It seems like ages ago that the US government flirted with a shutdown, but it was only this past spring when Washington danced on the precipice. A repeat performance is again approaching as political dysfunction in Congress leads to another game of chicken with a Sep. 30 deadline for passing a spending bill.

The threat is rising with each passing day as political warfare rages within the House Republican caucus. With just 10 days left to enact legislation, time is quickly running out for a solution. Despite the dwindling window of opportunity, Axios reports: “Most analysts seem pretty relaxed about the risks.”

“A government-wide shutdown would directly reduce growth by around 0.15 [percentage points] for each week it lasted; including modest private sector effects, the hit to growth could be around 0.2 [percentage points] per week. In the quarter following reopening, growth would rise by the same amount,” Goldman Sachs economists wrote in August.

“Shutdowns tend to be very short-lived and have a negligible impact on economic growth,” UBS fixed-income analysts wrote early this month.

Morgan Stanley last week published a similar outlook, advising: “A government shutdown may cause only modest losses in gross domestic product (GDP)” and that “The 20 government shutdowns that have occurred since 1976 appear to have had limited impact on the economy.” History also suggests that a shutdown would be brief, lasting “on average… just over a week.”

The potential for a data vacuum for economic analysis, however, could be problematic. All the more so given this point in the business cycle, when the Federal Reserve is struggling to adjust monetary policy amid uncertainty about inflation and economic activity.

Greg Daco, chief economist at EY-Parthenon, anticipates that “A government shutdown would lead to a delay in economic data releases as agencies would suspend data collection, processing and dissemination.”

In December 2018 and January 2019, the 35-day government shutdown led to a data drought with the postponement of over 10 key economic data releases including trade, housing and consumer spending data.

Given the current state of the economy and numerous uncertainties on the horizon, the absence of data could carry a significant cost for private sector economists, investors and Fed policymakers who would fly partially blind as they assess the US economy’s performance.

Agron Nicaj, US economist at MUFG, also sees trouble lurking if a data drought arrives. “Decisions are made based on the consistency and reliability of government data,” he says. “This is especially true in today’s economic climate where uncertainty is high and the margin of error is very small for the Fed to over or under tighten monetary policy.”

Although history suggests that a shutdown would be fleeting and the blowback minimal, some analysts think this time could be different. “If there is a shutdown on Oct. 1, it could be quite long as there is not an action-forcing policy catalyst that would force lawmakers to find some common ground and pass a funding measure,” predicts TD Cowen Washington Research Group’s Chris Krueger in a research note. “The only politically sensitive deadline is Oct. 13, when paychecks are due to the uniformed military.”

Meanwhile, the US 10-Year Treasury yield ticked up to a new 16-year high yesterday (Sep. 19), closing at 4.37%.

Later today, the Federal Reserve will announce what is expected to be a pause in rate hikes and a new set of economic forecasts, followed by central bank Chairman Jerome Powell’s press conference.

The Fed’s already in a tough spot as it grapples with the ongoing goal of taming inflation with minimal impact on economic activity. A government shutdown would make that job tougher and increase the risk of a policy mistake by pausing data reports from the government.

“If, for argument’s sake, the Fed overestimates the strength of the real economy and raises rates further in November — because of delayed downward revisions to July and August data, and delayed access to weaker September and October data — investors, businesses, and households could incur unnecessary costs and risks,” notes Julia Pollak, chief economist at ZipRecruiter. “By the time the Fed discovered its mistake, the effects of excessive monetary tightening could be difficult to reverse.”

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* GOP infighting is driving the government toward a shutdown on Sep. 30
* Fed expected to leave interest rates unchanged at today’s FOMC meeting
* China’s demand for oil may peak by end of the decade
* Biden’s manufacturing agenda threatened by auto workers’ strike
* Disinflation denial is easily refuted with a careful review of the data
* US housing starts fall to 3-year low in August as building permits rise:

US stock market volatility remains low, but some analysts expect higher levels in the near term. “We haven’t seen volatility this low since pre-pandemic period,” Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop tells Yahoo Finance. JPMorgan head of investment strategy Marko Kolanovic advises in a research note: “Equity valuation faces increasing risk from higher for longer [interest rates]. Equities are up 16% YTD mostly on multiple expansion while real rates and cost of capital are moving deeper into restrictive territory. History suggests this relationship is becoming increasingly unsustainable, posing risk to the equity multiple.”

The government’s third quarter economic report appears to be on track to report that US output accelerated to 3%-plus, based on the median estimate via several sources compiled by CapitalSpectator.com. Although some forecasters are still warning that a recession is lurking down the road, the latest numbers strongly suggest that it won’t start in Q3.

