● Trade Wars: Past and Present
Nils Ole Oermann and Hans-Jürgen Wolff
Summary via publisher (Oxford U. Press)
This book explores the causes and instruments of 500 years of armed and non-armed international trade conflicts. Nils Ole Oermann and Hans-Jürgen Wolff draw on decades of experience to examine trade wars, economic sanctions, and different types of economic warfare, investigating their history, ethics, economic driving forces, and legality under current rules. They provide a clear and accessible account of the economics of trade, of trade and financial policy since the nineteenth century, and of the effectiveness of sanctions and the ‘winnability’ of trade wars.

● Politicians and Economic Experts
Anna Killick
Summary via publisher (Agenda Publishing)
In recent years politics has seen an increasing role in economic policymaking for a technocracy of experts. How do politicians feel about this and how do they balance their political and ethical aims with economic expertise? Anna Killick offers an in-depth study of how politicians engage with economists and economic opinion. Based on interviews with politicians from the main parties in France, Germany, Denmark, the UK and USA, the book highlights the role economic opinion plays in politics and the tension that can arise between democracy and technocracy. Deferring to the experts is shown to be neither viable nor desirable, and that we should trust politicians to take the lead role in solving economic problems.

● The Myth of the Silver Spoon: Navigating Family Wealth and Creating an Impactful Life
Kristin Keffeler
Summary via publisher (Wiley)
The next generation within wealthy families are often said to be born with a silver spoon in their mouths. Perceived as free from life’s toughest challenges. “Having it all.” But being raised in affluence brings a unique set of pressures and hidden tripwires. Great wealth casts a long shadow. Inheritors commonly face intense familial expectations, public scrutiny and judgment, and confusing or debilitating self-narratives, under which many flounder. And we—as family, friends, and society—slowly lose their contribution to our lives and the common good.

● Influence Empire: Inside the Story of Tencent and China’s Tech Ambition
Lulu Chen
Review via Harvard Business Review
Any discussion of tech in China would be incomplete without considering Tencent, the company behind WeChat (the superapp that serves as a home base for social media, payments, gaming, and other functions for more than one billion monthly active users). The speed and scope of Tencent’s growth since its founding, in 1998, can be difficult to comprehend—but the journalist Lulu Chen’s Influence Empire: The Story of Tencent and China’s Tech Ambition takes us behind the curtain to share the story of CEO Pony Ma, who rose from humble beginnings to head a global behemoth. Chen describes a shy, geeky programmer, nervous about talking in front of crowds but driven to spend innumerable sleepless nights striving to overcome every hurdle on the path to success. Some of those obstacles, such as aggressive government censorship and unexpected regulatory shifts, are no doubt specific to the Chinese context. But Chen’s compelling and relatable narrative depicts Ma as “temperate, stoic and almost irritatingly self-aware…a quiet but doggedly persistent force who rallies people, many of whom he considers smarter by his own account, to undertake his vision.” Her portrait serves as a powerful reminder that the West has no monopoly on inspirational entrepreneurs.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

By special proclamation from the world headquarters of The Capital Spectator your editor hereby declares Thursday and Friday as days of rest, reflection and gratitude. The usual routine returns on Saturday with a new installment of Book Bits. Cheers!

Recent data for the US economy reflect a mixed profile, but several widely followed business-cycle indicators are screaming recession.

A pair of Treasury yield curves are signaling that the odds are high that a period of economic contraction is approaching. The spread for the 2- and 10-year Treasury on Wednesday (Nov. 22) edged deeper into negative terrain, slipping to -0.71 percentage points, a new four-decade low. The 3-month/10-year spread is also negative. History strongly suggests that when these yield curves are inverted, as they are now, a US recession is near.

“Historically, when you get a sustained inversion like this… it’s a very reliable indicator of a recession coming,” says Duane McAllister, a senior portfolio manager at US firm Baird Advisors.

It could be different this time, and the main source of optimism remains two pillars of US economic activity: the labor market and consumer spending. On both fronts, the latest numbers continue to point to growth.

US payrolls increased 261,000 in October, a solid gain, albeit the slowest in nearly two years. Meanwhile, retail spending picked up last month, rising 1.3% from September. Taken together, these critical indicators continue to reflect an economic expansion.

But it’s been clear for some time that growth is slowing. The deceleration has been captured in a pair of proprietary indicators published in the weekly updates of The US Business Cycle Report. In this week’s issue, the Economic Trend Indicator and Economic Momentum Indicator for October remain close to their respective tipping points that mark the start of recession.

