• Another (mostly) down week for global markets
• Across-the-board declines for our strategy benchmarks this week

Losses continue to weigh on the global markets this week. But not entirely. Another recurring feature this week: Japan stocks continued to lead the small set of winners for our global opportunity set through Friday’s close (Sep. 17).

continue reading at The ETF Portfolio Strategist

Banking-Crisis Interventions, 1257 – 2019
Andrew Metrick and Paul Schmelzing (Yale)
September 7, 2021
We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number of interventions outside of those crises. The data show a gradual shift over the past centuries from the traditional interventions of a lender-of-last-resort, suspensions of convertibility, and bank holidays, towards a much more prominent role for capital injections and sweeping guarantees of bank liabilities. Furthermore, intervention frequencies and sizes suggest that the crisis problem in the financial sector has indeed reached an apex during the post-Bretton Woods era – but that such trends are part of a more deeply entrenched development that saw global intervention frequencies and sizes gradually rise since at least the late 17th century.

Can Financial Soundness Indicators Help Predict Financial Sector Distress?
Marcin Pietrzak (IMF)
July 23, 2021
This paper shows how the role of Financial Soundness Indicators (FSIs) in financial surveillance can be usefully enhanced. Drawing from different statistical techniques, the paper illustrates that FSIs generate signals that can accurately detect, with 4 to 12 quarters lead, emerging financial distress—as measured by tight financial conditions.

Financial Crises: A Survey
Amir Sufi (U. of Chicago) and Alan M. Taylor (U. of California)
August 17, 2021
Financial crises have large deleterious effects on economic activity, and as such have been the focus of a large body of research. This study surveys the existing literature on financial crises, exploring how crises are measured, whether they are predictable, and why they are associated with economic contractions. Historical narrative techniques continue to form the backbone for measuring crises, but there have been exciting developments in using quantitative data as well. Crises are predictable with growth in credit and elevated asset prices playing an especially important role; recent research points convincingly to the importance of behavioral biases in explaining such predictability. The negative consequences of a crisis are due to both the crisis itself but also to the imbalances that precede a crisis. Crises do not occur randomly, and, as a result, an understanding of financial crises requires an investigation into the booms that precede them.

Macroeconomic and Financial Risks: A Tale of Mean and Volatility
Dario Caldara (Federal Reserve), et al.
August 2021
We study the joint conditional distribution of GDP growth and corporate credit spreads using a stochastic volatility VAR. Our estimates display significant cyclical co-movement in uncertainty (the volatility implied by the conditional distributions), and risk (the probability of tail events) between the two variables. We also find that the interaction between two shocks–a main business cycle shock as in Angeletos et al. (2020) and a main financial shock–is crucial to account for the variation in uncertainty and risk, especially around crises. Our results highlight the importance of using multivariate nonlinear models to understand the determinants of uncertainty and risk.

Pre-crisis conditions and financial crisis duration
Thanh Cong Nguyen (Phenikaa University)
July 3, 2021
This paper examines how pre-crisis conditions affect the duration of different types of financial crises using a data sample of 244 financial crises in 89 countries over the period 1985-2017. Results from our parametric survival analysis show that the duration of any type of financial crisis is longer for countries having higher levels of public debt prior to financial crises, whereas it is shorter for countries characterised by higher pre-crisis levels of (i) current account balance, (ii) international reserves, and (iii) institutional quality. Similarly, while pegged exchange rate regimes are associated with a longer duration of financial crises, majority governments help countries emerge faster from crises. Moreover, banking and currency crises tend to be more prolonged when preceded by higher credit growth. We also find a positive effect of pre-crisis fiscal balance on the probability of crisis ending, and it is noteworthy that this effect is strengthened under majority governments and a stronger institutional environment. Finally, our duration dependence analysis suggests that banking, currency, and twin and triple crises are more likely to end when they grow older.

Monetary policy, financial shocks and economic activity
Anastasios Evgenidis (U. of Newcastle) and A.G. Malliaris (Loyola U. Chicago)
March 1, 2021
This paper contributes to a deeper understanding of macroeconomic outcomes to financial market disturbances and the central bank’s role in financial stability, by using Bayesian VAR (BVAR) models. We document that a shock that increases credit to non-financial sector leads to a persistent decline in economic activity. In addition, we examine whether the behavior of financial variables is useful in signaling the 2008 recession. The answer is positive as our medium-scale BVAR generates early warning signals pointing to a sustained slowdown in growth. Finally, we suggest that the expansion phase of the business cycle can be subdivided into an early and a late expansion. Based on this distinction, we show that if the Fed had raised the policy rate when the economy moved from the early to late expansion, it could have mitigated the severity of the last recession.

