MacroScope

from Global Investing:

The best of all worlds for investors?

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return. 

But this is not the number one scenario for either.

This is the second best return regime of the business cycle, beaten only by those periods in which both growth and inflation are below trend, the condition that has applied so far
this year.

Specifically, the findings were as follows:

         Real annual returns, 1925-2008, U.S. assets
                                       Real annual returns Pct
                                                                             Equities Bonds Tbills

Live Blogging G20

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

G20 Finance Ministers Meeting in London

Price level targeting vs inflation targeting

Professor Charles Goodhart of the London School of Economics explains the difference between inflation targeting and price level targeting in the lobby of Jackson Lake Lodge after taking part in an animated discussion of whether central banks should target price levels rather than inflation.

A paper University of California, Santa Cruz economist Carl Walsh presented at the Federal Reserve’s annual mountain retreat suggested that one lesson from the recent financial crisis is that central banks would benefit from the greater flexibility that price level targeting might give them.

A former Fed governor,  Frederic Mishkin, said that while in theory price level targeting may sound attractive, in actual practice it is more difficult to use effectively. One difficulty he cited was in explaining to consumers how it works. 

How to count a recovery

If it takes two successive quarters of falling GDP to enter a recession, how can a country emerge from recession with only one quarter of growth?  In the past week or so, journalists have declared the recession over in France, Germany and now Japan.  Of course, most reports rightly ask how long this will last and stress that a genuine recovery is far from certain.

Some people regard the two quarters definition of a recession as arbitrary and a bit silly, something supposedly cooked up by one of Lyndon Johnson’s economic advisers  to avoid acknowledging a downturn until after the next election.

But it does serve a serious purpose: At least it reduces the risk that we’ll be misled by a statistical blip in one quarter’s data which might be revised away in the next release.

Long shot ricochets in Steinbrueck’s quest for legacy

As the German election approaches and with it a chance he may not hold onto his job, Finance Minister Peer Steinbrueck took a long shot this week to try and boost his legacy as the man who took on the tax dodgers and won. While some of the new rules he proposed in a now trademark campaign against tax fraud failed to pass, the 62-year-old Social Democrat can only have boosted his popularity with voters and upped his chances of holding onto the Finance portfolio after the September 27 vote.

The idea was to give the Finance Ministry a “free hand” in drawing up its own list of countries and jurisdictions it deems uncooperative in efforts to crack down on tax evasion. Finance would thus have a bigger stick to wield as it signs new bi-lateral tax agreements next year, since the threat of sanctions on operations in Germany would have been immediate and easier to execute without the hurdle of consensus in Berlin. Or so the thinking went.

The proposal managed to stand its ground for a day. After supporting the plan on Monday, the Finance Ministry was forced to retreat under a hail of criticism from business lobbies, and when cabinet outlined its new procedures on Wednesday, it was clear that any future sanctions decisions will also have to be agreed by the Foreign and Economy ministries.

Are Americans really saving?

The Dutch investment bank ING reckons talk of Americans rediscovering savings is misleading.

Households are slashing their purchases of financial assets. The savings ratio is rising because borrowing is falling even more rapidly.   The household savings ratio climbed to 6.9 percent in May, up from a low point of 0.4 percent in 2005. But their purchases of financial assets plunged to -0.5 percent of income in the first quarter (the most recent data), down from a recent peak of 21.6 percent in 2004.

Given this, it will be more than interesting to see the second quarter figures, which should reflect most of the March to June global equity rally. But until then, what do you think? Is the “Americans are saving” mantra misleading?

Why the BRICS like Africa

There is little doubt that the BRICs — Brazil, Russia, India and China — have become big players in Africa. According to Standard Bank of South Africa, BRIC trade with the continent has snowballed from just $16 billion in 2000 to $157 billion last year. That is a 33 percent compounded annual growth rate.

What is behind this? At one level, the BRICs, as they grow, are clearly recognising commercial and strategic opportunities in Africa. But Standard Bank reckons other, more individual, drivers are also at play.

In a new report, the bank looks at what each of the individual BRIC countries is trying to do. To whit:

Shoots and weeds in the economic garden

Nouriel Roubini is a bearish guy at the best of times, but he is currently worried that signs of those “green shoots” of economic recovery are covering up something altogether more stubborn in the garden.

Recent data suggest that the rate of contraction in the world economy may be slowing. But hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds.

His point, in a new post on his much-followed blog, is that the consensus view that the global economy has or will soon bottom out has already been proven too optimistic.

How to calculate the decline of decline

Analysts and strategists assessing whether there’s an economic recovery on the way are increasingly referring to “second derivatives”. It usually means a measure, say production, has declined, but not by as much as it did last month, or quarter.

Are second derivatives a strong basis for optimism? If you have to perform differential calculus to make a point, it may be a sign of desperation.

Equities markets continue to factor in a recovery, with the FTSE 100 up about 30 percent from its six-year low of March 9.

Why are commodities surging?

Interesting take on the rise in commodity prices from Julian Jessop, chief international economist at Capital Economics. The rise has little to do with the weaker dollar and everything to do with expectations of global economic recovery, he says.

The broad-based revival in commodity prices since March clearly reflects a combination of factors. One of these is the pure accounting effect of the depreciation of the dollar. Other things being equal, a fall in the U.S. currency will of course put upward pressure on commodity prices when measured in dollar terms – commodity producers with bills to pay in other currencies such as euros and pounds will require a higher price in dollars, while consumers outside the dollar bloc will be more able to pay that higher price. However, the movements in currencies have generally been small compared to the underlying movements in commodity prices.

Looking closely at the relative performance of different commodities, Jessop reckons the rally has primarily been led by oil and industrial metals, which are the most sensitive to the economic cycle. Inflation-driven commodities such as precious metals, including gold, have underperformed in the rally, he says.