Forward projections for ETI and EMI through December point to the possibility of flat to slightly negative economic activity.

Business-cycle indicators from other sources paint a brighter picture, but only modestly. Consider the New York Fed’s Weekly Economic Index, which eased to its softest reading in a year-and-a-half. Extrapolating the recent trend suggests economic contraction will start in early 2023.

Keep in mind that the Federal Reserve is still expected to raise interest rates. The pace of hikes is projected to slow, but the effects of previous hikes and additional policy tightening will continue to strengthen economic headwinds in the months ahead.

The November and December economic numbers will be a critical test for deciding if the forces of growth succumb to contraction. For the moment it’s too close to call in terms of timing, although the Treasury market is signaling that a new recession is near. Optimists are looking to next week’s November report on payrolls (Fri., Dec. 2) to argue otherwise.

How is recession risk evolving? Monitor the outlook with a subscription to:
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* World economic growth projected to “slow further” in 2023, OECD predicts
* Despite slowing growth, world economy expected to avoid recession
* China’s ability to maintain zero-Covid policy may be fading
* Workers in China protest over pay amid anti-virus controls
* US and allies plan to announce oil price cap for Russian crude
* Eurozone business activity contracts for fifth month in November
* HP will layoff 6,000 workers in latest downsize in tech industry
* NY governor signs law banning certain bitcoin mining
* Richmond Fed Mfg Index continues to signal weak mfg conditions in November
* US 2yr/10yr Treasury yield curve falls to -0.71, taking out previous low in 2000:

US housing sector headed for rocky period in 2023, predicts the Conference Board’s principal economist. “The ongoing housing price correction will have implications for the US economy, but lower home prices should help to quell high inflation,” writes Erik Lundh. “It will indeed come at the expense of economic growth, as homebuilding activity is already slowing rapidly and consumer confidence (and spending) will likely suffer as well. But it’s unlikely we’re heading for a repeat of 2008.”

Last month I reported that the ‘fair value’ of the US 10-year Treasury yield appeared “lofty” relative to the average estimate for a combination model. In the weeks since, the benchmark rate has fallen. That’s probably noise, but a month later the model continues to advise that the 10-year rate is lofty.

The 10-year yield settled at 3.83% in yesterday’s trading (Nov. 21), well below the recent peak of 4.25% (Oct. 24). It’s premature to assume that rates won’t rebound and set new highs, but for the moment the market is taking a breather.

Meanwhile, my fair-value estimate, which is built on three models, continues to suggest that macro headwinds are pushing back on higher yields in a stronger degree.

One factor to consider is the Federal Reserve’s ongoing efforts of tightening monetary policy. The rate hikes that began in March are the fastest in four decades and markets are expecting more hikes to come.

Fed funds futures are pricing in a 70%-plus probability of a 50-basis-points hike at the next FOMC meeting on Dec. 14. If correct, the increase would mark the first time the Fed eased its tightening after a series of 75-basis-points hikes to date.

Nonetheless, it’s “premature” to rule out another 75-basis-points increase, says Mary Daly, president of the San Francisco Fed. Although consumer inflation eased in October, “It’s way too early to cause a turning point on inflation. One month does not a victory make. It doesn’t give me comfort,” she explains. “We will need more good months of data before call this a turning point.”

The Fed, of course, can raise rates for reasons that seemingly defy real-time economic logic. That’s partly because monetary policy, as Milton Friedman famously observed, works with long and variable lags. As a result, it will probably take several more months at a minimum before the Fed is comfortable with assuming that inflation has peaked and is no longer a threat to the economy. And that’s assuming incoming inflation data behaves.

Meanwhile, the headwinds for further increases in the 10-year yield are comparatively strong, based on my modeling. The chart below shows the spread on the market rate for the 10-year less the average model estimate. This alone doesn’t ensure that the market rate can’t rise further, but it’s a factor that suggests that the upside bias for the 10-year yield has faded vs. recent history. The logic here is that the higher the 10-year rate rises over the average estimate, the higher the probability that the market rate will stabilize if not fall.

The key risk for this relatively dovish analysis: upcoming inflation reports turn out to be surprisingly hot. No one can rule out the possibility. But tighter monetary policy is slowing the economy and it’s likely that inflation, if it hasn’t peaked, will do so soon. In turn, the 10-year yield will increasingly reflect this analysis. In fact, there’s a reasonable debate about whether much of this macro outlook is already driving the recent pullback in the 10-year rate.