Stress Testing the Financial Macrocosm
J. Doyne Farmer (University of Oxford), et al.
August 30, 2021
What kind of models do we need to guide us through the next crisis? If past crises are any indication, we need to explore new approaches. During the Great Financial Crisis, the models that existed at the time were of little value because they focused on firm-level interactions and did not capture the system-wide dynamics that fueled the crisis. In this paper, we sketch a vision for a new approach to understanding and mitigating financial and economic crises. We argue that next-generation stress test models must take a comprehensive a view of the financial macrocosm to enable the regulator to effectively regulate and supervise the macro-financial dynamics of the global economy.

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

* FDA will review evidence for recommending Covid-19 booster shot
* Economists expect Fed will announce bond taper in November, survey finds
* IMF chief criticized for favoring China as head of World Bank
* China seeks to join trans-Pacific trade pact that US rejected
* Will Putin’s authoritarianism strengthen after Russia’s elections?
* Population of migrants surge temporary camp in Del Rio, Texas
* Invesco in talks to merge with State Street’s asset-management division
* Jobless claims in US picked up last week but remain near pandemic low
* Philly Fed Mfg Index: strong acceleration in business activity in September
* US retail sales rose in August, beating estimates for decrease by wide margin:

The US economic expansion to date remains unusually strong overall, with one stark exception: personal income. In contrast with employment, consumer spending and industrial production — collectively known as the big-four macro indicators — the recovery in consumer income has been abnormally weak in comparison with economic recoveries following the end of recessions since 1970.

The reason, of course, is the atypical aspect of the business cycle during and following the onset of the pandemic. The sudden, dramatic collapse of the economy in the spring of 2020, followed by an equally remarkable government-supported recovery overall.

The exception is personal income. As the first chart below shows, the recovery in household income has been notably soft relative to recoveries over the past 50 years. Indeed, since the current expansion began in May 2020, US personal income has varied sharply, but remains effectively flat through July 2021 since the expansion started over a year ago. By comparison, recoveries in income in decades past at equivalent points in expansions have been sharply stronger.

It’s unclear if this is a temporary phenomenon or if there will be lasting repercussions for the economy. It’s also premature to draw hard and fast conclusions about the trend, given the unusually abnormal path of economic activity during the pandemic. But this much is clear: if personal income’s rebound remains unusually weak, as it has so far, there will be a cost for the US economy, perhaps in the form of softer-than-expected gains in consumer spending in the months and years ahead.

In any case, monitoring upcoming updates of monthly personal income reports deserves close attention for evaluating this risk. The August report on personal income is scheduled for October 1.

Meantime, three other key indicators for economic activity – employment, consumer spending and industrial production – continue to post unusually strong recoveries vs. previous expansions, as shown in the charts below. (Note: the current recoveries for this trio of indicators runs through August 2021, a month ahead of the latest personal income numbers). Will these robust gains offset the weak recovery in personal income in some degree and lay the groundwork for a catch-up recovery? Unclear for now, but at least this trio of indicators continues to post relative strength in a hefty degree, providing in the aggregate a powerful driver for keeping the expansion alive.

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

* Political anxiety rising in Washington as debt-ceiling showdown looms
* Biden’s economic legislation at risk of delay as Dems debate
* US, UK and Australia announce new security partnership to counter China
* NY Fed Mfg Index shows sector growth accelerated in September
* US import prices eased for first time in 10 months in August
* Atlanta Fed business inflation expectations steady at elevated pace in Sep
* US poverty rate fell in 2020 via stimulus checks and unemployment benefits
* US industrial output growth slowed in August, partly due to Hurricane Ida:

US consumer inflation eased more than expected in August, hinting that the recent surge in pricing pressure may be cooling. But if this was a sign for commodities prices to ease, the market didn’t get the memo.

continue reading at The ETF Portfolio Strategist

US consumer inflation’s one-year trend eased in August, marking a second month of lesser pricing pressure, the Bureau of Labor Statistics reports. But the pace of inflation remains elevated and a new run of analytics suggest that the pullback from the recent surge will be unfold slowly.

Let’s start with core CPI, which eased to a 4.0% year-over-year rate last month. The softer pace for the one-year change marks the second straight month of lesser inflation following the 4.5% peak in June.

