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Monday, October 15, 2012
U.S. growth. The U.S. economic recovery is likely to persist at a reduced
2.0%−3.0% trend real GDP growth rate, given the continuing headwinds involving
housing, consumer balance-sheet repair, and the transition toward fiscal
austerity in Europe and, eventually, the United States. Future U.S. economic
growth should prove more uneven than expected, given the downside risks of a
full-blown European sovereign debt/banking crisis, a housing-related Chinese
slowdown, and the (unresolved) process for addressing U.S. fiscal imbalances.
These and other (unanticipated) risks are likely to lead to periodic bouts of
risk aversion and economic slowdowns in 2013, 2014 and beyond, followed by economic rebounds.
U.S. inflation.Trend inflationary pressures are
currently modest, with the risk of returning to the high inflationary regime of
the 1970s and early 1980s over the next several years estimated to be less than
10%. Over the next ten years, we project a median inflation rate averaging
about 2.0%–2.5% per year for the U.S. Consumer Price Index (CPI).
Monetary policy.The target federal funds rate is likely
to remain near 0% through at least mid-2013, with a bias toward the Federal
Reserve’s remaining on hold into 2014. The return on cash will likely average
less than 2.0% over the next ten years through 2021, with real
(inflation-adjusted) short-term interest rates remaining negative for some
U.S. Treasury yields.Consistent with the current steepness of
the Treasury yield curve, our ten-year projections generally exhibit a gradual
rising-rate bias, although dispersion around this median path remains
considerable. Based in part on our inflation outlook, the yield on the 10-year
Treasury bond is expected to eventually move from its current range of
1.5%−2.5% toward the 3.5%−4.5% range over the next decade, a central tendency
near its historical long-run average.
Bond market returns.The expected long-run median return of
the broad taxable U.S. fixed income market is near current benchmark yields and
thus most closely resembles the historical bond returns of the 1950s and 1960s.
Despite the modest secular bias toward rising U.S. interest rates, we caution
investors against maintaining a secular short-duration bias in their fixed income portfolios. In our simulations,
shorter-maturity Treasury yields tend to rise more than the yields on
longer-maturity Treasury bonds. This so-called bear-flattening bias produces
expected median returns that are similar for all Treasury bond
portfolios, regardless of their maturity or duration. It is important to note
that the diversification benefits of fixed income in a balanced portfolio remain
under most scenarios; the bottom decile of expected U.S. bond returns through
2021 is positive, and is higher than the bottom-decile expected returns on
Stock market returns.Centered in the 6%−9% return range, the
long-term median nominal return for global equity markets is modestly below the
historical averages. But after adjusting for potential future inflation, we
estimate an approximately 50% likelihood that global equities over the next
decade will realize their post-1926 real return average. This generally
formative outlook for the global equity risk premium may surprise some readers,
given the economic outlook and low-rate environment. However, our long-held
view is that market valuations generally correlate with future stock returns, and
that consensus economic growth expectations and initial dividend yields do not.
As a result, the expected long-run return on emerging-market equities is
statistically identical to that on developed-market equities, and in fact tends
to be lower when adjusted for emerging markets’ higher expected volatility. The
expected distribution of correlations among major equity markets continues to
underscore the strategic benefits of international diversification.
FISCAL CLIFF. If the federal government continues to not address deficit issues, the economy will slow even further into a recession.
What does all this mean? Stay liquid, review your portfolios
every six months, equity financing of home loans is still positive but the
housing market will continue to be down, keep debt low (below 20% of your
assets). The job market will continue to be poor until 2015/2016. Whoever is
President, lots’ of luck.
VP DEBATE WRAP: LOTS OF HEAT; NO GAME CHANGE - It was a spirited brawl in Kentucky last night, but it's hard to see
how it changes the shape of the campaign very much if at all. Democrats were
thrilled with Vice President Joe Biden's fierce defense of the administration's
economic record - especially on the auto bailout - and plans for Social
Security and Medicare. GOP VP nominee Paul Ryan scored some points hitting the
administration's Libya terrorist attack response. But he mostly played small
ball and avoided any big mistakes.
Biden got slammed
on the right (not unfairly) for his constant laughing and smiling during Ryan's
comments. Ryan got derided on the left (not unfairly) for his smirk and limited
ability to refute some of Biden's attacks, such as on requesting stimulus funds
for a constituent while also slamming the stimulus. Republicans declared Ryan
the clear winner. Democrats said it was Biden in a walk. A multitude of largely
worthless instant polls produced a muddle of conflicting results that can be
instantly dismissed as telling us nothing.
impact: Biden's interruptions and persistent, derisive laughter turning off any
undecideds who happened to tune in.