How is recession risk evolving? Monitor the outlook with a subscription to:
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* Another 75-basis-points rate hike is possible, says San Francisco Fed president
* Iran starts producing uranium enriched to 60 percent
* OPEC oil producers are discussing an output increase
* Goldman Sachs lowers oil-price forecast
* China signs 27-year liquefied natural gas deal with QatarEnergy
* US rail strike is possible after unions disagree on contract vote
* Investor-related home buying falls 30% amid rising interest rates
* Digital-asset brokerage Genesis may file for bankruptcy
* Bitcoin falls to two-year low
* US economic activity slowed in October via Chicago Fed Nat’l Activity Index:

US gasoline prices have declined recently, but remain at the highest levels recorded (since 2000) for the Thanksgiving holiday, AAA reports. “The national average has fallen sharply since the June peak of nearly $5.02,” says Andrew Gross, AAA spokesperson. “But this Thanksgiving will be about 20 cents higher than a year ago, and a dollar more per gallon than a pre-pandemic 2019. However, we can be thankful that gas prices are moving in the right direction for now.”

As markets continue to grapple with various macro risks, government bonds indexed to inflation ex-US extended their recent rally and posted the strongest gain last week for the major asset classes, based on a set of ETFs.

SPDR FTSE International Government Inflation-Protected Bond ETF (WIP) rose 0.6% during the trading week through Friday, Nov. 21. The increase lifted the fund to its highest weekly close in two months. Despite the increase, WIP’s price trend remains bearish, echoing the technical profile for most other bonds sectors at a time of rising interest rates and elevated inflation.

Overall, trading was mixed last week for the major asset classes. Foreign bonds posted the bulk of the gains. Losses, by comparison, were comparatively steep, pulling down prices developed markets (VEA), including the US (VTI).

Equities in emerging markets (VWO) bucked the trend for stocks with a fractional gain, marking the ETF’s third weekly advance. Nonetheless, the trend for VWO still looks bearish as it trades modestly above two-year lows.

The bias toward selling last week weighed on the Global Market Index (GMI.F), an unmanaged benchmark, maintained by CapitalSpectator.com. This index holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for multi-asset-class-portfolio strategies overall. GMI.F fell 0.6% last week (red line in chart below). 

Turning to the one year trend, all the major asset classes remain under water for the trailing one-year window except for commodities (GCC).     

GMI.F is also posting a one-year loss, closing down 16.9% vs. the year-earlier price.

Reviewing the major asset classes through a drawdown lens continues to show steep declines from previous peaks. The softest drawdown at the end of last week: US junk bonds (JNK), which closed with a 12.5% peak-to-trough decline. The deepest drawdown: foreign corporate bonds (PICB), which ended the week with a 28.8% slide below its previous peak.

GMI.F’s drawdown: -17.4% (green line in chart below).

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
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* Will GOP control of House shield industries from new taxes and regulations?
* China locks down major transportation hub amid new Covid outbreak
* Goldman Sachs predicts bear market for US stocks will continue in 2023
* Finding workers still tough for small firms despite higher layoffs
* Analyst predicts US economy can absorb tech industry layoffs
* Will Saudi Arabia succeed with plan to keep global oil demand strong?
* Existing home sales in US fall for ninth straight month in October
* Foreign Treasury holdings in September drop to lowest level since May 2021
* US Leading Economic Index suggests US economy is contracting:

US Consumer savings accumulated during the pandemic will fuel spending for another 12 months, economists estimate. “Economists estimate that headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings”—the amount above what they would have saved had there been no pandemic,” reports The Wall Street Journal. “With the labor market still strong, economists don’t expect consumers to dramatically rein in their outlays until they see unemployment rising and become concerned about losing their jobs. Economists surveyed by The Wall Street Journal last month expected employers will start cutting jobs in the second and third quarters of next year.”

