March 28, 2024

Big in 2012, but the Future Is Hazy for Bonds

Americans sold off their stock mutual funds, the most popular way to invest in American companies, at the fastest clip since 2008, the year the financial crisis began. That occurred despite the fact that the stock market itself rose steadily; the benchmark Standard Poor’s 500-stock index ended the year up 13.4 percent.

Investors have been opting instead for the assumed safety of bonds. Money has been steadily flowing into mutual funds holding bonds of all sorts for the last four years, but the pace accelerated this year. The percentage of household investments in bonds shot up to 26 percent from 14 percent just five years ago, according to Morningstar.

Entering the new year, a growing number of professional investors are betting that the craze for bonds has gone too far, perhaps dangerously so, as has been evident in the headlines from the year-end reports from large investment firms. “Bond PAIN in 2013?” Wells Capital Management’s chief strategist asked. “Caution: Turn Ahead,” BlackRock analysts wrote. “The inflection year,” said Bank of America.

This is not the first time that analysts have forecast an end to the rally in bond values that has lasted for decades. But previously many of the voices predicting it were pessimists who believed that investors would sell off their bonds when they lost faith in the American government’s ability to pay back its bonds, forcing the government and many other bond issuers to pay higher interest rates. When interest rates rise, older bonds with lower interest rates are worth less.

While those previous forecasts have proved expensively wrong, this year the forecasters are being joined by many economic optimists who argue that a strengthening American economy is likely to make investors willing to embrace the risks involved in stocks, luring them out of bonds. The question, they say, is only how quickly it will happen.

“Mathematically, it’s next to impossible to get the kind of returns on bonds you’ve seen over the last few years,” said Kate Moore, the chief global equity strategist at Bank of America.

When the turn does ultimately come, it is likely to cause pain for at least some of the people who have been investing in bonds in recent years.

“You don’t want to be the last one out the door when the trends turn,” said Rebecca H. Patterson, the chief investment strategist at Bessemer Trust. “All good things come to an end and we want to make sure we’re in front of it.”

Most of the talk of investors shifting money from bonds into stocks relies first on the assumption that politicians in Washington are able to resolve the current impasse over the so-called fiscal cliff, the automatic spending cuts and tax increases that will go into effect if Congress and President Obama cannot come to an agreement, and the coming debate over the nation’s debt ceiling. If the political discord continues, it could renew investor attraction to the safety of bonds and put off any shift into stocks.

But a number of surveys suggest that professional investors are already starting to prepare for a change. Hedge funds polled by Bank of America said that they had more of their portfolio allocated to stocks than at any time since 2006.

All but one of the 13 bank strategists tracked by Birinyi Associates expects stock markets to rise in 2013. When 2012 began, the same strategists were predicting a downturn in share prices. Even among mutual fund investors, there are signs that the flows out of stocks and into bonds have been slowing down recently.

The preference for bonds has already been costly for retail investors. Over the last year, most types of American bonds have returned less than an investment in the S. P. 500. When inflation is factored in, the benchmark 10-year Treasury security is delivering negative returns.

But many investors are still rattled by the 2008 financial crisis and the turbulence in the stock markets since then, which have led to wild swings. Over the last five years, all major types of American bonds have done better than leading stock indexes.

The Federal Reserve has been engaged in an aggressive effort to buy bonds and drive down interest rates. The long term goal of that program is to encourage banks to lend money and to drive investors out of bonds. But in the meantime, falling interest rates have made bonds more attractive. The Fed has said it wants to keep rates low until 2015, though it could let them rise sooner if the economy picks up faster than expected. The 10-year Treasury hovered near 4 percent in recent years but has stayed below 2 percent for much of 2012.

Article source: http://www.nytimes.com/2013/01/01/business/big-in-2012-but-the-future-is-hazy-for-bonds.html?partner=rss&emc=rss

Fed to Consider Publishing a Forecast on Rates

Predicting its own future actions was a new step, an experiment in a time of crisis that the Fed has since repeated several times, most recently in August, when it said that it planned to keep interest rates near zero until at least the summer of 2013.