Today’s revised data indicates that economic activity for the July-through-September period will rise increase 3.3% for GDP’s real seasonally adjusted annualized change. This median nowcast reflects a strong improvement over the 2.1% increase reported by the government for Q2.

Notably, today’s revised nowcast also reflects a jump from the previous 2.9% estimate for Q3 published on Sep. 7.

If the current median nowcast is correct, GDP will rise in Q3 at the strongest pace in a year. But with ongoing uncertainty about the Federal Reserve’s plans for interest rates, there’s plenty of room for debate about how US economic activity will fare in Q4 and 2024.

Nouriel Roubini, a.k.a. Dr. Doom, has become a bit sunnier lately on his US economic outlook. A  year ago, Fortune notes, the CEO of Roubini Macro Associates thought it would be “mission impossible” for the US would avoid a severe recession 2023. Fast forward to this week and he admits that the US has dodged a business-cycle bullet.

“The good news is it doesn’t look like we are going to have a real hard landing,” he told Bloomberg on Monday. “The question is whether we are going to have a soft landing or a bumpy landing—a bumpy landing being a short and shallow recession—and on that debate, we don’t know yet.”

Meanwhile, recession forecasts persist, although the forecasters keep pushing the presumed start date further into the future as the economy continues to show resilience.

“I expect a recession in the first half of 2024, but not in 2023,” says Jeffrey Gundlach, founder and chairman of Los Angeles-based DoubleLine Capital.

Maybe, but there’s little sign of trouble for the upcoming Q3 GDP report scheduled for release by the Bureau of Economic Analysis on Oct. 26.

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* US national debt tops $33 trillion for first time, but…
* Federal debt as % of economy has fallen from pandemic high
* Rising oil prices threaten soft-landing scenario for Fed policy
* Central banks should keep interest rates high until inflation tamed, says OECD
* OECD lifts global economic outlook for 2023 but cuts next year’s growth forecast
* Obscure corners of energy world benefit from West’s sanctions on Russian gas
* US homebuilder confidence falls below neutral 50 mark in September:

Oil prices edge up to highest level since November 2022. The US benchmark — West Texas Intermediate — closed above $90.58 a barrel on Monday. “The symbolically important $100 [a barrel of oil] mark is now being considered once more,” says Sophie Lund-Yates, an analyst at investment firm Hargreaves Lansdown in Britain. “This is a difficult development, with fuel accounting for a significant portion of overall inflation.”

It’s been a strong year for American equities. Although US shares have been trading in a tight range recently, the market is holding on to the bulk of its robust year-to-date gain in 2023.

Stocks in the world’s biggest economy also continue to outperform the rest of the major asset classes, based on a set of ETFs through Friday’s close (Sep. 15). Vanguard Total US Stock Market Index Fund (VTI) is up 16.5% in 2023, which is only moderately below its 20%-plus year-to-date peak reached in August.

The next-best advance for the major asset classes this year is a distant-but-still-solid 10.4% rise for stocks in developed nations ex-US (VEA). Meanwhile, the worst performer this year is still global property shares ex-US (VNQI) via a 2.6% loss.

Investors are debating if the recent flatlining in US shares is a pause that refreshes or a peak in what will eventually be seen as a bear market rally following last year’s sharp correction. A key factor for deciding what comes next is linked to upcoming Federal Reserve decisions on interest rates. The central bank is widely expected to leave rates unchanged at Wednesday’s policy announcement on Sep. 20.

Even if the forecast is correct, analysts continue to debate if rates are set to peak.

“How the Fed delivers the pause is crucial for November and December rate expectations, but whether it’s presented with a dovish or hawkish tilt is what matters most for financial markets,” advises Quincy Krosby, chief global strategist for LPL Financial.  

A poll last week by Reuters reports that less than 20% of economists anticipate a rate rise before the end of the year.

Fed funds futures are also leaning toward the view that the Fed will leave its target rate unchanged for the rest of the year, although the implied probability for extending a pause at the November and December FOMC meetings is only moderate at this point. By contrast, the futures market is pricing in a near certainty for no change on Wednesday.

A source of uncertainty, notes Wilmington Trust chief economist Luke Tilley, is the Fed’s focus on repairing its credibility after reacting too slowly to surging inflation in 2021-2022. “They are being very risk averse and they’re still worried about making the mistake of the 1970s of letting inflation go back up,” he says. “They don’t want the market to take any kind of signal of dovishness and run with it. They need to keep financial conditions tight.”

Until the investors become confident on the question of when and where rates peak, the odds appear more than trivial that the stock market will be in a holding pattern.