The pullback strengthens, if only modestly, the view that the inflationary surge earlier from earlier in the year is abating. Although the June peak will likely mark the high point for the pandemic-related runup in inflation, the return to the low-2% range that prevailed before the coronavirus hit is currently expected to unfold slowly.

Consider CapitalSpectator.com’s Inflation Trend Index (ITI), which seeks to provide a degree of forward guidance on the directional bias of pricing activity in real time. ITI has been projecting a peak in inflation for several months (see the previous ITI update in late-August, for example). Revising the analytics with new data published through yesterday (Sep. 14) points to the inflation trend holding steady in September and then dipping moderately in October (red line in chart below).

For a clearer look at the evolution in ITI’s direction bias estimates to date, here’s how monthly changes in the index compare. No change in ITI is expected for September.

The key takeaway: inflation has probably peaked, as ITI has been anticipating throughout the summer. But for the moment, the retreat from the peak is expected to proceed slowly. As a result, inflation will remain elevated, with a downside bias, for the foreseeable future.

What factors could alter this outlook? The course of the pandemic is probably the main variable. If Covid-19 cases and fatalities fall substantially in the weeks and months ahead, the shift could be a boost to economic activity and perhaps keep inflation higher for longer than currently expected. Alternatively, if the pandemic worsens due to variants or other factors, economic growth could slow at an accelerated rate, and in turn cut inflationary pressure deeper and faster than ITI’s current outlook anticipates.

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

* North and South Korea test ballistic missiles as tensions spike on peninsula
* California Gov. Gavin Newsom wins recall election
* Most Americans would see tax cuts in Dems’ tax code plans, estimate shows
* Consumer inflation expectations rose again in August, NY Fed survey reports
* China retail sales rose much slower than expected in July
* Eurozone industrial output increased by more than forecast in August
* US small business sentiment remained middling in August vs. recent history
* SEC chairman says rules for cryptocurrency are in development
* US Consumer Price Index rose less than expected in August:

Is the stock market’s trending behavior changing? Are the winning streaks running longer and the corrections becoming shorter?

Let’s run some numbers for some perspective, starting with a 20% trigger for the S&P 500 Index. The first chart shows the length (in trading days) of upside trends without a 20% countermove. By this standard, there’s nothing unusual in recent history.

Looking at downside events for a 20% trigger, however, suggests that an unusual run of short corrections (or bear markets, as 20%-plus corrections are commonly labeled) have prevailed since the financial crisis in 2008-2009.

The caveat is that 20% moves are relatively rare and so it’s hard to distinguish between signal and noise. Let’s address this to a degree by lowering the trigger threshold to 10% to generate more events. The next chart suggests that longer 10%-plus winning streaks for the S&P 500 are becoming more common, based on a clustering of these events over the past decade.

On the flip side, eye-balling the 10% downside streaks suggest a modest run of fading for these events in recent years.

Although this data isn’t overwhelmingly convincing, it does point in the direction that winning streaks are running longer while losing streaks are shorter.

The bigger question is what forces are driving these changes? Any number of possibilities are on the short list, including a rise in momentum-based trading, increased institutional/professional trading, and a growing use of computer-based algorithmic/high-frequency trading.

For most investors, this sounds like good news. If the stock market goes up for longer and suffers fewer, shorter corrections, that’s a net plus for the buy-and-hold investor.

But if this is a new regime, the obvious question arises: How long will this bullish evolution run? Something less forever is the likely answer. Unfortunately, no amount of number crunching can provide wipe out the uncertainty on timing. Some aspects of modeling market risk are overly dependent on guesswork and speculation, and this is probably one of them.

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

* House Democrats propose new tax hikes to pay for $3.5 trillion spending plan
* Hurricane Nicholas makes landfall on the Texas coast
* Delta variant of coronavirus is weighing on economies around the world
* Covid-19 infections more than double in China’s southeastern province of Fujian
* California’s Gov. Newsom is expected to win today’s recall vote
* UK company payrolls surged in August
* Apple issues emergency security update for iPhones to counter spyware threat
* US small-cap stocks continue to lose ground against large-caps:

Nearly every slice of the major asset classes retreated in the trading week through Friday, Sep. 10, based on a set of ETFs. The upside exception: US inflation-indexed Treasuries.

The iShares TIPS Bond ETF (TIP) rose 0.4% last week, providing a rare bit of upside action in an otherwise down week for markets around the world. Nonetheless, TIP appears to be churning in a range after a strong rise earlier in the year.

