Real Time Economics: Global Stocks Rebound | Trump Says Fed is ‘Out of Control’ | Social Security Boost for Seniors

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here. Good morning. Today we look at global markets, President Trump’s unhappiness with the Fed, bond yields, Social Security payments, and the latest developments in U.S.-China relations. IS IT OVER? U.S. stocks tumbled for a second straight day Thursday. But global shares rebounded Friday, calming jittery investors who had been weighing whether this week’s deep selloff was the beginning of a broader downturn or simply a two-day blip, Avantika Chilkoti reports. Catalysts: China posted better-than-expected growth in exports, the U.S. Treasury Department next week is expected to find that China isn’t manipulating the yuan, and President Trump plans to meet with Chinese leader Xi Jinping next month, raising hopes that a further escalation in trade tensions may be averted. Next up: Investors are watching major Continue reading "Real Time Economics: Global Stocks Rebound | Trump Says Fed is ‘Out of Control’ | Social Security Boost for Seniors"

Real Time Economics: How Long Can the U.S. Economic Expansion Last? ‘Effectively Indefinitely.’

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here. Good morning. Today we look at extraordinary U.S. economic growth, rising bond yields, collateral damage in emerging markets, why U.S. worker wages might take a step back in September, and the continuing demise of the shopping mall. HOW ABOUT THAT ECONOMY! The 10-year U.S. Treasury yield rose to its highest level in more than seven years as investors bet on strong economic growth and rising inflation. The immediate cause: robust economic data and easing trade tensions after the U.S., Mexico and Canada hashed out a new pact. The 10-year Treasury is a closely watched barometer of sentiment toward growth and inflation. Investors appear to expect more of both. It’s also used as a reference for everything from auto loans to mortgages. Higher yields likely mean higher Continue reading "Real Time Economics: How Long Can the U.S. Economic Expansion Last? ‘Effectively Indefinitely.’"

The Balance: On Private Activity Bonds

================= For about two months, I wondered when I would write this.  Now I know… I’m writing it now.  To all my readers, I am letting you know that Aleph Blog is not ending, but it is changing.  I accepted a writing assignment with The Balance.  I am going to write 4-5 articles for them per month, and correct some old articles as well.  I will publish links to them here.  Like Aleph Blog, The Balance is free, so you don’t have to do anything more than click on the article link here to read it. Why did I do this?  I felt I was getting stale in my writing.  I was a little bored; that’s why I wasn’t writing so much.  I had completed all of my main goals for the blog in 2014, and slowly Continue reading "The Balance: On Private Activity Bonds"

SACEVS with Quarterly Allocation Updates [PREMIUM]

Do quarterly allocation updates for the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS) work as well as monthly updates? These strategies allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued: 3-month Treasury bills (Cash) More

Benefits of Volatility Targeting Across Asset Classes [PREMIUM]

Does volatility targeting improve Sharpe ratios and provide crash protection across asset classes? In their May 2018 paper entitled “Working Your Tail Off: The Impact of Volatility Targeting”, Campbell Harvey, Edward Hoyle, Russell Korgaonkar, Sandy Rattray, Matthew Sargaison, and Otto Van Hemert examine return and risk effects of long-only volatility targeting, which scales asset and/or portfolio exposure higher (lower) when More

Ziemba Party Holding Presidency Strategy Update [PREMIUM]

“Exploiting the Presidential Cycle and Party in Power” summarizes strategies that hold small stocks (large stock or bonds) when Democrats (Republicans) hold the U.S. presidency. How has this strategy performed in recent years? To investigate, we consider three strategy alternatives using exchange-traded funds (ETF): D-IWM:R-SPY: hold iShares Russell 2000 (IWM) when Democrats hold the presidency More

The Pips are Squeaking

Photo Credit: sid================= This should be a short post.  I just want to note the degree of stress that many emerging market countries are under.  The Fed raises rates, and something blows up.  That is often the class of debt that has grown the most in the bull phase of the cycle, or, the one that has financed with short-term debt.  This is the “volatility machine” that Michael Pettis wrote so well about. The Brazilian stocks I own have been falling.  A little lower, and I will make them double-weight positions.  Five times earnings for utilities that cannot be done without?  Wave the shares in. Look at Argentina, Indonesia, and Turkey.  Fundamentally misfinanced.  Maybe own assets there that have enduring demand.  I own IRSA [IRS]. Russia is fundamentally sound.  I own shares in RSXJ, which is Continue reading "The Pips are Squeaking"

