● What’s Your Future Worth?: Using Present Value to Make Better Decisions
By Peter Neuwirth
Excerpt via publisher (Berrett-Koehler)
Almost all of us imagine the future impact of the choices we make, but what distinguishes the actuarial perspective from the way people normally make decisions is that by using Present Value we can think about our choices in a systematic way that takes into account some aspects of the future that we rarely consider. In particular, when we use Present Value we try to imagine not just what we think the future impact of our choices will be, but rather consider all the possible futures each choice might lead to. And even more important than considering all the future consequences that a given choice might lead to, we consider when those future consequences might show themselves.
In summary, using the actuarial perspective means thinking about the future in a systematic way and using the idea of Present Value—the value today of something that might happen in the future—to make better choices.
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Private payrolls increased substantially more than expected in February, delivering an encouraging dose of optimism in the wake of wobbly data in recent weeks from other corners of the economy. US companies added 288,000 jobs last month, according to this morning’s report from the Labor Department — far above the consensus forecast for 230,000 via Briefing.com. The news is all the sweeter since it contrasts with the lesser rate of growth that’s implied via this week’s ADP Employment Report for February.
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One of the more intriguing observations in Berkshire Hathaway’s new letter to shareholders is Warren Buffett’s reference to what I like to call economic gravity, aka the law of large numbers. There are several ways to keep it at bay (maybe), but in the end it wins no matter what you do. Buffett and company, of course, have an extraordinary history of excelling where so many others have stumbled in this regard. But an unusually long run of success is taking its toll. As Buffett himself recognizes, gravity’s pull is increasing on Berkshire’s prospects. The observation inspires some brief ruminating on how to think about economic gravity generally in the realm of designing and managing investment portfolios.
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● US factory orders fall for sixth straight month | Reuters
● US factory orders down, but business investment rises | NY Times
● US jobless claims hit highest level since May | MarketWatch
● ECB raises GDP forecasts, sees zero inflation in 2015 | Reuters
● German Industry Output Rises for Fifth Month as Growth Firms | Bloomberg

New filings for unemployment benefits unexpectedly rose last week, reaching the highest level since last May. Is this an early warning sign of trouble for the labor market and, by extension, the economy? No, not yet. It could be nothing more than weather-related turbulence courtesy of a harsh winter. But if this leading indicator continues to rise in the weeks ahead, we’ll have a signal that’s not so easily dismissed. For now, the recent changes are still within the band of “normal” fluctuations that are linked with a healthy degree of forward macro momentum. The margin of comfort, however, is wearing thin and so the next several reports could prove to be decisive, for good or ill.
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Private nonfarm payrolls in the US are projected to increase by 230,000 (seasonally adjusted) in tomorrow’s February update from the Labor Department, based on The Capital Spectator’s median point forecast for several econometric estimates. The monthly prediction reflects a substantial deceleration in growth vs. January’s 267,000 gain.
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What should we expect for tomorrow’s February payrolls report from the US Labor Department? As usual, ADP’s estimate of job creation in the private sector offers a valuable clue. The current forecast based on yesterday’s update: government data will continue to show private payrolls rising above the 200,000 mark for last month, but at a substantially lower increase vs. January’s gain.
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● US private sector adds jobs in February, but growth slows: ADP | Reuters
● Faster Services Growth in U.S. Points to Resilience | Bloomberg
● Fed’s Beige Book: US Economic Recovery Continues Despite Trouble Spots | RTT
● Eurozone retail PMI points to further drop in sales | Markit
● PMI: Global economic growth accelerates to 5-month high | Markit
● German Factory Orders Fall Most Since August | RTT

Payrolls at US companies posted another respectable gain in February, advancing 212,000 over the previous month, according to this morning’s update of the ADP Employment Report. The increase is a bit soft relative to the consensus forecast, but the gain still reflects a healthy bias for expansion. Reviewing the numbers in context with recent history, however, shows that the pace of growth is slowing in the private sector. Is that a sign that the US economy’s acceleration of late is fading? Maybe, maybe not—another couple of months will bring deeper clarity. Meantime, there’s a bit more anxiety about the potential risk that the macro trend is slipping back into a familiar pattern in the wake of the Great Recession: sluggish growth.
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A recent paper (“Evaluating Trading Strategies”) on the hazards of backtesting in The Journal of Portfolio Management has been receiving a fair amount of attention lately, inspiring some folks to go off the deep end and argue that econometric analysis of investment strategies is always a bad idea. That’s a bit much for the simple reason that the only alternative to backtesting is blindly throwing money at markets without the benefit of perspective. Yes, backtesting can be dangerous when designed without best practices in mind. But in the grand scheme of investing, we’re all relying on one form of backtesting or another.
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