Meanwhile, the latest consumer inflation data for August convince some analysts that the Fed will be inclined to lift rates. The US Consumer Price Index accelerated slightly to 3.7% last month vs. the year-earlier level, in part because gasoline prices spiked.

“Ultimately, this release showed that there is still real work to be done to get inflation back to the Fed’s 2% target,” advises Sam Millette, fixed income strategist at Commonwealth Financial Network.

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* House GOP agrees on short-term deal to keep government open through Oct. 31
* Debate continues on odds that Fed can engineer a US ‘soft landing’
* Country Garden’s struggle to survive is China’s biggest property crisis to date
* Peak rates are expected to be near for major central banks
* Rising number young adults have given up on owning a home
* Median US home sales price rose 3% in Aug vs. year ago–biggest gain since Oct
* Net 51% of US banks tightening lending standards–highest since 2020
* US industrial production rises more than expected in August
* NY Fed Mfg Index survey: firms “more optimistic” in Sep. for 6-month outlook:

The US dollar is trading near a 6-month high ahead of Federal Reserve meeting on Wednesday. “In the grand scheme of things we’re quite positive on the dollar,” says Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “The US economy is outperforming both Europe and Asia, especially China.” Although the market expects the Fed to leave rates unchanged at the current 5.25% to 5.5% range, Tan says that there’s a possibility for more hikes down the road. “There’s a very strong consensus for a pause here,” he explains. “But there seems to be an expectation that we could see some hawkishness through the latest dot plot (of policymakers’ rate expectations), given how resilient the U.S. economy has been.”

● The Missing Billionaires: A Guide to Better Financial Decisions
Victor Haghani and James White
Summary via publisher (Wiley)
Over the past century, if the wealthiest families had spent a reasonable fraction of their wealth, paid taxes, invested in the stock market, and passed their wealth down to the next generation, there would be tens of thousands of billionaire heirs to generations-old fortunes today. The puzzle of The Missing Billionaires is why you cannot find one such billionaire on any current rich list. There are a number of explanations, but this book is focused on one mistake which is of profound importance to all investors: poor risk decisions, both in investing and spending. Many of these families didn’t choose bad investments– they sized them incorrectly– and allowed their spending decisions to amplify this mistake.

● Underground Empire: How America Weaponized the World Economy
Henry Farrell and Abraham Newman
Review via Los Angeles Review of Books
Letting private merchants chart the path to future spoils suits the world’s sovereigns just fine. Ledgers seem less threatening than scepters, which is what makes them such effective tools of empire. In Underground Empire: How America Weaponized the World Economy (2023), political scientists Henry Farrell and Abraham L. Newman’s novel account of our digital economy, merchants once more function as handmaidens to government power. The beaver pelt peddlers and colonial profiteers of yore are now early telecoms like MCI WorldCom, which laid the fiber-optic cables that the original internet ran on, and banks like J.P. Morgan & Co. and Citibank, which dreamed of a borderless global payments system.

● Taming the Street: The Old Guard, the New Deal, and FDR’s Fight to Regulate American Capitalism
Diana B. Henriques
Review via The Financial Times
The US Securities and Exchange Commission is very much in the news. Chair Gary Gensler recently made waves with an aggressive regulatory agenda that seeks to put a wide range of investment firms, from cryptocurrency exchanges to private equity funds, under much tighter supervision.
The financial industry is fighting back, claiming the SEC has overstepped and exceeded its statutory authority in ways that will ultimately harm investors. That makes Taming the Street, a new book by Diana B Henriques about the founding years of America’s primary securities regulator, particularly timely.

● Fear: An Alternative History of the World
Robert Peckham
Review via The Economist
Fear is a primal, necessary emotion. Mr Peckham calls it “a neurobiological process to keep us alive”. If our ancestors had not feared cliff-edges or sabre-toothed tigers, we might not be here today. The flipside is that, since humans are a communicative, imaginative species, fear can be conjured out of whispers. His book does not quite live up to its ambitious subtitle, but it illuminates the many ways in which fear has shaped human behaviour over the past 700 years, from which readers can draw lessons for the present.
The main one is: “Power depends on fear.” Mr Peckham argues that the turmoil of the Reformation and Counter-Reformation stemmed partly from the Catholic church’s loss of its “monopoly on fear” in western Europe.

● Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall
Zeke Faux
Review via Fortune
Books about crypto tend to fall into one of two categories: rah-rah accounts of how blockchain can better humanity or sneering takedowns that pronounce the whole thing a scam. After a recent bubble marked by staggering swindles and the arrest of leading crypto figures, you can guess which genre is hitting the shelves right now.
The newest offering is Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall by Bloomberg journalist Zeke Faux. Released today by Penguin Random House, the book features crypto Ponzi-schemer extraordinaire Sam Bankman-Fried on the cover and takes the reader on a sometimes laugh-out-loud tour of the crypto industry’s most despicable practices and people. And God, there is no shortage of those.

