Archive for the ‘Macroeconomics’ Category
Most salient economic trends of the decade
What are the most important trends in the last decade? Which ones will continue and which ones will turn? I have taken 7 major trends – gold, US stocks, emerging markets, debt, interest rates, housing and tech.
1. Spectacular rise of Gold.
From early 80s till the end of 90s, gold was a laggard. As inflation fears receded (thanks to China’s low cost exports) and growth fears subdued (due to “unreal” 90s – when growth skyrocketed due to open markets worldwide), gold’s role was really questioned. Most mainstream commentators thought gold bulls were dinosaurs and gold investing was anachronistic.
However, gold would prove its detractors wrong.
Funny video on economics principles
Why is a trading tax, a bad thing?
Congress wants to bring a new tax on trading. For every $5000 you trade, government wants to take $12.50. Well that doesn’t sound bad for long term investors, right? No. Taxing trade can significantly impact the market efficiency. Take a look at chart 1 that has transaction costs (in basis points) for a few economies.
Chart 1
Job losses getting severe
Today’s Wall Street Journal reports on the bad job data released by Bureau of Labor Statistics today. 
Executive Summary
The economy has shed 4.4 million jobs since the recession began in December 2007
Nonfarm payrolls, which are calculated by a survey of companies, fell 651,000
Unemployment rate rose from 7.6 to 8.1 percent
2.9 million people were unemployed more than six months
Average hourly earnings increased a modest $0.03, or 0.2%, to $18.47
Service-sector employment tumbled 375,000
Field report – Future of India and commodities
In January, I was visiting a few villages in India partly to understand how global markets are affecting them. After spending a week in Europe and a few weeks Indian cities, the villages marked a refreshing contrast. As I walked in the fields, I saw that the villagers were happy, gave me free juicy sugarcanes and they were more upbeat about economy that anybody else. As we will see, if India were to consume as much oil per-capita as a relatively poorer Eastern European nation like Slovenia, it alone needs 30 million barrels/day (mbpd) more (40% of world consumption) apart from another 35 mbpd from China. If they both want to consume as much as US, India needs about 60 million addition barrels apart from 70 mbpd for China (current world production of the order of 85 mbpd).
These villages might never get to the economic level of an average American or European countryside, their per-capita income might never get closer to that of an average American, but the changes going on in these nameless places will have a profound impact on world’s commodity, tech and consumer markets. And this could change the wage-commodity price relationship substantially.
Special Report – Recession impact on various sections of the society
Executive Summary
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82% are job loss are among men. Women are going to pass men in workforce for the first time
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West is hit the most compared to North east and MidWest
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Young, blacks and Hispanics are hit more in the recession
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Artists face a far worse time than other professions though their unemployment rate is not different from average population
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Uneducated lost more jobs than educated workforces, unlike the previous 2 recessions.
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With various government policies and market movement, misery could be spread to everyone, including rich
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Portland and St. Louis rank among the unhappiest cities in the US
Detailed Gold stats and analysis for Q4, 2009 – Update 1
Now this report is also a part of Manual of Ideas and Seeking Alpha
Here is the detailed stats and analysis using the data from World Gold council, US geological survey and other
sources.
Can Dow reach 1600 by the end of this crisis?
The title seems scary. Can we really get that bad and fall 3/4 from this point? Hopefully, we won’t. But, economic theories don’t preclude that possibility. This is because of the fundamental relationship between stock market and the economy.
Businesses produce profits and the profits impact both the GDP and stock values. You can have the profits go closer to zero and GDP still non-zero, due to the other components in GDP, but you cannot have GDP going to a toilet and profits keep going up indefinitely. Thus, GDP forms an upperbound for corporate profits. Generally Market capitalization of the entire economy is a product of GDP, corporate profits as a % of GDP and what investors think the future will be (Price to Earnings ratio).
Properties of a currency
What are the special properties of a currency? Can we use anything as a currency? Can the organization issuing currency print any amount they want?
http://en.wikipedia.org/wiki/Money A currency satisfies 3 purposes
a) Medium of exchange – can you get trade your currency for something else. Almost all currencies are legal tender in their nation. So, if you have any debt in that currency in that nation, you can use it to discharge debt. For example, if I take $10000 from you, I should be able to give $10000 (plus interest) at any time and discharge the debt. However, I cannot legally bound you to discharge my debt in sheep or gold, for example.
US Budget highlights
S&P gets its earnings wrong
Today’s Op-ed makes an interesting case for changing how S&P computes “E” in P/E for the S&P 500 index.
http://online.wsj.com/article/SB123552586347065675.html
Standard & Poor’s recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936.
