New orders for durable goods, which serve as a key indicator of economic trends, dipped by 0.1% in the previous month when adjusted for seasonal variations. This decline follows a substantial increase of 4.1% in July. Amid growing concerns regarding a potential recession, it is noteworthy that new orders did not see a sharper decline. The fact that this critical measure of economic activity retained nearly all of July’s gains suggests that while the economy may face challenges, it is likely to stave off a recession. This somewhat optimistic perspective is bolstered by a 1.1% increase in business investment last month (an indicator of capital spending, represented by nondefense capital goods orders excluding aircraft).
Volatility-responsive asset allocation
Bob Collie, et al. (Russell Investments) | Aug 2011
Using fixed weights in strategic asset allocation does not yield a stable risk/return pattern over time. Instead, it can lead to greater risk during periods of high market volatility and lower risk in more stable markets. Investors sensitive to volatility can achieve more consistent outcomes—both in the volatility of returns and the volatility of volatility itself—by adopting a dynamic, or volatility-responsive, strategy. The core principle of this approach is to reduce exposure to risky assets when volatility is high, and to increase that exposure when volatility is low. This may lead to a portfolio with a typical 50% equity market exposure, but which fluctuates above that during stable market periods and below during volatile times.
Gold enthusiasts may be feeling less than thrilled despite recent trends. Inflation expectations are declining, and this isn’t merely a temporary shift. The Cleveland Fed indicates that a diminishing expectation of inflation has been a consistent theme for three decades. Matthew Yglesias notes that we appear to be in a “period of persistently declining inflation expectations.”
September has proven to be a challenging month for riskier assets, while bonds remain surprisingly resilient. With heightened uncertainty on multiple fronts, risk aversion has resurfaced. The search for safe havens has become increasingly concentrated on U.S. fixed income, particularly Treasuries. The U.S. dollar has gained popularity, experiencing an increase of over 6% in the past month according to the U.S. Dollar Index. While the dollar carries its own set of challenges, it is regarded as the safest option in a turbulent environment. Notably, this uptick in dollar demand coincides with escalating concerns regarding the euro’s stability. This has led to a significant drop in foreign bond prices for both developed and emerging markets when evaluated in dollar terms. Here’s a closer examination of how this trend is manifesting across the major asset classes as tracked by our usual ETF proxies.
● The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World
By Jeremy Rifkin
Review via Bloomberg
Jeremy Rifkin argues that as long as the world continues to depend on outdated fossil fuels, the global economy will experience shocks and recessions, with increasingly brief and feeble recoveries. “We will encounter cycles of growth and collapse every three years or so,” he remarked in a recent interview. He emphasized that we are on the verge of a significant transition toward renewable energy, drawing parallels to the historical transformation seen with the advent of the Internet in communication systems. Without a full transition to this “third industrial revolution,” the recurring debt crises—like those currently troubling the euro area—are likely to persist.
Following a steep 3% decline in the stock market yesterday, the S&P 500 has now shown a year-over-year decrease for the first time in nearly two years. While this drop is marginal—approximately 0.4% down compared to a year ago—it does mark a notable milestone. Should we express concern? Absolutely. In today’s uncertain climate, another reason for anxiety is the last thing anyone needs, yet here we are.
John Bogle, the founder of Vanguard and pioneer of the first index fund, recently looked back over the evolution of investment strategies. In a talk given earlier this month, Bogle reflected on insights from a 15-year-old investment guide he had shared. He revisited the recommendations he made in the summer of 1996, comparing them against the actual performance of the average endowment fund tracked by The National Association of College and University Business Officers, also known as NACUBO.
$avingsAccount.org has recognized The Capital Spectator as one of the top 50 investment blogs. I am truly grateful for this acknowledgment. Unfortunately, I seem to have misplaced my acceptance speech in my other suit. However, the real honor comes from being listed alongside so many remarkable blogs and websites. I am humbled by this recognition. In the meantime, if you’re seeking a comprehensive overview of leading analysts in economics and finance, the $avingsAccount.org lineup is sure to impress.
New jobless claims decreased last week, but the decrease seems uncertain. There has been a noticeable upward trend in unemployment benefit applications, indicating a slowdown in the economy. The spike in new claims observed in the spring had foreshadowed impending economic challenges, even when the general sentiment was still somewhat optimistic. These claims have demonstrated their utility as a forward-looking indicator. Unfortunately, current figures do not paint an encouraging picture. One week’s slight decline is insufficient to convince many that the trends are returning to a healthier path.
Twist and Yawn
David Beckworth (Macro and Other Market Musings) | Sep 21
The Fed decided today to lower the average maturity of publicly-held Treasuries by trading $400 billion of shorter-term securities for an equal amount of longer-term Treasuries. Furthermore, it reaffirmed its commitment to maintaining the current size of its mortgage holdings, with low-interest rates expected to persist through mid-2013. The pressing question is how significantly the Fed’s “operation twist” will influence the economy. In my view, the impact will be minimal. While it may provide some monetary stimulus, it is unlikely to be enough to trigger a robust recovery, similar to the modest effects seen during the initial operation twist. Without a clear commitment to reshape expectations regarding future spending and inflation, this new initiative is unlikely to wield lasting influence beyond what was achieved with QE2. The Fed must shift its strategy from launching large dollar programs to consistently acquiring assets until it meets a target level for nominal GDP or inflation.
These insights illustrate the complexities of the current economic landscape, characterized by fluctuating market indicators, evolving investment strategies, and ongoing shifts in inflation expectations. As we navigate these turbulent waters, staying informed and adaptable will be crucial for investors and policymakers alike.