● Optimal Illusions: The False Promise of Optimization
Coco Krumme
Review via Publishers Weekly
“By embracing efficiency above all, we’ve crowded out what can’t be measured and optimized and allowed the metaphor of optimization to cannibalize other worldviews,” according to this muddled debut. Krumme, a mathematician and scientific consultant, aims to outline the shortcomings of the modern preoccupation with optimization but stumbles early in neglecting to define what she means by the term. This creates confusion later on when she traces the rise of optimization by lumping together thinly connected accounts of Isaac Newton’s efforts to break down natural forces into their constituent parts, mathematician Stanley Ulam’s innovations in computational methods while working on the Manhattan Project, and Marie Kondo’s gospel of decluttering.

● Elon Musk
Walter Isaacson
Review via CNN
As Isaacson writes in the closing sentences of his 600-page tome, “Sometimes great innovators are risk-seeking man-children who resist potty training. They can be reckless, cringeworthy, sometimes even toxic. They can also be crazy. Crazy enough to think they can change the world.” Crazy, cruel, immature: these aren’t failings; they’re features of creative genius.
That is Isaacson’s thesis, anyway. But it relies on a narrow understanding of genius. Genius for Isaacson can be measured in patents and profits. Musk runs several companies and is the richest man in the world. His genius is a given. All the rest, no matter how harmful, must be understood as an essential ingredient of that genius.

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!

The US 10-year Treasury yield continued to trend higher in August, rising further above CapitalSpectator.com’s “fair-value” estimate, which is based on averaging three models. It’s unclear if the mean estimate is wrong or the market’s experiencing an extended run of irrational exuberance. Perhaps it’s a bit of both. In any case, the widening spread in the market yield over the model’s estimate is striking from a historical perspective.

The 10-year rate in August marked a full month of 4.0%-plus yields—the highest sustained run at or above that mark since 2008 (black line in chart below). By contrast, the average fair-value estimate via three models remains below 3% (red line).

The spread in the market rate over the average estimate for the three models rose to 1.42 percentage point last month. That’s up modestly from July and also marks the highest spread since 1994, as shown in the next chart below.

Spreads at the current level, or higher, aren’t unprecedented, although we haven’t seen this level of divergence for several decades. What’s more, relatively wide spreads can persist for several years. But as the spread chart reminds, eventually the market rate moves closer into alignment with the average fair value estimate, quite often overshooting to the opposite extreme. Timing, however, is uncertain.

Notably, the spread varies around the mean estimate randomly, which implies that extreme variations will “correct” eventually and that the average estimate provides useful if not timely information. That suggests a couple of takeaways from the current market/fair value mismatch.

First, the current market yield appears to offer a relatively attractive opportunity for buy-and-hold investors. Second, the unusually high premium in the current market yield vs. the average estimate suggests that further increases in the 10-year rate face headwinds.

The caveat, of course, is that the market can remain irrational for longer than you can remain liquid. To be fair, another interpretation is that the modeling is simply wrong and the crowd is correctly pricing in higher yields because economic and/or inflation conditions warrant that pricing.

Pick your poison. I still favor the view that the 10-year rate is at/near a peak. But Capital Spectator has been saying that for several months and the market continues to ignore the advice. Hope (and confidence in the model) spring eternal.

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* US government still heading for a shutdown at end of September
* United Auto Workers union launches strike against Big Three automakers
* China reports signs of modest but fragile economic recovery in late-summer
* Oil prices rise above $90 a barrel for first time in 2023
* Current 2%-plus real yields for TIPS still look attractive
* 4-week average of US jobless claims falls to lowest level in 7 months
* Wholesale US inflation accelerated in August after historically slow pace
* US retail sales rise more than expected in August:

Ray Dalio likes cash… “temporarily”. The founder of Bridgewater Associates says “I don’t want to own debt, you know, bonds and those kinds of things.” Speaking at the Milken Institute Asia Summit in Singapore on Thursday he advises: “Temporarily, right now, cash I think is good … and the interest rates are fine. I don’t think [it] will be sustained that way.”

US consumer inflation rose more than expected in August, but the surprise jump hasn’t persuaded markets to abandon expectations that the Federal Reserve will leave interest rates unchanged at next week’s policy meeting.