● The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism
Clara E. Mattei
Excerpt via Promarket.org
Austerity has been so widespread in its uptake over the last century that it has become largely undetectable: the economics of austerity, with its prescribed budgetary cuts and public moderation, is largely synonymous with today’s economics. This makes a critical history of austerity, especially one rendered in class terms, profoundly challenging. But to the extent that we stop perceiving austerity as a sincere toolbox for managing an economy, and when we consider its history through the lens of class, it becomes clear that austerity preserves something foundational to our capitalist society. For capitalism to work in delivering economic growth, the social relation of capital— people selling their labor power for a wage— must be uniform across a society. In other words, economic growth presupposes a certain sociopolitical order, or capital order. Austerity, viewed as a set of fiscal, monetary, and industrial guardrails on an economy, ensures the sanctity of these social relations. The structural limitations it imposes on spending and wages ensure that, for the vast majority of those living in a society, “work hard, save hard” is more than just an expression of toughness; it’s the only path to survival.

● Unbiased Investor: Reduce Financial Stress and Keep More of Your Money
Coreen Sol
Author profile via The Globe and Mail
She also advocates for clients to adopt simple habits to guard against common errors in judgment, so they can make fewer, more reliable financial decisions throughout their lives. This strategy provides the added benefit of reducing the financial stress of unnecessary emotional choices. That is the critical reason to clarify personal economic values, and motivated her book Unbiased Investor: Reduce Financial Stress & Keep More of Your Money, (Wiley & Sons).

● The Great Money Bubble: Protect Yourself from the Coming Inflation Storm
David A. Stockman
Summary via publisher (Humanix Books)
Americans are facing sticker shock at every turn: from the gas pump to the grocery store and every kind of consumer service. But the eye-popping price increases are just the tip of the iceberg in terms of the threat to the country’s economic recovery. Inflation showers windfalls on the rich while penalizing workers, savers, retirees, small businesses, and most of Main Street economic life. New York Times bestselling author and former investment manager David A. Stockman, who served as director of the Office of Management and Budget under President Reagan, explains the roots of today’s runaway inflation so investors at all levels can calibrate their financial strategies to survive and thrive despite economic uncertainty.

● Power and Prediction: The Disruptive Economics of Artificial Intelligence
Ajay Agrawal, et al.
Review via Financial Times
When these three authors published a well-reviewed book about the economics of artificial intelligence called Prediction Machines in 2018, they thought they had nailed it. They later realised they had missed out important parts of the jigsaw, which has conveniently given them an excuse to write a second book.
Their fault, they admit, was to obsess too much about what the technology could do in theory rather than how it might be used in practice. Neural networks can indeed be usefully viewed as prediction machines that can draw robust conclusions from vast amounts of disparate data. But they will never be adopted in an organisational vacuum. So, the authors have shifted their focus to how we make decisions (human cognition), why people make decisions (social behaviour) and the interconnections between decisions (production systems and industry structures).

● Power Failure: The Rise and Fall of an American Icon
William D. Cohan
Review via The Dispatch
And then there is the sorry story of General Electric, as told by noted business journalist William D. Cohan in Power Failure: The Rise and Fall of an American Icon. (Cohan’s publishers must have real faith in the book: You’ll notice that the company’s name does not appear in the book title, and its logo appears on the cover only as 18-point shadow text.)
GE—the company that once boasted, “We bring good things to life”—helped bring to market world-changing products from the electric lightbulb to the jet engine. Yet it ended up being a company that mostly played with money through GE Money Bank, a subsidiary of GE Capital. And it did so with a genuinely spectacular level of incompetence.

● Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency
Andy Greenberg
Review via The New York Times
Greenberg, a writer who covers, among other things, hackers, surveillance and the seamier precincts of the internet for Wired, deftly assembles a rogues’ gallery of characters who fell prey to this false sense of invulnerability: drug marketers, thick-necked federal agents, globe-trotting libertarians and (less amusingly) child porn collectors.
“Tracers in the Dark” sets the scene by highlighting politicians’ self-fulfilling predictions that the new internet wild west would provide an unprecedented chance for bad actors to carry out lurid evil deeds with impunity.

● Hayek: A Life, 1899–1950
Review via The Economist
Bruce Caldwell and Hansjoerg Klausinger
Robert skidelsky’s three-volume biography of John Maynard Keynes achieved something few histories of economic thought can do: it was well written, packed with interesting detail and offered enough—but not too much—theory. Now Keynes’s great rival, Friedrich Hayek, is the subject of a biography comparable to Lord Skidelsky’s. It is certainly on a similar scale. The first volume is more than 800 pages, and a second is on the way. Bruce Caldwell’s and Hansjoerg Klausinger’s work also has the makings of something just as good.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Risk-off sentiment continues to dominate global markets. Although there have been hints that the worst of the selling has passed, there’s still plenty of room for skepticism, based on trends for key markets via a set of ETF pairs for prices through Thursday’s close (Nov. 17).