Now the technique looks increasingly likely to become a permanent method for influencing economic growth. When the Fed’s policy-making committee convenes on Tuesday, it will consider the idea of publishing a regular forecast of its future decisions on interest rates. Any such plan would most likely be announced no sooner than its next meeting, in January, when it is already scheduled to publish economic projections.

Forecasting policy is part of a broader set of changes that the Fed is considering to improve public understanding of its methods and goals. The Fed’s chairman, Ben S. Bernanke, and other officials say that improved communications could deliver a modest boost to the economy with relatively little risk. None of their other options for additional action are nearly so appealing.

“We are actively considering methods that we could use to provide greater clarity,” Janet L. Yellen, the Fed’s vice chairwoman, said after a recent speech in San Francisco. “Is it a game-changer? I feel that it could have some favorable impact. I don’t want to exaggerate how large that is.”

The meeting of the Fed’s policy-making committee on Tuesday comes at a moment of unusual uncertainty about the plans of other economic policy makers.

Congress is debating the extension of a payroll tax cut and unemployment benefits, which some forecasters estimate could lift economic growth next year by more than one percentage point. Europe is convulsing, and Mr. Bernanke is among the economists who have warned that the United States could slip back into recession if the euro collapsed.

Recent federal data suggest that the United States economy is improving somewhat, reducing the pressure on the Fed to expand its aid programs. Even though unemployment remains at a level that Fed officials regard as unacceptable, most analysts who follow the central bank say they do not expect major changes in policy at this meeting.

Another round of asset purchases remains a possibility — including a specific investment in mortgage-backed securities — but officials are concerned that the benefits diminish with each new round, while the risks, both economic and political, have increased.

Monetary economists had long agreed that central banks should avoid making predictions or commitments. They worried that deviations from the predicted path would create costly turbulence in financial markets as investors corrected their misconceptions.

In recent years, however, more policy makers have concluded that the power to shape expectations should be embraced. Some central banks have come to regard speaking about the future as a primary policy tool. For example, the central banks of Britain, Canada and Australia, among others, have adopted explicit goals for inflation and the rate of increase in prices and wages. The central banks of Sweden and Norway publish forecasts of the level of interest rates. New Zealand announces goals and forecasts.

Mr. Bernanke is a longtime advocate of setting an inflation objective. But Congress has given the Fed a dual mandate to manage inflation and unemployment, and past proposals to formalize an inflation goal have foundered on the question of how to communicate an equal concern about the health of the labor market. This remains the subject of lively debate within the Fed.

Predicting the future is less controversial. The minutes of the committee’s most recent meeting, in November, said that “participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate.”

Article source: http://feeds.nytimes.com/click.phdo?i=b23a4401d6808dc6e245f2c007b5f12f

Wealth Matters: Forecasters Find the More Pessimistic View Is the Fashion

But I’ll give them this: in terms of macroeconomic events, this has not been an easy year to predict, starting with the earthquake in Japan and the revolutions in the Middle East. There has also been the continuing failure of European politicians to come up with a workable solution to Greece’s debt problem and, in August, Standard Poor’s downgrade of the United States credit rating.

Perhaps not surprisingly, the group this time around was unwilling to venture a guess on that staple of all market predictions: where the Standard Poor’s 500-stock index will end the year. The best I could muster from anyone was “higher” than it is now.

The group has been consistently off the mark on economic growth, lowering their expectations each quarter. Predictions of 3 to 4 percent growth in January have given way to predictions this time of half that, or less.

So given the year so far, it is remarkable that many of this group’s predictions have held true, for good and bad. Here is an assessment of the group’s calls to date and some tepid predictions on what the last quarter will bring.

GOOD CALLS The good calls have been the conservative ones.

Bill Stone, the chief investment strategist at PNC Wealth Management, has championed dividend-paying stocks all year and continues to do so. What has changed is his reason for recommending them.

At the beginning of the year, Mr. Stone said he backed these stocks because he believed that money would move from bonds into stocks and that dividend-paying ones would benefit first. As other people turned against stocks over the summer, he said that companies paying a dividend had the cash reserves to continue to pay or increase them — evidence that they were well-run.