The policy-sensitive 2-year US Treasury yield ended yesterday’s session (Sep. 13) at 4.96%, comfortably below the current 5.25%-5.50% Fed funds target rate. That’s a sign that the Treasury market expects the central bank will leave policy unchanged at next week’s FOMC meeting (Sep. 20).

Keep in mind that the Treasury market, based on the 2-year yield, has been consistently wrong about Fed policy this year. The 2-year rate has remained below the Fed funds target rate — widely seen as a forecast for no change or a cut in rates — despite the ongoing policy tightening.

Fed funds futures, however, agree with the implied 2-year yield forecast. Traders are currently reflecting a near-certainty of confidence for no change in policy at next week’s monetary policy decision, based on futures pricing.

Meanwhile, the current Fed funds rate looks moderately restrictive, based on a model using unemployment and inflation. The implication: even if the central bank leaves rates unchanged for the near term, the current 5.25-5.50% Fed funds rate would reflect a policy of passive tightening – all the more so if inflation continues to ease.

Some analysts advise that the central bank’s active tightening efforts have ended. “We believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold,” predicts Greg Wilensky, head of US Fixed Income at Janus Henderson Investors, in a research note.

Looking ahead to the two remaining Fed meetings this year, futures are leaning toward expectations that rates will stay unchanged, but for now confidence is low about what happens in November and December, effectively pricing in a coin flip for rate decisions. The question is how incoming economic and inflation data will change the outlook?

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The US Business Cycle Risk Report

* US government shutdown risk in focus for September 30
* Over half (56%) of US employees say they use AI at work, survey finds
* US mortgage applications fall to lowest level since 1996
* Tech CEOs tell US senators it’s time to regulate AI
* Will Google antitrust trial lead to major changes for tech industry?
* Business inflation expectations unchanged at 2.5% in Sep: Atlanta Fed
* US consumer inflation rebounds in August to 3.7% annual rate:

Despite the pickup in the annual rate of US headline consumer inflation in August, the core rate of CPI suggests that the disinflation trend in recent history is intact. Core CPI, which is considered a more reliable measure of the trend, continued falling last month for the year-over-year change. The 3-month annualized pace of core CPI fell even more, implying that disinflation is set to continue in the near term.

Analysts who favor one or two indicators to forecast US recessions have had a rough year. The reliance on a generally robust predictor may yet prove its worth in the months ahead. But so far the months-long calls by some pundits that recession is near have been wrong, or at least premature.

There’s always another recession approaching, of course, but the timing aspect is the tricky part. Some of the forecasts have relied on what has long been celebrated as a so-called flawless predictor: the US Treasury yield curve. The historical record, numerous studies point out, show that when long rates fall below short rates, economic output turns negative in due course.

But while the 10-year-less-3-month spread turned negative nearly a year ago, the US economy continues to expand and the odds remain low that an NBER-defined recession has started or is imminent.

Some recession forecasters have doubled down on the recession call and now say they’ll be vindicated by the start of a downturn in 2024. Maybe, but it’s useful to review some simple truths about analyzing the business cycle.

First, looking beyond a few months is effectively a coin flip. The US economy rarely turns on a dime, short of an exogenous shock, such as the pandemic that hit in 2020. Otherwise, it’s reasonable to run some basic modeling to nowcast the current scenario and make some reasonable projections about how output will evolve over the next 2-3 months. Beyond that there are just too many factors that are unknown to confidently assess what could happen, or not.

Second, relying on a handful of indicators is asking for trouble. The yield curve is a valuable metric and it has an impressive track record of anticipating recessions. But every indicator fails at some point, typically with little or no warning. The solution: model the business cycle with a carefully selected, diversified mix of indicators to minimize noise and maximize signal. It’s not perfect, but compared with the alternatives it’s substantially more reliable–assuming you don’t abuse by, say, making recession forecasts 6 month or a year into the future.

That’s the basic idea in a pair of proprietary business cycle indicators that are updated in each weekly edition of The US Business Cycle Risk Report, published by CapitalSpectator.com. The individual components for the Economic Trend Index (ETI) and Economic Momentum Index (EMI):

Aggregating the data sets in the table above shows that a modest growth bias continues to prevail in the US as both ETI and EMI hold above their respective tipping points (50% and 0%, respectively):

There are hints that the latest run of growth for the US economy is peaking, based on forward estimates of ETI and EMI through October.

It’s too soon to know if the peaking is noise or the start of a deeper decline that eventually ushers in the recession that so many analysts have been looking for.

But for now the probability that a recession has started, or is about to start, remains low, based on another indicator featured in The US Business Cycle Risk Report. The Composite Recession Probability Index (CRPI) aggregates ETI and EMI, plus three other business cycle indicators (including two from regional Fed banks), for a robust real-time estimate of US macro conditions. The current reading: the probability that the US is in recession is a low 7%.