Let’s start with the ratio of an aggressive asset allocation strategy (AOA) to conservative (AOK). Although the trend for this proxy has popped lately, the downside bias remains intact, based on 50- and 200-day moving averages and so it’s premature to assume that the bear market has been exhausted.

The downside bias for medium-term Treasuries (IEF) relative to short-term Treasuries (SHY) certainly hasn’t changed, which suggests that the appetite for safety remains strong.

Risk-on for the inflation/reflation trade continues to hold its ground, based on the ratio for inflation-indexed Treasuries (TIP) vs. their standard counterparts (IEF), but the trend is looking tired and is vulnerable if the economy continues to weaken.

Estimating the risk appetite for US equities (SPY) relative to a portfolio of low-volatility shares (USMV) continues to signal risk-off.

A proxy for economic activity – semiconductor stocks (SMH) vs. equities overall (SPY) – has enjoyed a relief rally lately, but it’s too early to say that the bearish trend for this proxy has ended.

Despite the bearish bias for stocks generally, the appetite for US equities (VTI) over foreign stocks (VEU) persists.

Finally, relative strength for value stocks (IWD) vs. growth stocks (IWF) continues to run. The logic is the widely held view that value shares tend to outperform when interest rates are rising. On that basis, expectations that the Federal Reserve will continue to hike rates in the near term implies that value will continue to outperform.

How is recession risk evolving? Monitor the outlook with a subscription to:
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* N. Korea fires ICBM into sea near Japan in ‘brazen violation’ of UN resolutions
* UK finance minister warns of hard times ahead for Britain’s economy
* Rate hikes have had ‘limited effect’ on US inflation, says St. Louis Fed president
* US mortgage rates fell sharply last week
* Philly Fed Mfg Index slides in November, dropping to lowest level since May 2020
* New filings for US jobless benefits remain low for week ending Nov. 12
* US housing starts fall sharply in October:

St. Louis Fed President James Bullard estimates “the sufficiently restrictive zone” for Fed funds rate in the 5%-7% range to tame inflation — well above the current 3.75%-4.0% target range.

Economists say biggest risks to their outlook for Federal Funds rate forecast is a longer-than-expected period of policy tightening that lifts interest rates above current outlook for the terminal rate, according to a new Reuters poll. “While markets are focused on peak inflation, underlying inflation trends are persistent. This could force the Fed to keep raising the federal funds rate well into next year and beyond levels currently anticipated,” says Philip Marey, senior US strategist at Rabobank.

Speculation that the Federal Reserve is close to pausing its rate hikes took a hit this week after a Fed official downplayed the odds in a TV interview on Wednesday.

“Pausing is off the table right now,” says San Francisco Fed President Mary Daly tells CNBC yesterday (Nov. 16). “It’s not even part of the discussion. Right now, the discussion is rightly around slowing the pace and… focusing our attention really on what is the level of interest rates that will end up being sufficiently restrictive.”

The equities market is getting ahead of itself in seeing a pause in rate hikes, much less a reversal, for the immediate future, says the chief client officer at Aspiriant, a wealth manager. “The market is just trying to grasp for news and it’s prone to overcompensate for the news, whether it’s good news or bad news,” advises Sandi Bragar. “We’re just at that point in the cycle where we think there’s still the high likelihood for potential downward trajectory of stocks as we head into 2023.”

Learn To Use R For Portfolio Analysis
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The Fed funds futures market this morning is pricing in high expectations of a slower pace of rate hikes going forward. A 50-basis-points increase is assigned a roughly 85% probability for the next FOMC meeting on Dec. 14, according to CME data. If correct, it will mark the first softer increase after a string of 75-basis-points increases this year. Looking into early 2023, another rate hike, perhaps just 25 basis points, is also considered possible at the February meeting, according to futures.

The case for a pause or pivot also looks premature based on comparing the effective Fed funds rates with the 2-year Treasury yield, which is widely seen as the most policy-sensitive maturity. History suggests that the 2-year rate is a relatively reliable proxy for Fed funds expectations. That’s certainly been true in the current rate-hiking cycle. Notably, the 2-year rate began rising well ahead of the first rate hike in March.