Now, like other strategists, Mr. Stone sees dividend-paying stocks as unique survivors and one of the few securities that offer income. The average dividend yield on the S.. P 500, 2.22 percent, is now higher than the 2.08 percent yield on 10-year Treasuries for the first time since the 1950s.

“We’re sticking with the call, but when it won’t work is when we get a strong snapback,” Mr. Stone said. “When the market decides it’s not so concerned about the double-dip recession, it will drive the other stocks higher more quickly.”

The other stock picker who has stuck to his recommendations with good results is Niall J. Gannon, director of wealth management at the Gannon Group at Morgan Stanley Smith Barney. His big call at the beginning of the year was on stocks of companies that derive a substantial proportion of their revenue from outside the United States. One of his favorites is Nike, which is up 3.78 percent this year.

He said these were the only companies that were insulated from country-specific economic shocks. People may be buying fewer bottles of Coca-Cola in Greece, but they may be buying more in Brazil.

Of course, being right is not always something to gloat about. Richard Madigan, chief investment officer for J. P. Morgan’s Global Access Portfolios, has been right about something he wishes he had gotten wrong: unemployment in the United States. He predicted it would stay between 9 and 10 percent all year. While he was briefly wrong when the unemployment rate dipped to 8.9 percent in March, he is right again, and he does not like the implications of being correct.

“For markets, it’s going to be a much more aggressive campaign cycle into next year,” he said. “The political rhetoric will distract markets. It’ll be noise with a lot of policy uncertainty.”

With this bleak outlook, he is encouraging clients to stop thinking in calendar years. Trying to make up for the losses of the last two months could land people in worse straits.

CHANGED CALLS If there is one area that did not turn out as this group imagined, it was debt.

Richard Cookson, chief investment officer at Citi Private Bank, was the most brutally honest member of the group. A week before our call, he issued a report to the firm’s clients conceding that he had gotten one of his calls on long-duration bonds wrong. He titled it “Gross Miscalculation.”

Now, instead of those government bonds, he is recommending investors shift to long-dated corporate bonds.

Article source: http://feeds.nytimes.com/click.phdo?i=e6752bef2038ca926502d9f6037d148c

Jobs Bill Could Help Economic Growth, Some Forecasters Say

The possibility of major parts of President Obama’s $447 billion jobs bill becoming law, and of further steps next week by the Federal Reserve, have forecasters saying that the decisions Washington makes in the weeks ahead could have a substantial effect on economic growth and unemployment. At a minimum, the stimulus could be insurance against the headwinds blowing from Europe’s debt crisis and the impact of the recent government spending cuts in this country.

The jobs package of tax cuts and spending initiatives could add 100,000 to 150,000 jobs a month over the next year, according to estimates from several of the country’s best-known forecasting firms; the potential Fed actions could add 15,000 more jobs a month over two years.

While those estimates are difficult to verify, the nation’s economy since April has added an average of only about 40,000 jobs a month, raising concerns about a double-dip recession.

It remains uncertain, of course, what Congress or the Fed will do and, if they do act, whether their actions will have the intended effects.

Many businesses and consumers remain sufficiently scarred by the financial crisis and long economic slump that they are awaiting clear evidence of a recovery before beginning to spend and hire at a healthy pace again. And Congressional Republicans, after initially expressing openness to the jobs plan, turned sour when Mr. Obama on Monday proposed to offset its short-term costs with future tax increases on wealthy taxpayers.

But the economy’s weakness, as well as polls showing low approval ratings for both Mr. Obama and Congressional Republicans, seem to have raised the prospects of a policy response.

That is a significant shift. Earlier this year, the Federal Reserve chairman, Ben S. Bernanke, said he was not inclined to take more steps to help growth, out of a belief that a recovery was solidly under way. And the new House Republican majority and Mr. Obama had spent much of the year negotiating spending cuts to reduce deficits.

But economists and bond investors have grown increasingly critical of those cuts, warning of a repeat of 1937, when government austerity helped caused a double-dip recession. Moody’s Analytics has estimated that the current fiscal policy would subtract 1.7 percentage points from gross domestic product next year. State and local cuts have eliminated 259,000 jobs this year.