There’s another recession lurking in the future, but a careful review of a range of indicators continues to suggest that the start of the next downturn is still beyond the immediate horizon. That forecast/analysis is subject to change as new numbers are published, which is why it’s crucial to routinely update the modeling. Meanwhile, the one thing you shouldn’t do is make forecasts that conflict with the majority of a broadly diversified set of predictors.

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* United Auto Workers union plans for possible targeted worker strikes
* Congressional panel urges Wall Street execs to curb US investments in China
* European Union launches probe into China subsidies for electric vehicles
* Writers sue Meta AI Platform for copyright infringement
* UK economy shrinks in July at fastest pace in 7 months
* Real household incomes for Americans fell for third straight year in 2022:

Tax Cuts and surging budget deficits have become a constant in Washington as Republicans and Democrats are reluctant to curb spending or raise taxes on majority of Americans. “We are at a political equilibrium where both parties compete to pander for middle-class and professional-class votes by promising them endless spending and taxes that can only fall,” says former GOP Senate aide Brian Riedl who’s currently at the conservative Manhattan Institute via The Wall Street Journal.

Current yields continue to show signs of peaking, based on a broad review of the major asset classes via a set of proxy ETFs. In each of our periodic updates of yields so far this year, the numbers reflect a decline from the previous review.

Today’s figures extend the trend. The average yield for global risk assets dipped again to 3.67% (as of Sep. 11, 2023) from the previous update’s 3.76% (July 19, 2023). The peak for our irregular updates was 4.50% (Dec. 19, 2022).

While the trailing 12-month yield (according to Morningstar.com) for risk assets has been falling in 2023, US Treasury yields continue to rise. The 10-year Note, for instance, ticked up to 4.29%, well above the portfolio average in the table above.

Cherry picking markets, however, still reflects unusually high trailing yields. The top payout rate in the table above is still SPDR FTSE Int’l Gov’t Inflation-Protected Bond (WIP), which boasts a trailing 12-month yield of 7.58%, Morningstar reports. Although that’s persistently eased this year, it’s still head and shoulders over the rest of the field. At the opposite extreme: real estate ex-US (VNQI), which is yield a thin 0.58%.

Payout rates in financial markets may be sliding, but there’s still opportunity for potentially capturing relatively high yields. But here comes the standard caveat: Trailing payout yields for stocks and other risk assets listed above aren’t guaranteed (in contrast with current yields from government bonds for buy-and-hold investors). Keep in mind, too, the ever-present possibility that whatever you earn in yields via ETFs fund could be wiped out, and more, with lower share prices.

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* US government shutdown risk in focus as House returns today
* US sets record in 2023 for weather disasters that cost $1 billion-plus
* US consumers worry about access to credit: NY Fed survey
* Central banks look set to keep rates elevated to tame inflation
* Change in policy at Bank of Japan could be factor in pushing up US yields
* US household wealth rises to record $154.3 trillion in Q2
* US small business optimism ticks higher in August but still near decade low:

Driven in part by rising US-China tensions, Mexico has become the biggest supplier of goods to America recently. “The new Cold War is a business opportunity, and Mexico looks better placed than almost any other country to seize it,” Bloomberg reports.

Global markets have enjoyed a strong rebound this year following 2022’s rout, but recent turbulence suggests that previous highs reached will remain elusive for the near term.

The good news for investors is that nearly all of the major asset classes are still posting gains year to date, led by US stocks, based on a set of ETFs through Friday’s close (Sep. 8). Even after the latest pullback, Vanguard Total US Stock Market Index Fund (VTI) is up a sizzling 16.1% so far in 2023.

The only components of the major asset classes with losses this year: a broad measure of commodities (GCC), government bonds in developed markets ex-US (BWX) and real estate ex-US (VNQI).

In a clear sign of a generally rising tide for asset prices, the Global Market Index (GMI), maintained by CapitalSpectator.com, is up nearly 11% in 2023. This unmanaged benchmark 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.

The rallies have stalled in recent weeks, which is unsurprising given the strength and persistence that, until recently, prevailed in markets around the world. But investors are now struggling to decide if the latest setbacks are clues of a bear-market rebound in 2023 or pauses that eventually lead to new highs in due course.

From a US perspective, a key component of the analysis centers on assessing the economy’s strength and how that will influence upcoming Federal Reserve decisions on interest rates.

“I worry that current good economic data are likely to keep inflationary pressures bubbling under the surface,” says Marija Veitmane, a senior multi-asset strategist at State Street Global Markets. “That would keep the Fed and other central banks from cutting rates, which would eventually break the economy.”

