Concerns about risk emerged prominently last week due to increasing geopolitical and economic uncertainties. Despite pulling back from its recent peaks, the US stock market continues to demonstrate notable resilience in both absolute and relative terms. Positive economic updates over the past few weeks have significantly contributed to this strength. However, upcoming data releases on retail sales (August 13) and industrial production (August 15) will provide critical insights into the macroeconomic landscape. In the meantime, US equities lead all major asset classes, as indicated by the trailing 250-day total return, which serves as a rough gauge of one-year performance through our standard set of proxy ETFs.
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● Unmasking Financial Psychopaths: Inside the Minds of Investors in the Twenty-First Century
By Deborah W. Gregory
Summary via publisher, Palgrave Macmillan
As financial markets expand globally in response to economic and technological advancements of the twenty-first century, our perceptions of the individuals engaged in these markets also evolve. “Unmasking Financial Psychopaths” posits that many financiers labeled as “financial psychopaths” are not genuinely psychopathic but rather products of a swiftly changing personal and professional milieu. While strides have been made in identifying psychopaths outside of violent contexts, distinguishing them in cultural environments that may encourage psychopathic behaviors remains a challenge. The investment sector is experiencing a radical shift: the profile of individuals in financial firms and the environment in which they operate have transformed. Societal expectations of financiers have adjusted to these subtle undercurrents, leading to a heightened perception of psychopathic behavior in the financial industry. Recognizing true psychopathic financiers from those merely conforming to behavioral norms is critical for fostering cultural change within the financial sector.
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Treasury yields continued their downward trend yesterday, with the benchmark 10-year rate dropping to 2.43% at Thursday’s market close—its lowest level in 13 months. Further declines were observed in early trading on Friday as yields dipped below 2.40%. While lower yields often serve as a cautionary signal, they are influenced by a mix of factors. The reassuring aspect is that the macroeconomic weaknesses in the US do not seem to be causing this trend, as suggested by a recent drop in weekly jobless claims, which has left the four-week average for this crucial indicator at an eight-year low. This unexpected drop implies that growth within the US labor market may be accelerating. Nevertheless, this improving macro narrative comes at a time when aversion to risk is escalating.
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Last month, I pondered whether lower yields were indicative of rising risk, and that inquiry remains relevant. Indeed, the benchmark 10-year Treasury yield has fallen below 2.50% again, nearing the lowest levels we’ve seen this past year. This phenomenon is surprising given that US economic data continues to show positive trends, even though the housing market appears shaky. However, nonfarm payroll figures and other key macro indicators presently show no significant warning signs. Thus, the moderately positive economic outlook suggests that the Federal Reserve may proceed with tapering its quantitative easing program this autumn, paving the way for potential interest rate hikes next year. Nonetheless, global risks are casting a shadow over interest rates, increasing the appeal of a safe haven provided by the world’s reserve currency.
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In early August, US economic trends maintained a positive trajectory, albeit at a subdued level compared to historical standards, as indicated by a market-driven assessment of macroeconomic conditions. The Macro-Markets Risk Index (MMRI) closed at +7.7% on August 5, which is close to its lowest point in two years. This latest reading is significantly below the MMRI’s recent peak of +13.7% mid-June of this year. Nevertheless, the consistent stream of positive data suggests that business cycle risk remains low. A decline in MMRI below 0% would signal elevated recession risks, while values above 0% indicate potential economic expansion in the near future.
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Every time I update the returns for the Global Market Index (GMI) and its components, whether as seen last week or through my analyses on risk premia forecasts, I receive inquiries regarding the associated asset allocation percentages. It seems many readers regard the asset weights for GMI as essential indicators. However, it’s important to note that these weights are primarily useful as benchmarks for tailoring a portfolio and for risk management analysis. Understanding your own asset allocation in relation to Mr. Market’s is valuable information.
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In July, most of the major asset classes faced declines, marking the widest array of corrections in global markets since January. Despite these drops, the latest update on risk premium forecasts remained largely unchanged. Long-term projections based on July data vary between stability and slight decreases compared to previous figures.
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● Economists and the State: What Went Wrong
Summary via publisher, Edward Elgar
Adam Smith is celebrated as the ‘father of modern economics.’ The author argues, however, that Smith’s outcome-oriented political economy, which is shared by the Founding Fathers of America, fails to align with the economists’ utilitarian and process-detached view of the state. This ‘misstep’ indicates that as economists struggle to address an expanding federal framework where utilitarian ideals overshadow the morally and constitutionally constrained views of Smith and Madison, they remain passive observers amid rising skepticism, demands for ‘social justice,’ and proliferating rights claims that threaten our self-governing republic.
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July marked a turning point for risk in financial markets, as it experienced the broadest set of negative returns since January across major asset classes. Developed market stocks, including those from the US, faced significant declines, with a notable exception in emerging market equities, which saw a modest gain last month. Specifically, the MSCI EM Index recorded a respectable 1.9% increase, while US stocks dropped by 2.0% (Russell 3000)—marking the first negative monthly return for American equities since January. Developed market foreign stocks (MSCI EAFE) also faced a decline of 2.0% in July.
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The US economy generated fewer jobs than anticipated in July. However, the year-over-year change in private-sector payrolls did increase, reaching an eight-month high, according to the Labor Department reports. Meanwhile, personal income and spending figures for June aligned with expectations, as indicated by an update from the US Bureau of Economic Analysis. Despite the media’s focus on monthly fluctuations and various dramatic interpretations, the real trend shown by these data points suggests stability in monitoring business cycle risks.
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