February 8, 2010
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.
Continue reading "ENTER THE EXIT STRATEGY"
February 5, 2010
THE PUNDITS & THE LABOR MARKET
Today's employment report was, well, discouraging. Or was it? The range of opinion was unusually wide, or so it seems.
The reported facts, at least, are clear. Quoting from the Labor Department's press release, "The unemployment rate fell from 10.0 to 9.7% in January, and nonfarm payroll employment was essentially unchanged (-20,000), the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs."
But that's just the beginning. Or is it the end? You decide. Here's a sampling of the commentary on today's numbers that, for one reason or another, caught our attention...
Continue reading "THE PUNDITS & THE LABOR MARKET"
CFA INSTITUTE REVIEWS MY BOOK
Martin Fridson of Fridson Investment Advisors reviews my new book, Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
JANUARY'S EMPLOYMENT REPORT: ANOTHER DISAPPOINTMENT
Always a bridesmaid, never a bride. That about sums up the struggle in nonfarm payrolls to reach the tipping point of growth (or at least zero).
Continue reading "JANUARY'S EMPLOYMENT REPORT: ANOTHER DISAPPOINTMENT"
February 4, 2010
WHAT ARE THE LEADING INVESTMENT TRENDS FOR 2010?
Mercer, the consultancy, has some thoughts. Ten, to be exact...
1. Superannuation legislation will force change in the way we look at retirement and how retirement savings are invested
2. A weaker global banking system will create opportunities for private credit
3. Emerging market growth will outstrip developed markets, but equity markets may have priced this in
4. Environmental, Social and Governance (ESG) factors will continue to rise on investors’ radar
5. Investors will critically examine their investment strategies in the context of evolving deflation/inflation risks
6. Dynamic Asset Allocation (medium-term asset allocation tilts) will be de rigueur to capture market mispricing in the medium-term
7. Investors will undertake more due-diligence on hedge fund strategies
8. The big “macro” moves may be behind us - time to become “micro”?
9. Super funds will question the role of illiquid assets in their portfolios
10. Diversification will remain key.
HEY, BUDDY...CAN YOU SPARE A LOAN?
Yields on short-term government securities vary from just above zero (10 basis points for 3-month T-bills) to around 1% (88 basis points for a 2-year Treasury). Those are extraordinarily low rates by the standards of recent decades. But don’t confuse that with borrowing costs, or the demand or ability to borrow.
Continue reading "HEY, BUDDY...CAN YOU SPARE A LOAN?"
A CHANGE IN THE TREND?
Last week we pondered the possibility that an ill wind was blowing in what had been a fairly consistent decline in initial jobless claims. Today’s update on new filings for jobless benefits doesn't offering a soothing follow-up. If anything, we're more anxious.
Continue reading "A CHANGE IN THE TREND?"
February 3, 2010
MONETARY VS. FISCAL STIMULUS
Economist Scott Sumner makes the case that if we need more stimulus, it should be of the monetary variety rather than fiscal. That sounds about right, based on my analysis at 2009's close that if there's any evidence in favor of economically stimulating stimulus over the past year or so, the clues suggest that the monetary toolkit was the productive catalyst for averting a deeper contraction/crisis.
YOUR EDITOR ON THE RADIO...
I'll be discussing the finer points of portfolio strategy, strategic-minded investing and my new book (Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
CLEAR GRASP OF THE OBVIOUS
Is it really necessary to remind folks not to spend the rent (or college) money on the slot machines? And if someone is actually engaging in such obsessive and self-destructive behavior, is a casual comment to do otherwise from a stranger on TV likely to make a difference? Apparently the President of the United States thinks so. Maybe he's right. In that case, let me remind everyone to be sensible and avoid the following: driving with your eyes closed, investing every last dime of your life savings in out-of-the-money options and expecting that politicians will focus (and speak) on the priorities du jour.
ADP REPORTS A (SMALL) JOB LOSS FOR JANUARY PAYROLLS
ADP’s estimate of nonfarm payrolls for January shows a 22,000 decline. That’s in contrast with the consensus view of economists, who collectively expect a small rise of 13,000 in the official jobs report from the U.S. Labor Department, which is scheduled for release on Friday.
Continue reading "ADP REPORTS A (SMALL) JOB LOSS FOR JANUARY PAYROLLS"
THE TROUBLE WITH MICRO-CAP STOCK INVESTING
Microcap stocks soared last year, even by the inflated standards of the broad market. The CRSP Decile 10 Index (the smallest of the small in micro-cap land) surged more than 80% last year vs. a bit more than 26% for the S&P 500.
