an exit strategy, but nothing was imminent.
“We have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus,” he said, according to prepared remarks. “We have full confidence that, when the time comes, we will be ready to do so.”
REGULATION VS. REGULATION
Is the goal of avoiding the risk of “too big to fail” in regulating banks by keeping them smaller too improbable to work? Yes, according to Avinash Persaud of Intelligence Capital, a financial advisory firm. In a new essay posted today on Vox, he argues that policymakers should instead focus on making “the financial system less sensitive to the error in the markets’ estimate of risk…”
STAG + INFLATION?
No one’s talking about stagflation these days, and for good reason. Inflation expectations remain quite low in the U.S., although the outlook for prices has been rising over the past year, albeit from a depressed state. As such, the stag part of the equation–a stagnant economy–seems more likely, although one might think otherwise in the wake of the latest GDP report, which superficially looked quite strong. But there may be less to the top-line rise in GDP than it appears, as we discussed.
DOES INDEXING MAKE SENSE IN “INEFFICIENT” MARKETS?
Since the first index fund was launched in the early 1970s, the concept of passive investing has come a long way in terms of earning respect. For broad U.S. equity mandates in particular, finding supporters of active management is getting tougher in the 21st century. And among those managers who claim to mint alpha relative to broadly defined benchmarks, such as the Russell 3000 and MSCI U.S. Broad Market Index, many track records look a lot less impressive after adjusting for size (market cap) and style (value).
REBALANCING & THE GLOBAL MARKET INDEX
There are countless investment strategies, but arguably there’s only one true benchmark: the market portfolio, defined as a passive allocation to all the major asset classes, initially weighted by the relative dollar values and thereafter left to the whim of market fluctuation.
This benchmark isn’t necessarily appropriate for everyone as an investment strategy, although it’s easy and inexpensive to build, thanks to the proliferation of index funds, ETFs and ETNs. Yes, it’s a mindless measure of the risk and return profile from a broad-minded definition of markets. And yet the results over time, although middling (as you’d expect), look pretty good these days.
ENTER THE EXIT STRATEGY
Fed Chairman Ben Bernanke will be chatting up the central bank’s exit strategy later this week when he testifies before the House Financial Services Committee on February 10. To say that there are political and economic risks hovering over the subject is to understate the potential hazards.
There are risks to tightening too early, which some worry would repeat the mistakes of 1936-1937, when reserve requirements were tightened and the economy slipped into recession. At the same time, it’d be foolish to discount the potential for higher inflation in the years ahead in the wake of the extraordinary monetary stimulus over the past year or so. Regardless of the economic reality, the political pressure to keep rates low is intense, given the weak labor market.