Above the Market’s Leading Investment Indicators

Leading IndicatorThis fifth edition of Above the Market’s Leading Investment Indicators is for mid-year 2014 and the first since last July. Earlier iterations are here, here, here and here. As I always note, in economics, leading indicators are measures that typically change before the economy as a whole changes, thus providing some predictive power with respect to what lies ahead. For example, the Conference Board publishes a Leading Economic Index intended to forecast future economic activity.

My intent has been and still is to derive some Leading Investment Indicators. Unlike leading economic indicators, these were not designed as short-term or even intermediate-term predictors. The strength of these metrics is as a tool to measure potential real long-term returns. Thus they are better used as longer term indicators of value, risk and expected returns. They in no way should be used as any sort of timing mechanism. The stock market can continue higher or lower regardless of what any metric of valuation is showing. These indicators are designed to be a tool to help shape an overall investment thesis and process as well as to separate short-term and long-term concerns, not to dictate trading decisions.

My previous conclusions suggested that the market was not long-term cheap. I think they are worth re-visiting in light of recent events (or lack thereof) and as we pass the mid-point of 2014. But I won’t bury the lead (or even the lede). Stocks remain rich and the secular bear market continues (despite the long cyclical bull market rally, fueled by the Fed). Fed activity, as intended, makes stocks look much more attractive than they otherwise would — sort of like being the skinniest kid at fat camp.

As I have noted repeatedly, trying to fight the Fed hasn’t been a very productive approach over the recent past. If you’re going to play (and the risks of sitting things out are big too), please be careful and consider putting on a hedging strategy of some sort. So here goes…. Continue reading

The Halftime Report

Q4“To err is human,” wrote Seneca. “To persist in it is diabolical” (Errare humanum est, Perseverare diabolicum). As 2014 opened, pundits expected interest rates and stocks to go higher, with more certainty about the former than the latter. They also expected the economy finally to turn the corner after five years of sub-par performance. Now that the midway point to the year has been reached and stocks, bonds and commodities have all posted gains together for the first time since 1993, my ongoing and deeply held cynicism about forecasts and forecasters has yet again been confirmed. In other words, be leery about fighting the Fed, fade forecasts and be sure to diversify. Continue reading

Framing Annuities More Attractively

FramingMy latest Research magazine column is now available. Here’s a taste.

“The view of the income annuity as anything like a routine first-choice retirement income option remains a good ways off. Too many individual factors can get in the way of using guaranteed income annuities despite their obvious benefits. However, the new research is clear that if and when partial annuitization strategies are regularly offered and recommended, especially when they are well framed, the idea that income annuity usage would be “extremely rare,” as Modigliani observed nearly three decades ago, will no longer be remotely accurate. And that would be a very good thing indeed.”

I would appreciate it if you read the whole column. Indeed, I recommend the entire magazine.

Framing Annuities More Attractively

Principles of Economics (Translated)

Yoram Bauman

Yoram Bauman

Yoram Bauman has a Ph.D. in economics, but is best known as the “stand-up economist.” Bauman’s excellent post this week, Top 11 Funniest Papers in the History of Economics, adapted from New Developments in Economics Education, reminded me (yet again) of his terrific video riffing on Greg Mankiw‘s famous (and expensive!) textbook, Principles of Economics. I’ve seen it a bunch of times and laugh out loud every time…a lot. Enjoy.

A rap version of Mankiw’s text is available here. An animated version is below.

Bauman is also the co-author of the Cartoon Introduction to Economics (volumes I & II) and the just-released Cartoon Introduction to Climate Change

Risky Business

risky-business-porsche-posterThe Risky Business Report, a bipartisan project backed by three former U.S. Treasury Secretaries as well as other political and business leaders that seeks to quantify and publicize the economic risks from the impacts of a changing climate, calls for new policies to “reduce the odds of catastrophic outcomes” from extreme heat and rising sea levels linked to climate change. Such severe impacts will likely cost billions of dollars in annual property loss, threaten human health. lower labor productivity and endanger the nation’s electricity grids, according to the report The findings summarized by the report also show that the most severe risks can still be avoided through early investments in resilience and through immediate action to reduce the pollution that causes global warming.

“I know a lot about financial risks — in fact, I spent nearly my whole career managing risks and dealing with financial crisis,” former treasury secretary (under George W. Bush) Henry M. Paulson Jr. says in the report. “Today I see another type of crisis looming: a climate crisis. And while not financial in nature, it threatens our economy just the same.” Continue reading