Why didn’t investors in funds targeting this slice of equities reap the lion’s share of the rewards? Rick Ferri of Portfolio Solutions explains the gap (hat tip to Mebane Faber’s World Beta blog). Ferri argues that microcap index funds “don't exist, because micro-caps are too small for index funds and ETFs to invest in.”
We’ll have more to say on the subject in the near future in terms of what it means for multi-asset class investing. Meanwhile, you can read Ferri’s article at Forbes.com.
JOBS, JOBS, JOBS
Friday's nonfarm payrolls promises (threatens?) to be a critical update on the labor market. Basically the question is, If not now, when?
Continue reading "JOBS, JOBS, JOBS"
February 2, 2010
THE CHALLENGE OF CHOICE
Yesterday’s Wall Street Journal warned that a "a treacherous landscape of potential trading problems" harasses the world of ETFs. Most of these problems are associated with liquidity. Some have it, some don't. Identifying the haves, and the have-nots, is prudent way to start looking at ETFs. But the task is daunting, at least in the beginning of your search, because of the sheer number of products to review.
Sifting through the potential list of choices takes more time with each passing month. There are more than 900 ETFs, according to Morningstar Principia, and the list keeps growing. That’s good news--lots of choices. It’s also bad news because you have to sort through the list in search of investor friendly products. There are also hundreds of index mutual funds to consider, if you’re so inclined. Most of these choices aren’t worth your time for reasons including high expense ratios, insufficient liquidity, high tracking error and poor overall design, to name a few.
Continue reading "THE CHALLENGE OF CHOICE"
TIDBITS FROM THE WORLD ECONOMIC FORUM
Did you attend Davos this year? No? Neither did I. Next year, perhaps. Then again, maybe we're not missing all that much by staying home. Why suffer airports and rubber chicken lunches in the digital age? Well, it's true you can't have a quiet chat with Mr. X over a scotch and soda via the web with the Swiss Alps in the background. On the other hand, everyone can afford the out-of-pocket expense for taking a peek as a long distance web voyeur.
Continue reading "TIDBITS FROM THE WORLD ECONOMIC FORUM"
February 1, 2010
A FORK IN THE ROAD...
The December update on personal income and spending isn’t terribly informative. Disposable personal income rose 0.4% in December, modestly above the monthly average rise during 2009 (0.3%). Meanwhile, personal consumption expenditures increased 0.2% in December, or slightly below average based on the monthly average for last year (0.3%). It all rounds out to a yawn in terms of what one month's numbers tell us. Par for the course.
Continue reading "A FORK IN THE ROAD..."
THE AGE OF NUANCE
January was a rough month for risky assets. For the first time since the financial crisis raged in late-2008, the red ink that spilled was broad and deep across the broad asset classes on a calendar-month basis. Bonds generally held their own in January, but stocks, REITs and commodities suffered sizable retreats.
Continue reading "THE AGE OF NUANCE"
January 29, 2010
A CONTINENTAL QUESTION
Unemployment in Europe is now at 10%, matching the jobless rate in the U.S. Does this undermine the argument in favor of European-style bigger government that's more proactive in trying to minimize the perceived limits of capitalism? One response is that Europe didn't do as much as the U.S. to mitigate the recession. For instance, the European Central Bank didn't cut interest rates as quickly or as deeply as did the Fed. If the problem was a slow and weak monetary response, maybe the so-called friendlier face of capitalism in Europe isn't all that helpful after all in the grand scheme of economic cycles. In that case, perhaps the lesson is that it's best to let free markets bloom and intervene only when and if it's necessary during financial panics a la Bagehot's lender of last resort doctrine.
Q4 GDP SURGES. WILL THE LABOR MARKET FOLLOW?
First, the good news. This morning’s release of the government’s initial estimate of fourth-quarter GDP is a blow-out number: +5.7%. That’s the highest annualized quarterly real (inflation-adjusted) rise in GDP since 2003 and it’s also up sharply from Q3’s 2.2% rise. In addition, the Q4 number exceeded what most economists were expecting, and most were predicting a healthy increase.
Continue reading "Q4 GDP SURGES. WILL THE LABOR MARKET FOLLOW?"
January 28, 2010
BEN'S BACK IN TOWN
Fed Chairman Ben Bernanke was confirmed for a second term today in the Senate, albeit by a relatively thin margin: 70-30. That's reportedly the "thinnest approval ever extended to a chairman in the central bank’s 96-year history." Just a few days ago there was some question as to whether he would survive the populist political backlash that threatened to vote him out of his position as head of the central bank.