Otherwise, losses dominated. The biggest decline last week for the major asset classes: US real estate investment trusts (REITs). Vanguard Real Estate (VNQ) fell a hefty 4.1%, reversing the previous week’s surge.

A benchmark portfolio that holds all the major asset classes retreated last week. The Global Market Index (GMI.F) fell 1.3%, marking the first weekly decline in three weeks. This unmanaged benchmark (maintained by CapitalSpectator.com) holds all the major asset classes (except cash) in market-value weights via ETF proxies.

Reviewing asset classes via the one-year window continues to show US stocks in the lead. Vanguard Total US Stock Market (VTI) ended the week with a 38.1% total return.

VTI’s leading one-year performance is just slightly ahead of the 36.7% total return for Vanguard Real Estate (VNQ), the second-strongest gainer over the past 12 months.

The weakest one-year performance for the major asset classes: foreign government bonds in developed markets (in US dollar terms) via SPDR Bloomberg Barclays International Treasury Bond (BWX), which is down a fractional 0.3%.

GMI.F’s one-year performance: a strong 25.1%.

Looking at the major asset classes in terms of current drawdown continues to show most markets with little or no declines relative to the previous peaks. The main exceptions: commodities (GCC) and stocks and bonds in emerging markets (EMLC and VWO, respectively).

GMI.F’s current drawdown is a mild -1.3%.

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

* House Dems eye taxes on wealthy, corporations to pay for $3.5 trillion budget
* Sen. Manchin, a key swing vote, says he will not vote for $3.5 trillion budget
* Government-shutdown risk is rising threat for Democrats in Washington
* Delta variant drives another Covid-19 outbreak in China
* North Korea reports testing a new long-range missile
* Russia’s military influence in Africa is rising, posing challenge to status quo
* US job growth won’t regain peak until 2030, new gov’t analysis predicts
* US producer inflation accelerated in August, reaching record 8.3% from year ago:

Our proprietary strategies lost ground in line with the Global Beta 16 (G.B16) benchmark last week. Year to date, the benchmark is still in the lead, but by a narrowing margin — a mere 20 basis points over this year’s top-performing prop strategy — Global Managed Volatility, which is up 9.2% in 2021 vs. 9.4% for G.B16 through Friday’s close (Sep. 10).

continue reading at The ETF Portfolio Strategist

● System Error: Where Big Tech Went Wrong and How We Can Reboot
Rob Reich, et al.
Excerpt via The Atlantic
After decades of innovation by computer and internet companies unfettered by government regulation, Americans are enjoying the benefits provided by Big Tech—but also contending daily with problems that the industry has ushered in. Even consumers who love their smartphones and Instagram accounts may be concerned about how they siphon up personal data and lure users back with every new alert. While tech platforms help keep people in contact with family and friends, they also rely on opaque algorithms that shape the content we see. Seeing these dynamics, many politicians appear uncertain whether to get cozy with the visionary leaders of Google, Apple, and Facebook—or to campaign against the pollution of the American information ecosystem, the amplification of hate speech and harassment, and the striking concentration of market power among a small number of companies.

● The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans
Jonathan A. Knee
Summary via publisher (Portfolio)
Many think that they understand the secrets to the success of the biggest tech companies: Facebook, Amazon, Apple, Netflix, and Google. It’s the platform economy, or network effects, or some other magical power that makes their ultimate world domination inevitable. Investment banker and professor Jonathan Knee argues that the truth is much more complicated–but entrepreneurs and investors can understand what makes the giants work, and learn the keys to lasting success in the digital economy.

● In Defense of Public Debt
Barry Eichengreen, et al.
Summary via publisher (Oxford U. Press)
Public debts have exploded to levels unprecedented in modern history as governments responded to the Covid-19 pandemic and ensuing economic crisis. Their dramatic rise has prompted apocalyptic warnings about the dangers of heavy debts—about the drag they will place on economic growth and the burden they represent for future generations. In Defense of Public Debt offers a sharp rejoinder to this view, marshaling the entire history of state-issued public debt to demonstrate its usefulness.

● The Exponential Age: How Accelerating Technology is Transforming Business, Politics and Society
Azeem Azhar
Excerpt via Wired
Moore’s Law amounts to a halving of the underlying cost of computation every couple of years. It means that every ten years, the cost of the processing that can be done by a computer will decline by a factor of 100. But the implications of this process stretch far beyond our personal laptop use. In general, if an organisation needs to do something that uses computation, and that task is too expensive today, it probably won’t be too expensive in a couple of years. For companies, this realisation has deep significance. Organisations that understood this deflation, and planned for it, became well-positioned to take advantage of the Exponential Age.

● Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China
Desmond Shum
Review via The Economist
The call from China came in the early morning. Desmond Shum, a former tycoon now living in the West, heard the voice of his ex-wife, Duan Weihong, for the first time in four years. Ms Duan vanished in Beijing in September 2017, shortly after Communist Party anti-corruption investigators came for a patron of hers, a young member of the Politburo once seen as a successor to the supreme leader, President Xi Jinping.

● Sludge: What Stops Us from Getting Things Done and What to Do about It
Cass Sunstein
Q&A with author via NPR
Sludge – yuck. Not just the kind that sticks to your shoes – the kind that sticks in your craw, bureaucratic sludge – long forms, long lines, entering the same information over and over, time and again, like the first days of COVID vaccinations when screens would flash back, we’re sorry, try again, try later – or never. In his new book, “Sludge: What Stops Us From Getting Things Done And What To Do About It,” esteemed legal scholar Cass Sunstein, who is also now senior counselor at the Department of Homeland Security, shows how sludge isn’t just a nuisance but can hurt our health, perpetuate poverty, frustrate democracy and cost jobs, scholarships and opportunity. Cass Sunstein, thanks so much for being with us.

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. 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!

• Losses dominated global markets this week
• All our portfolio strategy benchmarks posted weekly losses

Are the chickens coming home to roost? Maybe, but roosting speculation has been a popular sport for years and, so far, to no avail. It’s not obvious it’s different this time, although eventually it will be. Meantime, there’s plenty of red ink to ponder this week as declines weighed on most of the major asset classes.

continue reading at The ETF Portfolio Strategist

A new survey finds a majority of economists expecting that the Federal Reserve will begin raising interest rates sometime next year to combat inflation. Maybe, but the 10-year Treasury yield’s recent trend still reflects a flat to downside bias.

The benchmark rate ticked lower yesterday (Sep. 9), slipping to 1.30%, a middling level vs. the range over the past two months. The current rate is also well below the previous peak of 1.74% set in March.

The current 1.30% rate looks a bit low vs. CapitalSpectator.com’s fair value estimates of the 10-year rate. The modeling takes the average of three fair-value estimates and uses the result as a rough proxy for the implied rate. On that basis, the 10-year yield should be closer to 2%, based on modeling through August. That’s essentially unchanged from last month’s estimate.

Although the fair-value estimates should be viewed cautiously, the results imply that the downside bias for the 10-year rate is limited and that an upside adjustment is stronger than recent market action suggests.

The main source of uncertainty is the Delta variant of the coronavirus, which has created headwinds for the economy, and the labor market specifically. Until this threat has passed, there’s still meaningful potential for downside surprises in the 10-year yield.

“The big downside miss in the August data on US payrolls is a reminder that macro risk linked to the pandemic still lurks over the economy, advises Mark Zandi, chief economist of Moody’s Analytics. “After adding close to 1 million jobs in both June and July, businesses added fewer than a quarter million jobs last month. That’s not bad in typical times, but not good when the economy is still down over 5 million jobs from before the pandemic.”

In sum, he observes that “the dramatic comedown in job growth was driven by businesses that either closed or lost sales due to the virus.”

Until it’s clear that the blowback from the Delta variant is fading, any upside adjustment in the 10-year yield will likely be limited. In theory, the rate should be higher, as our fair-value estimates suggest. But theory takes a back seat to real-world conditions in an ongoing pandemic.

On a positive note, yesterday’s jobless claims fell to another pandemic low last week and job openings rose to a record high in July. The labor market, it appears, remains resilient. But the economic path ahead is still overly dependent on the pandemic.

Unfortunately, the virus will remain a significant risk factor for the near term. “The endgame is to suppress the virus. Right now, we’re still in pandemic mode, because we have 160,000 new infections a day. That’s not even modestly good control … which means it’s a public health threat,” Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said in an interview on Thursday. “In a country of our size, you can’t be hanging around and having 100,000 infections a day. You’ve got to get well below 10,000 before you start feeling comfortable.”