An early market signal that Fed rate hikes are close to a pause will arrive when the 2-year rate is roughly equivalent to effective Fed funds rate. When the 2-year rate falls decisively below Fed funds that will be a strong signal that the central bank is close to cutting rates at some point in the near future. But as the chart above suggests, a pause – much less a cut – is nowhere on the immediate horizon, based on the 2-year rate trading well above Fed funds.

Looking at the 2-year/Fed funds spread provides a more granular profile of how these two rates are evolving and on that front it’s reasonable to say that the rate-hiking regime has peaked. That alone doesn’t mean that a pause or pivot is imminent, but it provides a framework for concluding that the tide has turned.

There’s been a clear decline in the 2-year/Fed funds spread in recent months. Although this rate difference has been volatile, a downside bias is conspicuous. If the current spread – roughly 50 basis points – falls below this level, which has acted as a floor of late, it may signal that a pause is near.

How is recession risk evolving? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

* Republicans win control of House
* NATO says “no indication” that missile strike in Poland came from Russia
* US homebuilder sentiment slide for 11th straighth month in November
* US import prices fall for fourth straight month in October
* Atlanta Fed’s business inflation expectations steady at 3.3% in November
* US industrial production declines in October, first monthly slide since August
* US retail sales rebound sharply in October, rising more than expected:

The latest rebound in the stock market will soon face headwinds… again, predict analysts at BlackRock. “Equities have repeatedly jumped this year on hopes the Fed may be getting closer to stopping the fastest hiking cycle since the 1980s, letting the economy enjoy a soft landing that avoids recession,” says the head of the BlackRock Investment Institute Jean Boivin and his team. “We think those hopes will be dashed again as the Fed pushes ahead with policy overtightening. With the S&P 500 jumping 13% from its October low, stocks are even further from pricing in the recession — and earnings downgrades — we see ahead.”

US economy remains at risk for a recession in 2023, advise analysts at JP Morgan. The next Federal Reserve policy meeting on Dec. 14 is expected to bring another rate hike — 50 basis points is the likely increase, according to Fed funds futures. Federal Open Market Committee meeting in December will result a half-point hike. Additional hikes may continue in early 2023, albeit at a slower pace. Combined with the rate hikes to date, the accumulated rise in the price of money will take a toll on economic activity, advise Michael Feroli and his team at JP Morgan. “The almost 500bp of expected cumulative hikes is already delivering a commensurate tightening of financial conditions,” they predict. “[W]hich we believe will tip the economy into mild recession later next year.”

The recovery in US economic activity in the third quarter appears set to continue in Q4, based on the median for a set of estimates compiled by CapitalSpectator.com. Although the numbers point to a slowdown in growth, the current Q4 nowcast highlights the possibility that output will post back-to-back quarterly increases for the first time this year.

Today’s Q4 estimate indicates a modest 1.1% increase in Q4 GDP (seasonally adjusted annual rate). The nowcast marks a substantial slowdown from Q3’s 2.6% increase. The official Q4 data from the Bureau of Economic Research is scheduled for release on Jan. 26. 

The outlook for continued growth in Q4 pushes back on the recession narrative that’s been circulating lately, but it’s premature to assume that the danger for the business cycle has passed. The full effects of the Federal Reserve’s recent interest-rate hikes have yet to fully impact the economy and so the risk of downgrades to growth are a real and present danger in the weeks ahead.

The inverted 3-month/10-year US Treasury yield curve continues to paint a dark outlook for the economy. The spread between the two maturities fell deeper into negative terrain on Tuesday, signaling heightened risk of a US recession in the near term.

“Nothing is certain in these markets but yes, I think [the inverted yield curve] is a strong clue of a recession ahead,” says Antoine Bouvet, a senior rates strategist with ING.

For now, however, the numbers published to date still reflect economic growth. Notably, US payrolls continued rising in October, although the increase is the softest in nearly two years. But initial jobless claims – a leading indicator – remain low, suggesting that a recession isn’t imminent.

The next several months, however, will be a stress test as economies around the world face the accumulating effects of interest rate hikes and blowback from the ongoing Ukraine war.

“Readings for a growing share of G20 countries have fallen from expansionary territory earlier this year to levels that signal contraction,” writes Tryggvi Gudmundsson at the International Monetary Fund. “That is true for both advanced and emerging market economies, underscoring the slowdown’s global nature.”