For the moment, Bernanke has won. The question is whether his victory will turn Pyrrhic. At least expectations are uncomplicated:
"Now that the Senate has confirmed him for a second term as chairman of the Federal Reserve, Ben Bernanke has, or ought to have, a very simple agenda: improve confidence," writes Newsweek's Robert Samuelson. "That isn't his job alone, of course. President Obama and Treasury Secretary Timothy Geithner are hardly bit players. But what Bernanke does and says—how he projects himself and the Fed—matters a great deal, and he faces an exacting challenge."
DIAGNOSING THE PANIC
Professor John Cochrane offers his take on the financial crisis of 2008 in the current issue of the Cato Institute's Regulation.
His basic argument: "the signature event of this financial crisis was the 'run,' 'panic,' 'flight to quality,' or whatever you choose to call it, that started in late September of 2008 and receded over the winter. Short-term credit dried up, including the normally straightforward repurchase agreement, inter-bank lending, and commercial papermarkets. If that panic had not occurred, it is likely that any economic contraction following the housing bust would have been no worse than the mild 2001 recession that followed the dot-com bust."
Was that really the source of the crisis? Maybe, although no one really knows. This is economics, after all. Certainly there's no shortage of competing notions of about what happened. But even if you don't agree with Cocgrane 100%, he makes a number of salient points that, at the very least, demand consideration in the months and years ahead as the powers in Washington attempt to "fix" the system.
Continue reading "DIAGNOSING THE PANIC"
THE STRUGGLE CONTINUES
Last week we considered the possibility that the declining trend in new jobless claims had run its course. Today’s update on new filings for jobless benefits offers a reprieve from that ominous possibility. The reprieve may be temporary, of course, but for today at least it appears as though the nearly year-long decline in new filings remains intact--weak but intact.
Continue reading "THE STRUGGLE CONTINUES"
January 27, 2010
LOOKING (AND FEELING) BLUE
What shade of blue are you?
HOENIG'S DISSENT
The Federal Reserve voted to keep rates unchanged today, but the vote came with glitch. "Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted," the FOMC statement explained.
Continue reading "HOENIG'S DISSENT"
THE FED'S SHOCKING DISCLOSURE (NOT)
The Fed announced that the target range for Fed funds would remain at 0% to 0.25%. This will suprise no one, given the weakness in the labor market, the rising political vulnerability of the President (who makes his State of the Union speech tonight), and recent questions about Bernanke's reappointment prospects. Is the Fed funds rate really that susceptible to political factors? Probably not, but thinking that it might be is no longer beyond the pale. How it's come to this isn't easily explained, but it's clear that insuring monetary policy remain independent of politics is as compelling as ever. Arguably the potential for politicizing the Fed is higher than at any time in recent memory. At the very least, there's more confusion than usual.
A SMALL DOSE OF PERSPECTIVE FOR EQUITIES
A little perspective never hurts when surveying the equity landscape. There are no silver bullets, of course. But we must start somewhere in the thousand-mile journey of analyzing the possibilities in the land of equities, and a big-picture review of the global playing field is a reasonable way to begin.
Continue reading "A SMALL DOSE OF PERSPECTIVE FOR EQUITIES"
January 26, 2010
A BRIGHTER OUTLOOK FOR THE WORLD ECONOMY, BUT...
The global economy will expand by 3.9% for 2010, the IMF predicts in an update released today. That's up from its 3.1% forecast for 2010 that was published last October. Of course, today's forecast update contrasts sharply with last year's modest contraction in the global economy. For 2011, the IMF expects global output will accelerate to 4.3%.
Progress, it seems, is unfolding as we write. But there are caveats as well.
"The recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures," according to the IMF update. “For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it’s ok, but a year down the line, it will be a big question,” IMF Chief Economist Olivier Blanchard said in an interview.
Continue reading "A BRIGHTER OUTLOOK FOR THE WORLD ECONOMY, BUT..."
BANKING REFORM VS. BANKING REFORM
David Champion of the Harvard Business Review is unimpressed with the Obama administration's proposal on banking reform. In fact, he's downright dismissive:
"The Obama reform... seems to be neither radical nor particularly useful, except perhaps as political theater," Champion writes.
Of course, that's far from the consensus view, at least when surveying the movers and shakers. Britain's central banker Mervyn King seems to be in favor of Obama's plan. Ditto for OECD's secretary general.
Meanwhile, a pair of finance professors from NYU weigh in and offer support, with some caveats: "On balance, President Obama’s plans – a fee against systemic risk and scope restrictions - seem to be a step in the right direction from the standpoint of addressing systemic risk, if their implementation is taken to logical conclusions."
