While recent economic reports suggest a slightly brighter outlook, the likelihood of a new recession in the U.S. remains a topic of debate among experts. The Conference Board’s leading indicator indicates a promising cyclical perspective in its latest monthly update. However, the Economic Cycle Research Institute (ECRI) maintains its September 30 forecast, projecting a downturn for the U.S. The most recent ECRI update showed a decline in its weekly leading indicator for the week ending November 25, leaving it largely unchanged since late September.
The market’s expected inflation rate continues to stabilize around 2%, as indicated by the yield spread between nominal and inflation-indexed 10-year Treasuries. This suggests a general optimism regarding the economy’s future. In the New Abnormal, decreasing inflation expectations can signify trouble. Therefore, the current stabilization of inflation expectations is a positive development… assuming it can be maintained.
The issue of fat tails is pervasive in risk analysis. Although it poses significant challenges, there are many partial solutions available. Each approach has its unique advantages and disadvantages, which underscores the necessity of adhering to the fundamental principle of not relying solely on any single risk metric.
A Risk Based Approach to Tactical Asset Allocation
Stefano Colucci and Dario Brandolini (Symphonia Sgr) | November 28, 2011
Faber’s ‘A Quantitative Approach to Tactical Asset Allocation’ (2009) introduces a straightforward trading rule aimed at enhancing risk-adjusted returns across diverse asset classes. This paper proposes a simple quantitative, risk-based portfolio management strategy to maximize risk-adjusted returns. Drawing from the insights of Brandolini D. – Colucci S. in ‘Backtesting Value-at-Risk: A comparison between Filtered Bootstrap and Historical Simulation’, this approach has been validated since 1974 and has been in practical backtesting since 2000. The asset allocation strategy employs various indices, including the Standard & Poor’s 500, Topix, Dax, MSCI United Kingdom, MSCI France, Italy Comit Globale, MSCI Canada, MSCI Emerging Markets, RJ/CRB, and Merrill Lynch U.S. Treasuries (7-10 years), with all indices calibrated in U.S. dollars. Empirical results post-2000 indicate equity-like returns with reduced volatility and drawdowns, achieving only one negative year in both gross and net returns.
How should one determine a fair price for asset management? This continually arises during financial discussions. There’s no one-size-fits-all answer, but investors and institutions generally should be wary of high fees. Numerous claims exist regarding success in adding value over investment benchmarks, yet when audited results are compared to passive indices and simple rebalancing strategies, a different narrative emerges. Even before accounting for taxes and trading costs, truly exceptional active management is surprisingly rare.
Counter to common beliefs, the euro crisis was NOT initiated by excessive spending, as Dean Baker points out. This suggests that monetary policy—not fiscal policy—should be the focus of solutions, as Ambrose Evans-Pritchard elaborates. Meanwhile, politicians are pushing for a German-engineered political solution. “For the third time in less than two decades, Germany is attempting to impose a federal ‘political union’ on Europe that, to many observers, feels eerily reminiscent of a gentler, kinder Anschluss,” writes Tony Corn. The critical question is whether Europe will secure what it really needs before it’s too late. That remains uncertain.
● Cannibal Capitalism: How Big Business and The Feds Are Ruining America
By Michael C. Hill
Summary via publisher, Wiley
When the financial crisis struck, rather than uniting for recovery, the nation turned against itself economically, with corporations, business leaders, and government prioritizing their self-interests over the common good. In their attempt to maintain wealth, the ultra-wealthy effectively undermined the growth engines of the economy, jeopardizing the financial stability of the bottom ninety-nine percent. “Cannibal Capitalism” argues that genuine recovery requires educational investment in our youth, support for small businesses, and a return to substantial exporting practices.
According to the Labor Department’s latest report, private nonfarm payrolls increased by 140,000 last month. While this figure is reassuring and exceeds zero enough to quell fears of a looming recession, it does fall short of expectations set by ADP’s strong report released on Wednesday, which suggested higher government employment growth estimates. Regardless, a net gain of 140,000 private sector jobs is commendable, especially given the current challenges stemming from Europe.
Yesterday’s update on the ISM Manufacturing Index provides another positive indicator that complements the recent job creation surge noted in ADP’s November employment report. If it weren’t for the ongoing euro crisis and potential instability in budget negotiations in Washington, optimism would be much more straightforward. However, given the complexities of the current climate, expectations must be tempered.
New jobless claims increased last week, somewhat dampening the enthusiasm following the rebound seen in ADP’s November employment report. Unemployment benefits claims grew by 6,000, reaching a seasonally adjusted 402,000—the first time in a month that numbers have surpassed the 400,000 threshold. Nevertheless, it’s premature to conclude that the labor market is reversing course.