“If you look at the state of the economy, we want — we need — the policy makers to be very proactive, and that means both fiscal and monetary policy makers,” said Krishna Memani, director of fixed income and a senior vice president at Oppenheimer Funds. “If we don’t do that, the drag from fiscal contraction in 2012 will become very, very acute.”

More than half of Mr. Obama’s $447 billion jobs package consists of extending and expanding payroll-tax cuts for individuals and businesses, and those cuts have among the best chance of winning Republican support.

The administration’s main goal is to increase demand for goods and services — the lack of which appears to be the economy’s central problem — which could then give employers the confidence to hire. Most of the rest of the plan is for assistance to the long-term unemployed, which would also put money in people’s hands, and infrastructure spending, which would have a more direct impact on job creation.

While the plan also includes a tax credit for businesses that increase their payrolls, its direct impact on hiring is likely to be small, economists say. Macroeconomic Advisers, which was founded by Laurence H. Meyer, a former Fed governor, did not even include the tax credit in its analysis because it saw the effect as being so “modest.”

In all, the firm projected that the plan would add roughly 1.25 percentage points to gross domestic product and create 1.3 million jobs in 2012. JPMorgan Chase estimated that the plan would increase growth by 1.9 points and add 1.5 million jobs. Most bullish is Moody’s Analytics, which forecast that the package would add 1.9 million jobs, cutting the unemployment rate by a point, and increase growth by two percentage points.

The proposal “would help stabilize confidence and keep the U.S. from sliding back into recession,” Moody’s said. Congress will not pass many of the proposals, it predicted, “but the most important have a chance of winning bipartisan support.”

Fed officials will consider several options when the central bank’s policy-making committee meets for two days next week. The leading contender is a plan to shift the composition of the Fed’s $2.6 trillion investment portfolio, selling short-term Treasury securities and using the money to buy longer-term securities.

If it works, the shift should modestly cut credit costs for businesses and consumers. Macroeconomic Advisers estimated that the Fed could raise gross domestic product by about 0.4 percentage points over two years, increasing jobs by about 350,000 over the same period.

An impact of that magnitude would be roughly the same as the Fed achieved through its recently-completed purchase of $600 billion in Treasury securities, popularly known as QE2.

Under the new plan, the Fed would be absorbing more risk for each dollar it invests; 10-year Treasury securities are riskier than one-year securities because the investor makes a longer commitment. By shifting its portfolio, the Fed would seek to drive investors into even riskier assets, reducing borrowing costs.

Charles Evans, president of the Federal Reserve Bank of Chicago, said in a speech in London last week that the central bank had an obligation to ratchet up its efforts. With an unemployment rate of 9 percent, he said, Fed officials should be “acting as if their hair was on fire.”

But Richard Fisher, president of the Federal Reserve Bank of Dallas, said Monday that the Fed already had “filled the gas tanks of the economy,” that he doubted its ability to do more, and that the responsibility now fell on the rest of the government.

Article source: http://feeds.nytimes.com/click.phdo?i=d2f6a6b0e0b3532ce938e56758043aee

Economix Blog: Casey B. Mulligan: Preparing for Disaster

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Casey B. Mulligan is an economics professor at the University of Chicago.

Much of the economics of environmental disasters is about anticipating and planning.

Today’s Economist

Perspectives from expert contributors.

Hurricane Irene traveled the East Coast last weekend and was expected to be one of the rare hurricanes to hit New York (by the time it reached there, it had been downgraded to a tropical storm). Although many thousands of people in the region may be without electricity for days to come, New Yorkers are glad that Irene did little damage as hurricanes go.

The storm began to receive media attention the weekend before it arrived, and people in the New York area used the time to prepare themselves. Forecasters have been criticized for overestimating the amount of wind that New York would experience, but the winds and tides were plenty strong. Preparation was an important reason that damage was limited.

For example, the eye of the storm passed right over Kennedy International and LaGuardia Airports, but planes did not crash because the airports were shut during the storm. Few lives and little cargo was lost from ships in the area because the ports were closed, and vessels moved out of the area.