But this is all beside the point for the moment. What will the reform really look like once it runs through the political sausage grinder? Meantime, one might wonder if the core of the alleged solution--separating conventional banking from the trading-oriented aspects of financial institutions--is a touch misguided. It certainly plays well as headline material. But wasn't the real problem one of poorly designed loans? In that case, what do proprietary trading desks at investment banks have to do with any of this? Is it really the case that if we separate prop desks from banks the odds of another real estate buying frenzy will be diminished? Or might there be other factors to consider? Such as extraordinarily low interest rates?
A FRESH REVIEW OF AN OLD IDEA
A new research paper from the New York Fed connects some of the dots for thinking that monetary policy, balance sheets in banking, leverage, credit cycles and macro risk premiums are related ("Macro Risk Premium and Intermediary Balance Sheet Quantities"). That's hardly shocking, or at least it shouldn't be. But revisiting the economic plumbing is refreshing, not to mention necessary, as far too many pundits go off the deep end in assigning blame and evaluating cause and effect.
Continue reading "A FRESH REVIEW OF AN OLD IDEA"
January 25, 2010
IT'S ABOUT THE MONEY...REALLY
Economist Scott Sumner at The Money Illusion is exactly right when asserts that what we should be debating re: Bernanke's reappointment as Fed Chairman is monetary policy. To be precise, Sumner writes that the key economic issues are:
1. Whether to cut the fed funds target from 0.25% to 0%
2. Whether to put an interest penalty on excess reserves
3. Whether to do additional QE
4. Whether to set an inflation or NGDP target
5. Whether to target growth rates or levels
6. And of course the key overarching question: Would the economy benefit from an increase in AD, or nominal spending?
Yes, there are political considerations, as Sumner recognizes. It's Washington, after all. Nonetheless, it's striking how little attention is being given to the issue of monetary policy proper and the role it played, or didn't play, in the provoking if not causing the Great Recession. The usual suspects in economic commentary would have you believe that other issues take priority, but there are some weighty policy questions lurking, and a fair amount of it rests with decisions made (and not made) in the halls of central banking in recent years.
As we said earlier this month, "The question is less about blame and more of figuring out how to improve monetary policy going forward. Indeed, the stakes are higher than ever for the years ahead."
Indeed, there are other perspectives, such as the Austrian view. But unless you're looking hard and digging deep, you might think that the only stakes in new new debate over Bernanke's nomination are political. In fact, there's quite a bit more hanging in the balance than whether the President scores points in the next news cycle.
DEBT, DELEVERAGING AND…DEFAULT?
The three Ds are lurking, thought not necessarily in equal amounts. That's hardly surprising, but the details are somewhat sobering, as a new McKinsey & Co. report shows: Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences.
Among some of the notable points in the analysis:
• "Enabled by the globalization of banking and a period of unusually low interest rates and risk spreads, debt grew rapidly after 2000 in most mature economies. By 2008, several countries...had higher levels of debt as a percentage of GDP than the United States."
• "Deleveraging has only just begun…"
• "…Specific sectors of five economies have the highest likelihood of deleveraging…[in the U.S., the household and commercial real estate sectors have a relatively high likelihood of deleveraging]"
• “While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century…The historic episodes of deleveraging fit into one of four archetypes:
1)…credit growth lags behind GDP growth for many years;
2) massive defaults;
3) high inflation; or
4) growing out of debt through very rapid real GDP growth caused by a war effort, a 'peace dividend' following war, or an oil boom.”
WILL HE STAY OR WILL HE GO?
The media’s all a buzz with the question of whether Fed Chairman Ben Bernanke will survive the political gauntlet and be reconfirmed. The latest chatter leans toward an affirmative answer, including this overt prediction from Senate Republican Leader Mitch McConnell yesterday: ""He's going to have bi-partisan support and I would anticipate he will be confirmed."
At the very least, it's hard to imagine that the majority party would inflict a political wound on their President, who's already on the defensive in the wake of last week's election in Massachusetts. Obama's bona fides are being questioned left and right (politically speaking and otherwise) on matters of finance and economics. There's a chance to repair some of the political damage on Wednesday, when the President delivers the annual State of the Union speech. “He’s got to convince the American people that [jobs are] his number-one focus,” Jason Johnson, a professor of political science at Hiram College in Ohio, tells The Hill today. Call us crazy, but opening what surely would be a hornet's nest at this late date with questions of Bernanke replacements doesn't look all that savvy at this juncture.