… Suppose on a given day the only price changes in the S&P 500 are that the largest stock, Exxon-Mobil, rose 10% in price and the smallest stock, Jones Apparel Group, fell 10%. Would S&P report that the S&P 500 was unchanged that day? Of course not. Exxon-Mobil has a market weight of over 5% in the S&P 500, while the weight of Jones Apparel is less than .04%, so that the return on Exxon-Mobil is weighted 1,381 times the return on Jones Apparel. In fact, a 10% rise in Exxon-Mobil’s price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded.
Yet when S&P calculates earnings, these market weights are ignored. If, for example, Exxon-Mobil earned $10 billion while Jones Apparel lost $10 billion, S&P would simply add these earnings together to compute the aggregate earnings of its index, ignoring the vast discrepancy in the relative weights on these firms. Although the average investor holds 1,381 times as much stock in Exxon-Mobil as in Jones Apparel, S&P would say that that portfolio has no earnings and hence an “infinite” P/E ratio. These incorrect calculations are producing an extraordinarily low reported level of earnings, high P/E ratios, and the reported fourth-quarter “loss.”
How to proceed with Citi nationalization
Till this point government stuck to preferred stocks instead of common stocks (that we trade in the market). Preferred stocks are not exactly ownership, because there are no voting rights, and this arrangement between government and the banks is deliberate. Preferreds are more closer to debt than to equity. With today’s announcement, that might change with the government trying to convert its preferred holdings into common stocks. When it holds a majority of common stocks, it would then be defacto nationalization.
http://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.
21st Century debate: Contribution of Computers and Internet to Economic growth after almost a decade into the new century
How come we see the computer revolution everywhere except in the [aggregate] productivity statistics?
- Robert M. Solow, Winner, 1987 Nobel Prize for Economics (Sveriges Riksbank Prize)
Computers, Internet and mobile phones have fundamentally changed our life the last 2 decades. We could do more efficient shopping, connect to a lot more people and be more productive at work. As an engineer who have been a part in developing an Operating system, a search engine and a social networking tool – the three main products of this revolution, I feel they are great things to both build and to use. They make individuals much more productive looking at the micro level. However, looking from an economic point of view and see the Macro picture I’m bogged down with “Show me the money”. Economists of the 1980s and 90s have debated a lot about this and suggested that they may not have caused a lot of economic growth. As this review shows, the economists of late 80s successfully argued that this paradox is due to “mismeasurement, lags, redistribution and mismanagement”.
However, over a long period of time you should see the effect in economic growth, as the indirect effect of the productivity increases reflect in the macro economy. And things have changed since the original “productivity paradox” came, as PCs came into the living room and internet connected the ordinary people to do their mundane stuff in networks originally designed to survive nuclear attacks.So in this decade, have the powerful PCs, Smartphones, Search engines, Facebook led an explosive economic growth? In reopening the debate and looking at the recent data, there still seems to be dismal evidence for the productivity growth from the modern revolution. It is possible that the economy might have reached a saturation as a $10 trillion economy cannot continue to be sprinting like a $1 trillion economy, but still 1.7% annual growth in per-capita income since WWW came seems less. There might be other small causes too. The article concludes with what might be a possible cause for this.
Take a look at the Oil refining companies
The oil prices are going down and it should be bad for all petroleum related companies, right? Well, have you guys looked at the pump prices for gasoline the last 2 months? I took a month vacation in December and when I returned I was shocked to see the price in my gas station rocketed from 1.58 to 2.18 (a shocking 60% up), while the world oil prices are still going down. And in fact, the trend is seen nationally. The gasoline prices have gone up more than 25% since Christmas. So, who is benefitting from this? The answer is – refiners. Their gross margins have gone up from about 10% in December to as high as 50% in January.
Solution to Banking Crisis – Make small banks grow big
With money flocking to Treasuries and public mistrust on tainted institutions, why not create a fresh bank from the scratch, booted with government money? It will not carry too much of baggage and can be innovative with its management and hierarchies, and can do the basic job the banks must do – pool risk by transferring money from retail investors to capital spending in corporation. Today’s WSJ has an article on this.
http://online.wsj.com/article/SB122757211390954799.html
Now, I have another proposal. Identify the small strong banks and give them the money. Surely, there are enough banks that have played within their means with shrewd management. Now, pay enough attention to them and see if you can help few of these smaller banks to grow big. Too much of attention is paid to the failing banks that we might need to switch gear.