Fed funds futures are currently pricing in a high probability that the central bank will leave its target unchanged at the upcoming FOMC meeting on Sep. 20. Beyond the next rate decision, however, the market’s guesstimate is basically a coin flip.

“The data is stronger than expected and the Fed has highlighted that stronger than expected activity could lead it to hike rates again,” writes Tim Duy, chief US economist at SGH Macro Advisors, in a research note sent to clients today. “At the same time, however, lower inflation reduces the urgency to hike rates again, and the Fed is balancing policy against these two considerations.”

What is clear is that most markets are still well below their previous highs. Current drawdowns for nearly all the major asset classes are below -10%  and deeper than GMI’s peak-to-trough decline.

The key factors that will likely determine how soon new highs arrive is a function of how the slide in inflation unfolds over the final months of 2023 and how the Fed reacts.

In other words, weighing the evolving odds for a so-called soft landing – reducing inflation with minimal blowback for economic growth — will be front and center for markets in the weeks ahead.

Even optimists expect that the path forward will be rocky. “We think we are still in a bull market that will hit new highs before the end of the year, but it will be a choppy road,” predicts Ed Clissold, chief US strategist at Ned Davis Research.

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The US Business Cycle Risk Report

* Fed expected to pause rate increases in September and then reassess outlook
* US consumer spending set to peak, survey predicts
* Germany looks set to be only major European economy in recession this year
* China deflation eases in August as consumer prices rise
* Huge lithium deposit–key component in electric batteries–discovered in US
* Google antitrust trial re: its search engine business starts this week
* Wall Street cuts recession forecasts as US economy hums along:

Hedge funds ramp up bullish bets on crude oil’s price, according to data that tracks money managers. “A considerable amount of dry powder had been sitting on the sidelines, meaning the recent strong tape could set off a further chase and catch-up in positioning,” says Michael Tran, a global energy strategist at RBC Capital Markets. “This oil market has evolved into as much of a momentum-based market as it is a fundamentally based one.”

● Foreign Bodies: Pandemics, Vaccines, and the Health of Nations
Simon Schama
Review via The Economist
The first recorded vaccine—for smallpox—was administered by Edward Jenner, an English doctor, in 1796 to an eight-year-old boy, James Phipps. Jenner (pictured) took fluid from the lesions of a dairymaid who had become infected with cowpox and used it to inoculate Phipps against cowpox and smallpox.
That people could become immune to diseases after being exposed to them had been known for more than a thousand years before Jenner carried out his experiments. But the idea that people could be purposely infected as a way to ward off future illness, though ancient, took a surprisingly long time to spread and become accepted around the world.

● Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better
Lyn Alden
Summary via Amazon
Broken Money explores the history of money through the lens of technology. Politics can affect things temporarily and locally, but technology is what drives things forward globally and permanently. The book’s goal is for the reader to walk away with a deep understanding of money and monetary history, both in terms of theoretical foundations and in terms of practical implications.
From shells to gold, from papyrus bills of exchange to central banks, and from the invention of the telegraph to the creation of Bitcoin, Lyn Alden walks the reader through the emergence of new technologies that have shaped what we use as money over the ages. And beyond that, Alden explores the concept of what money is at its very foundation to give the reader a framework to analyze and compare different types of monetary technologies and monetary theories.

● Never Enough: When Achievement Culture Becomes Toxic-and What We Can Do About It
Jennifer Breheny Wallace
Review via The Wall Street Journal
Why have things turned “toxic” for high-flying kids? Ms. Wallace sees widespread status anxiety fueled by a post-1980s stalling of social mobility and a rise in economic precariousness. Competition has intensified for spots in exclusive colleges and universities. So even mothers and fathers who try not to push, who try to be mellow and undemanding—dwelling less on grades and more on effort, for instance—can feel the pressure and pass it on to their children.

● Gambler: Secrets from a Life at Risk
Billy Walters
Summary via publisher Avid Reader Press/Simon & Schuster
Anybody can get lucky. Nobody controls the odds like Billy Walters. Widely regarded as “the Michael Jordan of sports betting,” Walters is a living legend in Las Vegas and among sports bettors worldwide. With an unmatched winning streak of thirty-six consecutive years, Walters has become fabulously wealthy by placing hundreds of millions of dollars a year in gross wagers, including one Super Bowl bet of $3.5 million alone. Competitors desperate to crack his betting techniques have tried hacking his phones, cloning his beepers, rifling through his trash, and bribing his employees. Now, after decades of avoiding the spotlight and fiercely protecting the keys to his success, Walters has reached the age where he wants to pass along his wisdom to future generations of sports wagerers.