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

* President Biden expands vaccine mandate to combat the pandemic
* Biden’s vaccine mandate is also an effort to support the economy
* US businesses have questions, concerns over new vaccine mandate
* Biden calls China President Xi amid rising tensions between countries
* New survey of economists sees rate hikes in 2022 to counter inflation
* China selling some of its strategic oil reserve in a bid to lower prices
* Two Fed presidents sell stocks to address ethics concerns
* UK economic growth stalled in July, GDP data shows
* US jobless claims continued falling last week, dropping to new pandemic low:

o

There’s been an ongoing debate in recent years about the prospects for the US 60/40 stocks/bonds benchmark, which has become a staple for portfolio analytics. There’s much to criticize here, and arguably the weaknesses of the 60/40 standard are mounting in an increasingly global and complex world. But for good or ill, the 60/40 mix is a common reference point. The question is whether it’s time to move on? Yes, but that’s the easy answer. Next question: What portfolio benchmark should replace it?

Here’s where things get interesting – and complicated. Suffice to say, there’s a world of possibility here, starting with the major asset classes. and any number of variations — see the strategy benchmarks here, for instance.

For any given investor or institution, all the usual risk-management factors will (or at least should) influence preferences (risk tolerance, investment objective, time horizon, etc.). Meanwhile, the focus here is the pursuit of a generic alternative to the standard choice. There’s been no shortage of research on the subject in recent years. In this series, I’ll start by looking at some of the obvious possibilities and move on to various flavors of alternatives.

In this introductory post, let’s begin by setting up some standard benchmarks that move only slightly beyond the US 60/40 allocation. Think of this starting point as a baseline for perspective on the research to follow.

This review will use ETFs to build and test portfolios, starting with the primary US 60/40 benchmark, which is based on a 60% weighting in Vanguard Total US Stock Market (VTI) and 40% in Vanguard Total US Bond Market (BND), a.k.a. BMK.60.40. Year-end rebalancing applies throughout, for the US benchmark and the three alternative portfolios defined as:

BMK.60.40.Alt-1
60%: Vanguard Total World Stock Index (VT)
20%: Vanguard Total US Bond Market (BND)
20%: SPDR Bloomberg Barclays International Treasury Bond (BWX)

BMK.60.40.Alt-2
60%: Vanguard Total World Stock Index (VT)
20%: Vanguard Total US Bond Market (BND)
10%: SPDR Bloomberg Barclays International Treasury Bond (BWX)
10%: VanEck Vectors J.P. Morgan EM Local Currency Bond (EMLC)

BMK.60.40.Alt-3
60%: Vanguard Total World Stock Index (VT)
8%: Vanguard Total US Bond Market (BND)
8%: SPDR Bloomberg Barclays International Treasury Bond (BWX)
8%: VanEck Vectors J.P. Morgan EM Local Currency Bond (EMLC)
8%: Vanguard US Real Estate (VNQ)
8%: WisdomTree Continuous Commodity (GCC)

Systematically expanding the standard 60/40 US stock/bond mix into international markets and then adding US real estate investment trusts and commodities has merit, but the results have been disappointing in recent years. That could change, of course, and there are several reasons for entertaining that possibility.

Meantime, here’s how the three alternative portfolios compare to the US 60/40 mix, based on a start date of Dec. 31, 2010.

Have the results materially changed in the past five years? In a word, no.

The main takeaway from these results suggests that developing an alternative to the US 60/40 allocation isn’t going to be easy, which is to say without paying a price. In this initial test, it appears that you’ll have to pick your poison: accept substantially lower return or embrace a higher (or at least materially different) risk profile, or some combination.

In part II, I’ll push the envelope a bit more and consider another trio of alternatives that move beyond the standard choices outlined above in an effort to find a better trade-off between risk and return.

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

* Treasury Secretary Yellen warns US may default on national debt in October
* US oil output remains squeezed due to ongoing fallout from Hurricane Ida
* Fed’s Beige Book reports higher inflation and slower growth
* Factory-gate price inflation in China rose to 13-year high in August
* Emerging markets split between hawks and doves on dealing with inflation
* Britain set to lose status as one of Germany’s top-10 trading partners
* State Street announces it will buy Brown Brothers Harriman Investor Services
* US job openings rose to a new record high in July:

You can learn a lot just by watching, runs one of Yogi Berra’s baseball-infused proverbs. Let’s take a page from the famed Yankees catcher and redirect it to the ebb and flow of weights in our strategy benchmarks. Can we learn something by watching the to and fro? Yes, or at least there are times when monitoring this data yields above-average insight.

continue reading at The ETF Portfolio Strategist