ECB Unleashes a Wall of Money
Financial Times | Dec 21
The European Central Bank responded to the eurozone crisis with an enormous liquidity boost on Wednesday. Over 500 banks secured a total of €489 billion in three-year loans—an amount that represents around 5 percent of the eurozone’s GDP and marks the largest single liquidity operation in ECB history.
A Central Bank Doing What It Should
NY Times | Dec 22
After initially hesitating to adopt the kind of aggressive financial strategy used by Washington during the peak of the 2008 financial crisis, European central bankers injected nearly $640 billion into the Continent’s banking system on Wednesday. This bold maneuver has elevated hopes for alleviating the ongoing credit squeeze in the region.
In the ongoing great debate regarding the potential for another recession, economist Andrew Smithers, the head of Smithers & Co. and author of Wall Street Revalued
Several analysts suggest that the sluggish housing market has been the primary barrier to broader economic growth. A recent study emphasizes that Housing Is The Business Cycle. This relationship has largely led to problems in recent years, especially following the market’s dramatic decline. However, a glimmer of optimism regarding residential real estate has surfaced today after reviewing the latest update on housing starts and newly issued building permits for November, both of which showed significant monthly increases. While we’ve experienced false dawns before, the upward trend in recent months might indicate a genuine turning point for the housing sector.
How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries
Philippe Bracke (London School of Economics) | Oct. 2011
This analysis of 19 OECD countries provides two sets of results: one concerning the average cycle length and the other about its distribution. Typically, upturns outlast downturns; however, this difference vanishes when excluding the last housing price boom. Notably, longer upturns are more likely to end as their duration increases, which supports the boom-bust theory of housing dynamics, indicating that booms are often unsustainable departures from fundamental values.
Will the risks emerge from within our own systems or from external factors? Or are we at risk of experiencing another downturn? Perhaps the more critical question is whether a downturn is imminent at all?
● Frontiers of Modern Asset Allocation
Edited by Paul D. Kaplan
Summary via publisher, Wiley
Drawing from over 15 years of research in asset allocation, Paul D. Kaplan addresses the crucial challenges encountered by investment professionals in applying asset-allocation theory. This book tackles pressing questions such as:
• How should asset classes be categorized?
• Is it beneficial to classify equities based on investment style, geography, or other criteria?
• Should asset classes be represented by market-cap-weighted indexes, or should alternative methodologies, like fundamental weighting, be utilized?
• How do actively managed funds integrate into asset-class allocations?
Kaplan also conducts interviews with industry pioneers who have significantly shaped asset allocation strategies, including Harry Markowitz, Roger Ibbotson, and the late Benoit Mandelbrot. Throughout the book, Kaplan elucidates allocation theory, presents innovative strategies, and corrects widespread misunderstandings, offering unique insights. He includes three appendices containing technical details for new asset-allocation frameworks, introducing what Kaplan refers to as “Markowitz 2.0.”
Is this a genuine improvement? The most recent report on new jobless claims indicates they have dropped to a 3-1/2 year low, suggesting that the labor market may continue to strengthen, possibly at slightly accelerated rates than we’ve experienced in 2011. “This is unexpectedly great news,” comments Ian Shepherdson of High Frequency Economics. However, skepticism remains justified. Numerous false starts have emerged in the recovery since the Great Recession officially ended in June 2009. While it’s uncertain whether this recent decline in claims signifies a true turning point, it is a possibility that shouldn’t be dismissed just yet.
We’re making progress. Initial claims for new jobless benefits decreased last week by a substantial 19,000, settling at a seasonally adjusted 366,000—the lowest level since May 2008, prior to the financial crisis triggered by the Lehman Brothers collapse. This notable shift in this leading indicator implies that the U.S. economy might navigate through 2012 with greater resilience.
The consensus forecast for tomorrow’s consumer inflation report anticipates a modest increase of 0.1% for November, as per Briefing.com. Thus, inflation remains largely uneventful, despite the vociferous concerns from certain quarters.
Implied Risk Premium and the Business Cycle: You Can’t Always Get What You Want
Georg Bestelmeyer (University of Cologne), et al. | December 1, 2011
This study examines the relationship between investors’ risk premium demands and overall economic conditions. Unlike prior research, we emphasize ex-ante risk premium expectations indicated in market prices and earnings forecasts instead of ex-post realized excess returns. Our findings show that implied risk premiums tend to be counter-cyclical and are significantly influenced by the economic context. Generally, implied risk premiums are higher (or lower) when the economy is contracting (or expanding). However, realized excess returns do not exhibit this pattern on a monthly basis throughout our sample from March 1983 to December 2009. Furthermore, implied risk premiums are highly responsive to macroeconomic risk factors, such as term and default spreads, reinforcing that these premiums vary with time and are intimately linked to the business cycle—much more so than realized excess returns.
By synthesizing key economic indicators and insights, this collection of articles highlights the interplay between monetary policy, the housing market, and overall economic health. The analyses present a nuanced view of the challenges and opportunities that lie ahead, emphasizing the importance of monitoring developments closely. Each piece contributes to a broader understanding of fiscal dynamics during a time of uncertainty.