How is recession risk evolving? Monitor the outlook with a subscription to:
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* NATO convenes emergency meeting after missile hits Poland
* Biden says missile that hit Poland ‘unlikely’ fired from Russia
* Russia denies blame for missile that strikes Poland
* Group of 20 leading economies condemn Russia for Ukraine war
* UK inflation rises to 41-year high in October: +11.1%
* US household debt surges at fastest pace 15 years fueled by credit card use
* US wholesale inflation rose less than expected in October
* NY Fed Manufacturing Index rebounds in November but outlook weakens:

US 3mo/10yr Treasury yield curve falls deeper into negative terrain, signaling heightened recession risk for US economy:

Real (inflation-adjusted) M2 money supply in US contracts at steepest rate in four decades in September in year-over-year terms:

It’s been tempting in recent weeks to look at the stock market’s performance following US mid-term elections as biased upward for reasons linked to a special factor that prevails after voting. This is probably narrative mining than robust quantitative analysis.

The stock market does, in fact, show an upward bias in the 12-month periods following mid-term elections. The problem is that there are only a handful of mid-term elections in the historical record vs. thousands of 12-month-return windows, which are in fact upward biased. Teasing out why the former are a special subset from the latter due to mid-term elections isn’t obvious, but it makes for great headlines.

Consider how all the S&P 500’s one-year returns stack up since 1952. Clearly, there’s a strong positive skew. The average performance for 18,000-plus one-year returns is +9.1%. Roughly 74% of the one-year results are positive, which means that randomly choosing a handful of data points will likely show gains. Are mid-term election dates something special as start dates for analyzing one-year returns? Maybe, but it’s going to take more than a simple profile of return histories to make that case.

But let’s not be too critical of the stories in recent weeks that suggested there’s some unique force that tends to lift markets following mid-term elections. In a rough year for markets it’s understandable that investors are in need of a timely bullish narrative. But there’s always one waiting in the wings if your time horizon is the next 12 months.

The stock market’s general bias to rise can be attributed to many things, but it’s not obvious that mid-term elections are a critical, much less the only factor. To posit otherwise requires a degree of qualitative and/or multi-factor quantitative analysis that’s been lacking in the profiles making the rounds lately.

The point here is that it’s all too easy to assume that the stock market rises or falls because of one factor – mid-term elections in this case. Finding deep support in the data is something else entirely.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
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By James Picerno

* Republicans now within 1 seat of retaking House after voting updates
* Fed’s Brainard says rate hikes likely to slow at next meeting
* China retail sales and industrial output post weaker-than-expected results
* Amazon reportedly plans to announce mass layoffs
* Global population reaches 8 billion
* Americans expecting higher inflation for year ahead via NY Fed October survey
* Japan’s economy unexpectedly contracts in Q3
* Economists lift inflation outlook through 2023, according to new survey:

Warren Buffett’s Berkshire Hathaway discloses large purchase of Taiwan chipmaker TSMC. “I suspect Berkshire has a belief that the world cannot do without the products manufactured by Taiwan Semi,” says Tom Russo, a partner at Gardner, Russo & Quinn, which owns Berkshire shares. “Only a small number of companies that can amass the capital to deliver semiconductors, which are increasingly central to people’s lives.”

The major asset classes continued to recover in the trading week through Friday, Nov. 11, based on a set of ETF proxies. The lone exception: a broad measure of commodities.

Vanguard Global ex-US Real Estate (VNQI) led last week’s rallies by surging 8.1%. Despite the powerful gain, the ETF still reflects a deeply bearish trend and so it’s unclear if the latest bounce marks a bear-market bounce or the start of new bull run.

Property shares are prized for relatively high payout rates and so prices in this corner of risk assets are relatively sensitive to interest rate increases. On that score, there’s still a case for a cautious outlook. Although last week’s encouraging news on US inflation inspires expectations that the Federal Reserve will soon pause rate hikes, Fed Governor Chris Waller says monetary policy tightening isn’t over.

“We’ve got a long way to go to get inflation down unless by some miracle incomes start dropping off very rapidly, which I don’t think anybody expects,” he advises. “We’ve got to see this continue because the worst thing you can do is stop [tightening conditions] and then it takes off again, and you’re caught.”

Commodities posted the only setback last week for the major asset classes, edging down 0.5%. WisdomTree Enhanced Commodity Strategy Fund (GCC) continues to trade in a tight range after a summer sell-off.

The broad rally in markets lifted the Global Market Index (GMI.F), an unmanaged benchmark, maintained by CapitalSpectator.com. This index holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for multi-asset-class-portfolio strategies overall. GMI.F roared higher by 5.6% last week, the benchmark’s best weekly gain in 2-1/2 years (red line in chart below).   