Some thoughts on taxation
What is an ideal tax rate? Do you know that the peak tax rate in 1944-45 was 94%? Do you know till 1913 the federal tax rate was below 2%, before the 16th amendment to US constitution gave wide range of powers to congress to tax the citizens? Does tax cuts really inspire growth?
If this is a depression, is it then the end of the world?
Most data points of the current era draw similarity with the great depression – the volatility of the stock market, the fall of the biggest financial institutions and plummeting industrial production can all be compared to only one other even in modern American history – The Great Depression. So, the past one year, I spent time in watching some of the movies that are related to depression that came in 1930s and afterwards. I would have assumed that 1930s movies would be too gloomy, given all what we have read and seen in the latter era. But, majority of of the 60+ famous movies I saw during that era were either normal or positive, but in any case didn’t have a semblance of the gloom even when they touched the wall street crash.
So, is it really the end of the world, if we get into another Great Depression?
Are we done with the down fall yet?
We have been seeing housing and stock markets falling the last few months. So, are we there yet? Is the crisis over?
I don’t think so.
Housing
Here is Shiller’s home price snapshot between 1890-2006. We have fallen a bit since 2006, but we have not fallen anywhere closer to historical levels. Look at how home price zoomed in the last 20 years, and we have a long way to fall to that point.
Stocks
Here is the historic stock price to earnings ratio measure as an average of 10 year corporate profits. This is the classic measurement that says how much value for money you get from your stock investment. This snapshot was taken last year, and current P/E as measured by this chart is around 18, whereas during historical bear markets, P/E fell below 10. So, we are not even down the half way point.
Image from Newyork Times
Energy usage patterns of tomorrow
Couple of interesting graphs from today’s International Energy Agencies’ report:
Peak oil? Nah… But, you cannot keep continuing to rely on crude. Crude production is hitting a peak at the currently producing fields, but other forms of oil production will continue to be going up.
Deloitte’ world economic outlook – summary
Here is the 4th quarter world report from Deloitte. Lots of good stuff on various things that affects global markets (credit crunch, oil prices, currency pegs) with their historical comparisons.
How do Banks create money in Fractional Reserve Banking?
I saw a few videos and articles about how banks create money in fractional reserve and disturbed by the whole tone. They showed this as though something illegal or counterintuitive is happening. But, this is not that controversial and the facts were not spelled out properly. How do banks create money actually? We will see some of Economics basics about these.
Exploding cost of education and medical services
Related ETFs: HHD, APOL, CECO & ESI
Have you ever wondered why your cost of tuition and medical costs keep going up far more than other costs? If yes, you are correct. Here is the research I made on the inflation in tuition, medical services compared with other items in the data from Bureau of Labor Statistics. In this article we will analyze the issue, the causes and give the performance of related indices.
What’s happening with Gold?
Gold had the biggest monthly drop since 1983, last month. It dropped 18% in that month to about $700/ounce (1 troy ounce approximately equals 31 grams). It seems counterintuitive given the fact that crisis generally increases the price of gold, and October is the month of peak credit crisis.
Lending started to get back to normal? What investment choices do you make at this critical intersection?
The last couple of weeks we are seeing a thawing of global credit markets. The credit crisis caused the lenders to be extremely cautious and tighten standards in September. Loans to individuals and corporations with poor credit reduced substantially and banks started hoarding cash. The interest rate spreads between less risky and more risky loans widened substantially. However, recently things are seemingly coming back to normal and most people in the market believe that credit is getting available once again. CalculatedRisk blog writes about some of the progress made in the credit markets recently. Stock markets saw the progress and is having a rally the past 7 days. So, is it time to get back into the markets and start investing again? Should you consider buying more of Financial sector ETFs like XLF and UYG? Well, not so fast.
What is happening with oil and how do we hedge against its price rise?
This article appeared in Seeking Alpha
Oil prices have been steadily going down the last couple of months and a few are wondering how long this will last. The price of oil is around $67/barrel (1 barrel of oil approximately equals 42 US gallons or 159 liters) for December 2008 delivery and this is less than half the price we were seeing in the summer. However, the prices of future deliveries have not fallen that low. The prices for December 2013 contracts (to take oil delivery 5 years from now) are about $90 and this indicates that atleast a few traders believe that the price of the oil will go back up at some point. Let’s analyze what is happening, and see how we can take constructive action to protect us from future oil rise. We suggest two ETFs that might help you make constructive investment decisions based on this.