Hundreds of thousands of people were left without power, and many homes were flooded. But, clearly, the damage would have been much worse if Hurricane Irene had hit with no warning.

I have no expertise in climate, weather, physics or aerodynamics, but one of the lessons of economics that environmental changes are less harmful when they can be anticipated. With only a few days of preparation, as with Hurricane Irene, people and mobile capital can be moved out of harm’s way. Protective barriers can be constructed for the immobile capital like homes.

New York was not given a definite warning of Irene a year ahead, let alone a decade ahead. But if it had been warned years ahead, the economy could have adjusted even more by making plans to locate activity in more protected places. Or perhaps even to invent goods and production processes that are more hurricane resistant.

The opportunities for preparation are one reason why economists expect the damage from global warming to be different, and perhaps less, than from natural disasters that hit by surprise.

Global warming is expected to raise temperatures and sea levels over a period of decades – perhaps centuries. Even if scientists are completely unable to retard or reverse the environmental consequences of global warming, thanks to decades of warning the economy can greatly adjust to minimize the economic costs of those environmental consequences.

That’s the thesis of a recent book, “Climatopolis: How Our Cities Will Thrive in the Hotter Future,” by Matthew Kahn of the University of California, Los Angeles (disclosure: Professor Kahn is a friend and was my classmate at the University of Chicago). Given advance warning, people will protect themselves and innovate in order to make sales in future market when the symptoms of global warming are more threatening.

Article source: http://feeds.nytimes.com/click.phdo?i=d3d1e8e6358d0d38f90512810753300b

Year Packed With Weather Disasters Has Brought Economic Toll to Match

The weather this year has not only been lousy, it has been as destructive in terms of economic loss as any on record.

Normally, three or four weather disasters a year in the United States will cause at least $1 billion in damages each. This year, there were nine such disasters. They included the huge snow dump in late January and early February on the Midwest and Northeast, the rash of tornadoes this spring across the Midwest and the more recent flooding of the Missouri and Souris Rivers. The disasters were responsible for at least 589 deaths, including 160 in May when tornadoes ripped through Joplin, Mo.

These nine billion-dollar disasters tie the record set in 2008, according to a report by the National Oceanic and Atmospheric Administration. The total damage done by all storms, tornadoes, flooding and heat waves so far this year adds up to about $35 billion. The National Climatic Data Center says it estimates the costs in terms of dollars and lives that would not have been incurred had the event not taken place. Insured and uninsured losses are included in damage estimates and are likely to change as assessments become more complete. With four months to go in 2011, this year’s total amount of damage is likely to rise. Forecasters are already predicting further meteorological mayhem as hurricane season intensifies.

Over the last 30 years, there have been about 108 natural disasters that have caused $1 billion in damages each, according to NOAA. The total damage from all natural disasters since 1980 is about $750 billion.

“The increasing impacts of natural disasters, as seen this year, are a stark reminder of the lives and livelihoods at risk,” Jack Hayes, director of NOAA’s National Weather Service, said in a statement.

Part of the problem is that more people are living in high-risk areas, NOAA said. This makes them “increasingly vulnerable to severe weather events, such as tornado outbreaks, intense heat waves, flooding, active hurricane seasons, and solar storms that threaten electrical and communication systems,” the statement said.

NOAA, along with other private and public agencies, is taking several steps to try to make the nation more “weather ready,” including making more precise forecasts, improving the ability to alert local authorities about risks and developing specialized mobile-ready emergency response teams.

The National Weather Service is also planning several test projects involving emergency response and ecological forecasting. Test projects are to start soon at strategic locations in the mid-Atlantic region, on the Gulf Coast and elsewhere in the South. They include improvements to a system in Charleston, W.Va., for alerts three hours ahead of severe weather instead of the current half-hour.

The nine weather events that have caused at least $1 billion in damages so far this year are:

Central/East Groundhog Day blizzard (Jan. 29-Feb. 3). This storm was tied to 36 deaths. The losses exceeded $2 billion.

Midwest/Southeast tornadoes (April 4-5). Nine people were killed. Total losses were more than $2 billion.

Southeast/Midwest tornadoes (April 8-11). Resulted in more than $2 billion in losses.