Thoughts on Bank Debt

  I have long said that until an asset class goes through a “failure cycle,” risk-based pricing will be weak toward the assets in question.  One asset class that has become popular of late is bank debt.  Bank debt is a loan to a corporation that typically has first priority to make claims on the company in bankruptcy, ahead of the bondholders, much less the preferred stockholders and the common equity. Though it is called bank debt, often the loans are arranged by banks and allow others to lend alongside them.  This has become popular among closed-end funds and ETFs like BKLN.  What are the advantages?
  • In the past credit losses have been low, partially because of strong covenants and low availability.
  • The loans have floating rates, so if interest rates rise, you get paid more, assuming the company does not choke on Continue reading "Thoughts on Bank Debt"

Worldwide Long-run Returns on Housing, Equities, Bonds and Bills [PREMIUM]

How do housing, equities and government bonds/bills perform worldwide over the long run? In their February 2018 paper entitled “The Rate of Return on Everything, 1870-2015”, Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor address the following questions: What is the aggregate real return on investments? Is it higher than economic growth rate and, if so, More

Real Time Economics: Yields Up, Stocks Down | Trump Sending Trade Delegation to Beijing | Got A2 Milk?

This is the web version of the WSJ’s daily economic newsletter. You can sign up for daily delivery here. Good morning! Today we look at rising bond yields and company profit warnings, Trump’s outreach to China, French President Macron’s visit to Washington, the European Central Bank’s meeting this week, and corporate response to consumer demand for milk that’s missing a protein.  YIELD SIGN The yield on the 10-year U.S. Treasury note hit 3% for the first time since 2014. Investors took that as a vote of confidence for the economic expansion. But large companies warned that profits were peaking. That helped send the Dow industrials to their fifth straight decline. First, the bonds: The rise in yields was a signal that the Federal Reserve might have to raise interest rates more rapidly to respond to economic growth and the prospect of more inflation. That could add fuel to the Continue reading "Real Time Economics: Yields Up, Stocks Down | Trump Sending Trade Delegation to Beijing | Got A2 Milk?"

Real Time Economics: Inflation, the Economy and Treasury Yields | Mr. Macron Goes to Washington | $25K Bonuses on the Railroad

This is the web version of the WSJ’s daily economic newsletter. You can sign up for daily delivery here. Good morning! Today we look at rising U.S. Treasury yields, French President Emmanuel Macron’s visit to Washington, the end game for Nafta negotiations, and the latest sign of a tight labor market: $25,000 bonuses for railroad workers. THREE The yield on the 10-year U.S. Treasury note approached 3% Monday, hitting a multiyear high as investors bet that a pickup in inflation and economic growth would erode the value of government debt. The yield on the benchmark 10-year note, which influences borrowing costs for consumers, corporations and local governments, reached as high as 2.996% in early trading before settling at 2.973%, Daniel Kruger reports. That was its highest closing level since Jan. 8, 2014. Many analysts expect the note to breach 3% this year. “Our current 10-year yield forecast is Continue reading "Real Time Economics: Inflation, the Economy and Treasury Yields | Mr. Macron Goes to Washington | $25K Bonuses on the Railroad"

Why I Watch the Thirty

============= I like long bonds.  I am not saying that I like them as an investment.  I like them because they tell me about the economy. Though I argued to the Obama Administration that they should issue Fifties, Centuries and Perpetuals, the Thirty-year bond remains the longest bond issued.  I think its yield tells us a lot about the economy. How fast is nominal growth?  Look at the Thirty; it is highly correlated with that. What should the Fed use for its monetary policy?  Look at the Thirty, and don’t let the Five-year note get a higher yield than it.  Also, don’t let the spread of the Two-year versus the Thirty get higher than 1.5%.  When things are bad, stimulus is fine, but it is better to wait at a high spread than goose the spread higher. Excesses Continue reading "Why I Watch the Thirty"

