Some investors are under the illusion that they’re immune to asset allocation and all it implies for choosing how to design and manage a strategy. I frequently read stories in the financial press that suggest that the framework of a multi-asset-class portfolio is optional, perhaps even irrelevant, depending on the article. It’s not, although it’s easy to delude yourself into thinking otherwise. The romance of the money game is always tempting us to behave like artists; in fact, we should focus on acting more like engineers.
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Today marks the first press conference for the new Fed Chair Janet Yellen. Although she faces a complicated set of decisions for monetary policy in the months and years ahead, she still has one advantage that supported her predecessor’s tenure in recent years: a moderately positive macro trend.
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Housing starts fell again in February, inching lower by 0.2% from January. That’s the third monthly decline in a row. The rate of descent is slowing, which constitutes the only good news for this data series these days, but that’s more than offset by the fact that for the first time since 2009 the number of starts (seasonally adjusted annual rate) has slipped for three straight months. That’s a worrisome sign, but it’s premature to assume the worst. Indeed, the sight of a healthy upturn in the number of newly issued housing permits last month holds out the possibility that there may be a spring thaw waiting in the wings for starts.
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The contentious vote on Sunday in Crimea to secede from Ukraine and join Russia prompted the US and Europe to impose limited sanctions and restrictions on Russian officials, but markets yesterday shrugged off the event. Apparently the risk tied to Russia’s annexation of Crimea—an act that the West decries as illegal—is already priced into assets. But while the first act in this provocative narrative has been surprisingly calm, it’s a mistake to assume that the worst has passed. One side has to blink eventually, but at the moment the odds are low for expecting someone to back down. That raises the likelihood that a long, slow grind in a new East-West standoff is coming, with all the trimmings, including the threat of economic turmoil that’s lurking just below the surface.
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Housing starts are expected to total 955,000 in tomorrow’s update for February, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents a substantial rise vs. the previously reported 880,000 for January. Meanwhile, the Capital Spectator’s median forecast for February is above a trio of consensus estimates based on recent surveys of economists.
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Industrial production unexpectedly increased last month: output climbed 0.6% in February vs. the previous month, or well above most predictions, including The Capital Spectator’s econometric estimate. The good news may not mean much, however, if we’re headed into an economic war with Russia in the wake of yesterday’s vote in the Crimea to secede from Ukraine—an act that the West warns will lead to imposing sanctions on Russia. But for now, let’s consider the upbeat news in the industrial sector as is, even if it’s destined for a rewrite amid what could become the Cold War Light.
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Crimea yesterday voted to rejoin Russia and the West vowed to retaliate by initially imposing sanctions on a select group of Russian officials, assets and bank accounts. It’s anyone’s guess what the second phase of sanctions might look like. No matter the details, the US and Europe can’t reverse what appears to be an overwhelmingly strong desire by Crimeans to break free of Ukraine. Russia, having sent troops into the region and publicly stated its intentions in no uncertain terms, is unlikely to change course. Welcome to the biggest geopolitical stalemate of the 21st century to date.
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US industrial production in February is projected to increase by 0.2% vs. the previous month in tomorrow’s release from the Federal Reserve, according to The Capital Spectator’s median econometric forecast. The projected gain represents a rebound from the previously reported 0.3% decline for January. Meanwhile, the Capital Spectator’s median projection for February is in the middle of three consensus forecasts based on recent surveys of economists.
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● The Tragedy of the European Union: Disintegration or Revival?
By George Soros
Summary via publisher, PublicAffairs
The European Union could soon be a thing of the past. Xenophobia is rampant and commonly reflected in elections across the continent. Great Britain may hold a referendum on whether to abandon the union altogether. Spurred by anti-EU sentiments due to the euro crisis, national interests conflict with a shared vision for the future of Europe. Is it too late to preserve the union that generated unprecedented peace for more than half a century?… In a series of revealing interviews conducted by Dr. Gregor Peter Schmitz, George Soros—a man of vast European experience whose personal past informs his present concerns—offers trenchant commentary and concise, prescriptive advice: The euro crisis was not an inevitable consequence of integration, but a result of avoidable mistakes in politics, economics, and finance; and excessive faith in the self-regulating financial markets that Soros calls market fundamentalism inspired flawed institutional structures that call out for reform.
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Rising geopolitical stress over the evolving Ukraine crisis has taken a bite out of bullish sentiment lately. With this weekend’s secession referendum scheduled in Crimea, the crowd is again looking for safety. As a result, the risk-off trade is weighing on stocks. US equities are still in the lead among the major asset classes, based on our standard set of ETF proxies via a 250-trading-day window (the rough equivalent of 1-year returns). But the performance edge has been noticeably squeezed since the previous update in late-February. Meanwhile, emerging market assets remain at the bottom of the return ledger, albeit with a degree of red ink that’s more or less unchanged from the last time we crunched the numbers.
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