Midwest/Southeast tornadoes (April 14-16). Caused 38 deaths. Total losses are more than $2 billion.

Southeast/Ohio Valley/Midwest tornadoes (April 25-30). Caused 327 deaths. Losses total more than $9 billion.

Midwest/Southeast tornadoes (May 22-27). Caused 177 deaths. Total losses are more than $7 billion.

Southern Plains/Southwest drought, heat waves, wildfires. Direct losses are more than $5 billion.

Mississippi River flooding. At least two deaths and losses ranging from $2 billion to $4 billion.

Upper Midwest flooding. Losses estimated at $2 billion.

Article source: http://feeds.nytimes.com/click.phdo?i=b02b8bba7ab777ae8298abfc37c71ec8

A Year Full of Weather Disasters and an Economic Toll to Match

The weather this year has not only been lousy, it has been as destructive in terms of economic loss as any on record.

Normally, three or four weather disasters a year in the United States will cause at least $1 billion in damages each. This year, there were nine such disasters. They included the huge snow dump in late January and early February on the Midwest and Northeast, the rash of tornadoes this spring across the Midwest and the more recent flooding of the Missouri and Souris Rivers. The disasters are responsible for at least 589 deaths, including 160 in May when tornadoes ripped through Joplin, Mo.

These nine billion-dollar disasters tie the record set in 2008, according to a report by the National Oceanic and Atmospheric Administration. The total damage done by all storms, tornadoes, flooding and heat waves so far this year adds up to about $35 billion. The National Climatic Data Center says it estimates the costs in terms of dollars and lives that would not have been incurred had the event not taken place. Insured and uninsured losses are included in damage estimates and are likely to change as assessments become more complete. With four months to go in 2011, this year’s total amount of damage is likely to rise. Forecasters are already predicting further meteorological mayhem as hurricane season intensifies.

Over the last 30 years, there have been about 108 natural disasters that have caused $1 billion in damages each, according to NOAA. The total damage from all natural disasters since 1980 is about $750 billion.

“The increasing impacts of natural disasters, as seen this year, are a stark reminder of the lives and livelihoods at risk,” Jack Hayes, director of NOAA’s National Weather Service, said in a statement.

Part of the problem is that more people are living in high-risk areas, particularly coastal regions, NOAA said. This makes communities “increasingly vulnerable to severe weather events, such as tornado outbreaks, intense heat waves, flooding, active hurricane seasons, and solar storms that threaten electrical and communication systems,” the statement said.

NOAA, along with other private and public agencies, is taking several steps to try to make the nation more “weather-ready,” including more precise forecasts, improved ability to alert local authorities about the risks and the development of specialized mobile-ready emergency response teams.

The National Weather Service is also planning several test projects involving emergency response and ecological forecasting. Test projects are to start soon at strategic locations in the Gulf Coast, South and mid-Atlantic region. They include improvements to a system in Charleston, W.Va., for alerts three hours ahead of severe weather instead of the current half-hour.

The nine weather events that have caused at least $1 billion in damages so far this year are:

Central/East Groundhog Day blizzard (Jan. 29-Feb. 3). This storm was tied to 36 deaths. The losses totaled more than $2 billion.

Midwest/Southeast tornadoes (April 4-5). Nine people were killed. Total losses were more than $2 billion.

Southeast/Midwest tornadoes (April 8-11). Resulted in more than $2 billion in losses.

Midwest/Southeast tornadoes (April 14-16). Caused 38 deaths. Total losses are more than $2 billion.

Southeast/Ohio Valley/Midwest tornadoes (April 25-30). Caused 327 deaths. Losses total more than $9 billion.

Midwest/Southeast tornadoes (May 22-27). Caused 177 deaths. Total losses are more than $7 billion.

Southern Plains/Southwest drought, heat waves, wildfires. Direct losses are more than $5 billion.

Mississippi River flooding. At least two deaths and losses ranging from $2 billion-$4 billion.

Upper Midwest flooding. Losses estimated at $2 billion.

Article source: http://feeds.nytimes.com/click.phdo?i=b02b8bba7ab777ae8298abfc37c71ec8