PANETTA WARNS OF 'CYBER-PEARL HARBOR' - "Defense Secretary Leon
E. Panetta warned Thursday that the United States was facing the possibility of
a 'cyber-Pearl Harbor' and was increasingly vulnerable to foreign computer
hackers who could dismantle the nation's power grid, transportation system,
financial networks and government. In a speech at the Intrepid Sea, Air and
Space Museum in New York, Mr. Panetta ... said he was reacting to increasing
aggressiveness and technological advances by the nation's adversaries, which
officials identified as China, Russia, Iran and militant groups.
aggressor nation or extremist group could use these kinds of cyber tools to
gain control of critical switches,' Mr. Panetta said. 'They could derail
passenger trains, or even more dangerous, derail passenger trains loaded with lethal
chemicals. They could contaminate the water supply in major cities or shut down
the power grid across large parts of the country.' Defense officials insisted
that Mr. Panetta's words were not hyperbole, and that he was responding to a
recent wave of cyberattacks on large American financial institutions."
THIS WEEK – Birthday
wishes and thoughts this week to: Paul Abbondante …famous Finance Professor,
Sue Bird (32), Amy Carter (45), Eminem (40), Lee Iacocca (88), Judy Sheindlin
(70), Lindsey Vonn (28), Bob Weir (65).
THE MONTH –
1. Very dark;
gloomy; deep. 2.Classical Mythology. Of, pertaining to, or suggestive of a
western people believed to dwell in perpetual darkness.
“I was ripe for death, and along a road full of dangers,
weakness led me to the boundaries of the world and the Cimmerian land of
darkness and whirlwinds.” -- Arthur Rimbaud, A Season in Hell
to think about, to think over
“Pensándolo bien, he decidido no dimitir.” On reflection, I’ve decided not to resign.
COLLEGE FOOTBALL PICK OF
THE WEEK – Saturday
10/20, 7:00 PM ET, ABC: #4 Kansas State Wildcats (6-0) at #13 West Virginia
Mountaineers (5-1). This Big 12 matchup will show that The Wildcats belong in
the BCS and the Mountaineers do not. Kansas State 32 West Virginia 24. Season
to date (4-3).
SMALL COLLEGE FOOTBALL PICK
OF THE WEEK – Saturday
10/20, 2:00 PM ET, The Food Network: The Cheese Bowl game – Concordia (Wis.) Falcons
(3-3) visit Lakeland Muskies (2-4). The records go out the door when it is the
Cheese Bowl. The Falcons will carve out a victory; Concordia 40 Lakeland 24. Season
to date (6-1).
D-III TOP FIVE: (1). Mount Union, (2).
Mary Hardin Baylor, (3). Linfield, (4). St. Thomas, (5). UW-Whitewater
NFL FOOTBALL PICK OF THE
WEEK – Sunday
10/21, 4:24 PM ET, CBS: New York Jets (3-3) at New England Patriots (3-3). A
battle for first place in the AFC East, Pats 35 Jets 10. Season to Date (5-1).
NFL POWER RANKINGS: (1). Houston, (2).
Atlanta, (3). San Francisco, (4). Baltimore, (5). New England
THE SWAMI’S TOP PICKS – KSU 32 WVU 24, Concordia
40 Lakeland 24, Patriots 35 Jets 10, La Verne 38 Pomona-Pitzer 21. Season
to Date (17-10).
DRIVING THE WEEK - The second
presidential debate, a town hall format Tuesday night at Hofstra University in
Hempstead, N.Y., is the centerpiece of the week and a critical opportunity for
President Obama to reverse some of the damage from his weak performance in the
first meeting. Obama has been holed up in Williamsburg, Va., in debate prep and
aides promise a much sharper, more engaged president eager to draw sharp contrasts
with Mitt Romney and lay out a more specific agenda for a second term. The
debate will cover both foreign and domestic policy and Romney is likely to keep
up the sharp attack on the administration's handling of the Benghazi attack.
The format, featuring audience questions, could make it hard to get really
GOP vice presidential nominee Paul Ryan campaigns in
Waukesha, Wis., and Cincinnati, Ohio, today ... Bruce Springsteen is on the
road for Obama this week with stops Thursday in Parma, Ohio, with former
President Bill Clinton and later in the day with Vice President Joe Biden in
Ames, Iowa ... After the debate, Obama campaigns Wednesday in Mount Vernon,
Iowa, and Athens, Ohio, where he will "lay out the real and achievable
solutions he has" for a second term ...
Retail sales at 8:30 a.m. EDT today expected to rise 0.8
percent overall and 0.6 percent ex-autos ... Consumer prices on Tuesday at 8:30
a.m. EDT expected to rise 0.5 percent headline and 0.2 percent core ... Initial
jobless claims at 8:30 a.m. EDT on Thursday expected to reverse last week's
fluky drop to 339K and jump back up to 365K ... Philly Fed on Thursday excepted
to rise to 0.2 from September's -1.9 ... Existing home sales at 10 a.m. EDT on
Friday expected to dip to 4.75 million from 4.87 million ... Bank earnings
season continues with Citigroup today, Goldman Sachs on Tuesday, Bank of
America on Wednesday and Blackstone and Morgan Stanley on Thursday.