Monday, October 15, 2012

Finance 101

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 time.
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 equities.
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.

One possible 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.

"'An 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."

BIRTHDAYS 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).


Cimmerian \si-MEER-ee-uhn\, adjective:
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
pensar, verb
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).

NCAA BCS TOP FIVE: (1). Alabama, (2). Florida, (3). Oregon, (4). Kansas State, (5). Notre Dame.

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 aggressive.

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.

Next week; Trick or Treat?

Until Next Monday, Adios.

Claremont, CA
October 15, 2012

#III-25, 130

No comments:

Post a Comment