Despite last week’s powerful rallies, all the major asset classes remain under water for the trailing one-year window except for commodities (GCC).

GMI.F is also posting a one-year loss, closing down 16.0% vs. the year-earlier price.

Reviewing the major asset classes through a drawdown lens continues to show steep declines from previous peaks. The softest drawdown at the end of last week: US junk bonds (JNK), which closed with a 12.4% peak-to-trough decline. The deepest drawdown: foreign corporate bonds (PICB), which ended the week with a 29.2% slide below its previous peak.

GMI.F’s drawdown: -16.9% (green line in chart below).

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

* Dems hold the Senate as House control remains unclear
* Democrats say they’ll address US debt ceiling limit in coming weeks
* Fed’s Waller: “We’ve still got a ways to go” before pausing rate hikes, he says
* Biden meets President Xi and aim to ‘manage out differences’
* FTX collapse prompts rethink for crypto’s role in asset allocation
* Is de-growth the best way to address climate change?
* Pandemic housing bubble is bursting, says chief economist at KPMG.
* Small farmers priced out of market as farmland values reach record highs
* Eurozone industrial production is surprisingly strong in October
* US Dollar Index fell to 3-month low on Friday:

Despite softer consumer inflation data for October, it’s premature to assume that a soft economic landing is the odds-on favorite as inflation-taming efforts continue, says Kelsey Berro, a fixed-income portfolio manager at JPMorgan Asset Management. “The path to a soft landing where the Federal Reserve is able to bring inflation all the way back down to target without causing material economic damage is still narrow. While the direction of travel for inflation should be lower, the pace of deceleration and the ultimate leveling off point remain highly uncertain.”

Global housing markets expected to suffer a brutal slowdown. The International Monetary Funds warns that the market is at a “tipping point” via Financial Times. “As central banks around the globe aggressively tighten monetary policy to tackle price pressures, soaring borrowing costs and tighter lending standards, coupled with stretched house valuations, could lead to a sharp decline in house prices,” advises an IMF report.

● For Profit: A History of Corporations
William Magnuson
Review via The Economist
There is no mention of Elon Musk in William Magnuson’s magnificent history of corporations, which stretches from the societas publicanorum of ancient Rome, through Renaissance Florence, the Age of Discovery and the might of American industrial capitalism to Silicon Valley. Yet reading it makes clear why the pioneer of electric cars, private rockets—and now, via Twitter, controller of part of the public sphere—commands attention. For more than 2,000 years, corporations such as his have produced some of humankind’s greatest achievements. But usually the most dazzling overstep the mark, leaving a trail of debris and distrust behind them.

● Epistemic Risk and the Demands of Rationality
Richard Pettigrew
Summary via publisher (Oxford U. Press)
How much does rationality constrain what we should believe on the basis of our evidence? According to this book, not very much. For most people and most bodies of evidence, there is a wide range of beliefs that rationality permits them to have in response to that evidence. The argument, which takes inspiration from William James’ ideas in ‘The Will to Believe’, proceeds from two premises. The first is a theory about the basis of epistemic rationality. It’s called epistemic utility theory, and it says that what it is epistemically rational for you to believe is what it would be rational for you to choose if you were given the chance to pick your beliefs and, when picking them, you were to care only about their epistemic value. So, to say which beliefs are permitted, we must say how to measure epistemic value, and which decision rule to use when picking your beliefs. The second premise is a claim about attitudes to epistemic risk, and it says that rationality permits many different such attitudes.

● Microprediction: Building an Open AI Network
Peter Cotton
Summary via publisher (MIT Press)
The artificial intelligence (AI) revolution is leaving behind small businesses and organizations that cannot afford in-house teams of data scientists. In Microprediction, Peter Cotton examines the repeated quantitative tasks that drive business optimization from the perspectives of economics, statistics, decision making under uncertainty, and privacy concerns. He asks what things currently described as AI are not “microprediction,” whether microprediction is an individual or collective activity, and how we can produce and distribute high-quality microprediction at low cost. The world is missing a public utility, he concludes, while companies are missing an important strategic approach that would enable them to benefit—and also give back. In an engaging, colloquial style, Cotton argues that market-inspired “superminds” are likely to be very effective compared with other orchestration mechanisms in the domain of microprediction.

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