Politics doesn’t normally infiltrate these pages, but sometimes the news is too potent to ignore. The upset election last night of Scott Brown as the Bay State’s U.S. Senator certainly fits the bill. Indeed, Republicans are a rare bird in Massachusetts, but they’re slightly less unusual today. Meanwhile, the ramifications for economic policy, healthcare and some other issues swirling about in Washington are suddenly ripe for rethinking.
ASSET ALLOCATION…YET ANOTHER CLUE
Owning multiple asset classes isn’t everything, but assuming you own a broad spread you’ll probably generate middling results if not slightly better over time. That doesn’t sound like much, except when you consider how real-world results stack up–especially after taxes and trading costs are deducted. Can you do better? Maybe, but you’ll have to work at it. Yes, there’s lots of above-average performance records out there. But the opposite is true as well, a point that tends to be overlooked in all the marketing materials pumping the latest gee-whizz product.
The benefits of going broad, meantime, requires mostly discipline as opposed to hope and talent. It helps if you understand the nuances of why this strategy offers so much for so little effort. The details, of course, can get messy, particularly when it comes to deciding on when and how to rebalance and which products to use. That’s one reason why we tackle the challenge of managing asset allocation in some depth via The Beta Investment Report, its proprietary benchmark (the Global Market Index) and the associated model portfolios.
Meantime, the clues in support of the general concept are everywhere, including Paul B. Farrell’s Lazy Portfolios. Yes, investing is still a thousand-mile journey, but the first few steps, at least, are clear. Even better, you don’t need a Ph.D. in finance to figure out the basics. No, it’s not a free lunch. Instead, think of it as a deeply discounted tiffin. The perennial question, of course, is whether there’ll be any dessert.
MOMENTUM & EQUILIBRIUM
The momentum effect in securities prices has long been a thorn in the side of modern finance. Why does momentum exist? How can it exist in an equilibrium-based view of economics? It’s still a puzzle, but it becomes less so with time, as the research study du jour on this thorny subject reminds.
WHAT’S UP (OR DOWN) WITH THE INVENTORY CYCLE?
Will the inventory cycle help or hurt in the latter half of 2010?
It’s just one question in a sea of inquiries in the quest to get a handle on how the economy fares in the months and quarters ahead. Arguably it’s one of the more topical issues looming. One view is that the burst of economic activity that gave aid and comfort to last year’s third-quarter GDP (the economy grew by 2.2% in Q3, ending a string of GDP declines) was largely inventory related.
THE LONG YEAR AHEAD
The U.S. labor market is far from healthy, and the prospects are low for changing that diagnosis any time soon. But there’s a small ray of hope for thinking that the net loss of jobs is over and maybe, just maybe, some degree of expansion is near. Last week’s update on new hires is one of the positive smoking guns for expecting a better job market in the weeks and months ahead, if only marginally so.
It’s hard to overestimate how much influence the labor market will color the details of the economy in 2010. Suffice to say we’re at the point that the trend in jobs will have an outsized effect on what unfolds in the year ahead, for good or ill. A surprisingly strong recovery? A double-dip recession? Or something in between? We think the third choice is the right answer, although there’s a lot of play even there in terms of the details. In any case, much of the true answer will come via the labor market, now more than ever.
INFLATION RISK IN A NUT SHELL
Harvard’s Greg Mankiw today rounds out the basics of inflation risk in his NY Times column. And nicely done, we might add. The bottom line: the variables for inflation are present, but the weak interaction may keep the threat of higher prices at bay for some time. Maybe. Here are some key excerpts:
One basic lesson of economics is that prices rise when the government creates an excessive amount of money…
…governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall…
Yet, despite having the two classic ingredients for high inflation, the United States has experienced only benign price increases…
Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy.
In summary, he explains that…
Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.
A BIT OF SCHOLARLY RECOGNITION FOR THE CAPITAL SPECTATOR
The Capital Spectator has been labeled as one of several “top economics bloggers by scholarly impact” in a paper–“Blogometrics”–published in the Winter 2010 issue of the Eastern Economic Journal. See Table 1 (p. 4) and Table 2 (p. 6) of the PDF in the link. Actually, we’re tied with some other sites in the rankings. But, hey, now it’s only a matter of time until we’re offered a reality show, right? Meantime, here’s the paper’s abstract:
This study gathers information on a wide array of economics bloggers and blogs in order to develop a ranking of economics bloggers that is based on citations to their academic research. This ranking is used in an iterative process that next presents a ranking of economics blogs that is based on the ranking of economics bloggers, and finally a ranking of economics departments that is based on the ranking of economics blogs. The ranking of blogs included in this study is positively correlated with an external ranking based on their productivity (popularity), whereas the department ranking presented here comports quite well with department rankings in Coupe´ (2003) and Roessler (2004) that are developed with more traditional measures, such as the impact of the scholarship of an economics department’s faculty.
And in case you’re wondering, the top-ranked economics blog is Gary Becker and Richard Posner’s site, a.k.a. The Becker-Posner Blog, according to the paper. We’re nowhere near the ranking of this influential site, of course. In fact, we’re at or near the bottom, depending on the details of the particular ranking. But simply showing up on the same list as a few of the big boys is something. Or as they say in Hollywood, just being nominated is an honor.
EXPECTED RISK PREMIUMS, UNCERTAINTY AND LOTS OF CHOICES
There’s nothing new under the sun in the money game, but there’s always a fresh perspective. Sometimes that makes all the difference. Sometimes that’s all there is.
In the quest to offer something productive, let’s imagine that reviewing the whys and wherefores of risk premia can help sober us up about what’s necessary to keep the red ink at bay and maybe, just maybe, turn a profit with a multi-asset class portfolio.
For those who are interested in the details, including a broad review of the academic literature and the empirical record, you’re in luck. Your intrepid editor has a book coming out next month from Bloomberg Press—Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
As readers of these digital pages know, we begin with the market portfolio, broadly defined. A reasonable proxy for most investors can be modeled on a global mix of stocks, bonds, REITs and commodities, weighted by their respective market values. In fact, we do just that by calculating our Global Market Index, the benchmark for The Beta Investment Report.
2010’s BIG TEST
No one should doubt that an economic recovery is underway. But no one should assume that the rebound is robust or destined to quickly bring economic healing on a broad scale. It’s different this time.
The trend, at least, remains positive on a number of metrics, including the latest numbers on workers filing unemployment claims last week for the first time. New jobless claims rose 11,000 last week to 444,000, the Labor Department reports. But as our chart below suggests, the latest data point is statistical noise. The declining trend, in short, remains intact.
Since peaking in March 2009, weekly jobless claims have been on a steady downshift. As we’ve written many times, starting with this piece from early last year, a sustained decline in this measure bodes well for an upturn in the economic cycle. We’ve been arguing for some time now that the downshift in jobless claims has legs and so the natural forces of recovery are set to grow stronger. The latest report on this front offers no reason to change our view for the near-term future.
FED’S BEIGE BOOK: THE RECOVERY REMAINS SLOW & SLUGGISH
The U.S. economy is recovering, but slowly, the Fed advised yesterday in its latest “beige book” report. That’s no great surprise and in fact we’d have fallen off our chair if the central bank said anything different. Indeed, we’ve been forecasting no less for some time on these pages, such as our view from last June, when we worried that “the past and current ills weighing on the economy will remain a heavy burden for many quarters and, to some extent, several years.”