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Few assets confuse and confound the average investor as much as gold. But there’s an easy solution for cutting through the noise and thinking rationally about how the metal can fit into a broader asset allocation strategy: It’s money and should be treated as such.

Depending on your perspective, the world’s favorite precious metal is also considered in some circles as a hedge against chaos, protection from inflation and a general source of financial comfort. Some also use it as a speculative vehicle with time horizons measured in minutes, days or weeks. Another school of thought sees gold as one more risk asset that deserves to be considered in the same breath as stocks. At times it’s all (or sometimes none) of those things. But I prefer to think of it as money, which is the main takeaway over long sweeps of financial history.

There was a time when gold was formally used as money by the US and other governments. Those days are long gone, but the metal’s lengthy, evolving history as coin of the realm lives on, if only in the collective minds of investors and financial markets. We can debate about whether that’s reasonable or practical, but it’s a simple fact that dates to at least the Roman Empire.

For ill or good, much of the world considers gold to be a liquid asset. True, you can’t buy a loaf of bread or rent an apartment with it, short of tortured negotiations. But compared with every other commodity or non-currency asset on the planet, gold is the closest thing to “money” that’s immune to government control. Simply put: no one worries that you’ll have a problem liquidating your gold hoard at a fair, widely traded price in the world’s financial centers (and beyond).

To be fair, bitcoin and other crypto currencies are the new kids on the block that arguably offer the capacity to out-gold gold as alternative forms of money. But there are reasons to be skeptical. In the interest of brevity I’ll sidestep this debate here, other than to note that these are still very early days for deciding if the likes of bitcoin will replace gold’s millennia-long run as a store of value. Centuries of history aren’t easily or persuasively overturned with a track record that effectively launches with the start of the Obama administration.

Critics will rightly point out that gold, like bitcoin, is volatile in the short term and so its value as money is weak if your time horizon doesn’t extend beyond a few years. Agreed, and so on that basis you’ll have to look elsewhere for a “safe” asset.

But let’s also recognize that however you define “money,” there will be a unique set of pros and cons to your preference. Meanwhile, gold’s history as an alternative, if flawed, form of money is convincing as a possible addition to your “cash” allocation.

Consider, for instance, how gold performs against its arch fiat rival: the US dollar. Notably, gold and the greenback tend to be negatively correlated. When one rises, the other tends to weaken, and vice versa, as the chart below shows (based on history starting in 2010). That’s exactly what you’d expect to see from an alternative to US currency in the forex space.

Another test of gold’s claim to be an alternate, albeit informal currency: it keep’s pace and tends to outperform short-term US Treasuries, a cash proxy. Using 2010 as a start date, it’s clear that an investment in SPDR Gold Shares (GLD) – an ETF that holds bullion – has outperformed iShares Short Treasury Bond ETF (SHV) by a wide margin.

Granted, over shorter periods GLD suffers sharp losses compared with SHV’s relatively stable pricing. Again, gold’s short-term volatility is a major drawback for investors looking for stability in the near term.

But if you have a 10-year-plus horizon, history suggests that gold will likely keep pace and perhaps outperform Treasury bills. The longer the horizon, the higher gold’s advantage, albeit with roller-coaster-like volatility in the shorter term.

Should gold be part of your asset allocation? Minds will differ, but to the extent that gold is held the “safest” reasoning is that it’s an alternative form of money that compliments and diversifies “cash” holdings.

Alas, gold shares one common feature that applies to every asset class: there are no guarantees. But if you use history as a guide on matters of investment choices, gold’s track record is striking. Namely, it’s outlasted every formal currency in history and outperformed most in the interim.

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

* Biden’s options limited for preventing possible strike by auto workers
* Biden arrives at G20 meeting in India today–closer US-India ties on agenda
* The record-long slide in 1yr US home prices may be over
* Small- and mid-size business optimism rises to 21-Year High
* US banking industry “continues to face significant downside risks”: FDIC chair
* China’s currency falls to 16-year low vs. the US dollar
* Solar installations in US expected to reach record level this year
* US jobless claims fell to 7-month low last week:

Chicago Fed CEO Austan Goolsbee says the US may be on a “golden path” that tames inflation without materially damaging the robust labor market. Speaking with Marketplace.org on Thursday, he explained: “It’s possible we could get on the golden path, it’s not a guarantee. But the golden path would be almost unprecedented to get inflation down a lot without having a serious recession. That will be a triumph, the Fed and other central banks around the world have virtually never been able to do that. But I do think at this moment, we might be able to. Monetary policy’s working, that’s certainly what we’re trying to shoot for.”