Notes on the Fed Announcements

========================== Listening to the Fed Chair’s press conference, there was one thing where I disagreed with what Powell was saying.  He said a few times that they only made one decision at the FOMC meeting, that of raising the Fed Funds rate and the reverse repo rate by 0.25%.  They made another decision as well. The decided to raise the rate of quantitative tightening [QT] by increasing the rate of Treasury, MBS and agency bonds rolloff by $10B/month starting in April. They did that by increasing the rate of reduction of MBS and agency bonds from $8B to $12B/month, and Treasuries from $12B to $18B/month. The total rate of QT goes from $20B to $30B/month.  This may raise rates on the longer end, because the Fed will no longer buy so much debt. There was also a little concern over
Continue reading "Notes on the Fed Announcements"

Just Don’t Invert the Yield Curve

Photo Credit: Brookings Institution

================================ Jerome Powell is not an economist, and as such, has the potential to try to remake the way the Fed does monetary policy.  Rather than hold onto outmoded ideas ideas like the Phillips Curve, which may have made sense when the US was a more insular economy, there are better ways to think of monetary policy from a structural standpoint of how financial firms work. (Note: the Phillips Curve relies on a very simple assumption that goods and services price inflation stems from wage inflation, and that wage inflation occurs when domestic unemployment is low.  In a global economy, those relationships are broken when labor can be easily added from sources outside of the US.) Financial firms tend to grow rapidly when the yield curve is steeply sloped.  Borrowing short and lending long is profitable, at least in the short-run.  Continue reading "Just Don’t Invert the Yield Curve"

Rise and Fall of the Fed Model? [PREMIUM]

What is the historical relationship between U.S. stock market earnings yield (E/P) and U.S. government bond yield (Y)? In their February 2018 paper entitled “Stock Earnings and Bond Yields in the US 1871 – 2016: The Story of a Changing Relationship”, Valeriy Zakamulin and Arngrim Hunnes examine the relationship between E/P Y over the long run, with focus More

Estimating Future Stock Returns, December 2017 Update

The future return keeps getting lower, as the market goes higher

================= Jeff Bezos has a saying, “Your margin is my opportunity.”  He has found ways to eat the businesses of others by providing the same goods and services at a lower cost.  Now, that makes Amazon more productive and others less productive.  The same is true of other internet-related businesses like Google, Netflix, etc. And, there is a slight net benefit to the economy from the creative destruction.  Old capital gets recycled.  Malls that are no longer so useful serve lower-margin businesses for locals, become homes to mega-churches, other area-intensive human gatherings, or get destroyed, and the valuable land so near many people gets put to alternative uses that are better than the mall, but not as profitable as the mall prior to the internet. Laborers get released to other work as well. 
Continue reading "Estimating Future Stock Returns, December 2017 Update"

T-note Yield Divergence from Trend and Future Stock Market Return [PREMIUM]

A subscriber requested review of a finding that deviation of 10-year constant maturity U.S. Treasury note (T-note) yield from an intermediate-term linear trend predicts U.S. stock market return. Specifically, when weekly yield is more than one standard deviation of weekly trend divergences below (above) a weekly 70-week linear extrapolation, next-week S&P 500 Index return is More

Bond Yields Approach 3% | The Dollar and Inflation | Global Household Debt Sparks Concern

This is the web version of the WSJ’s daily economic newsletter. You can sign up for daily delivery here Today in Real Time Economics, what the 10-year Treasury yield is telling us about the economy, how a weaker dollar feeds inflation, household debt percolates as an economic issue, global growth pulls miners along for the ride, France tries to loosen its labor market, and Spain’s economy hams it up. BENCHMARK BONDS Long-term U.S. bond yields have crept within reach of 3% for the first time in years. The development has significant implications for financial markets and the broader economy. The 10-year Treasury note yield influences borrowing costs for governments, consumers and corporations. Its half-percentage-point rise this year contributed significantly to the 10% tumble in the Dow Jones Industrial Average earlier this month, Daniel Kruger writes. But stocks have bounced back, reflecting continued optimism about the outlook for growth and corporate Continue reading "Bond Yields Approach 3% | The Dollar and Inflation | Global Household Debt Sparks Concern"