Monday, March 27, 2017

How to Interpret the Shape of the Yield Curve

How to Interpret the Shape of the Yield Curve: Historically most recessions in the US are preceded by significant declines in the differential or interest rate spread between the 10-year T-bond and the 3-month Treasury security. Typically, this narrowing in the spread occurs many months before the onset of the recession.

Monday, March 20, 2017

Capital and Interest | Robert P. Murphy

Tariffs and Free Trade

Here is an excellent article titled, America Is Hardly a Bastion of Free Trade, as this is a key excerpt: "Rhetoric has recently trumped reality. It has become a misconceived bit of common “knowledge” that the United States of America is a bastion of free trade. Little could be further from the truth."

The author makes some good points, from an economic analysis standpoint. Tariffs, properly implemented and enforced, have an adverse effect on the market. It displaces scarce resources, and both markets(nations) suffer adversely. Of course, the incentive is in the favor of the domestic producers of the product to rent seek the local Government for the implementation of tariffs.

From a supply and demand analysis, tariffs shrink the supply, yet if demand is constant, the prices of the good rise. Another effect of tariffs: It reduces the number of firms in the marketplace. Since the cost of entry into that said marketplace includes the tariffs, potential firms will seek out other means that require their capital.

Tariffs acts similar to a tax, as the producers, or firms, pay the economic cost for the tax As previously mentioned, it raises the price of the good, but consumers price elasticity may push them to buy substitutes for that good. Once this happens, the substitutes will rise in demand, and the original good would drop in price.

If tariffs did not exist, then more firms would enter the marketplace, providing more options for the consumers. The more options that exist, the prices will fall accordingly. And, substitutes would appear on the marketplace for those consumers that prefer alternatives.

Tuesday, March 14, 2017

What Happens to Bond Funds When Interest Rates Go Up?

Bonds, on average, will decline when interest rates rise. In the capital markets, this is a common inverse relationship. Why?
Back to the fundamentals of Economic thought..
The true notion of interest rates is based on the time preference of consumers in the marketplace: The ratio of prices is based on consumption of goods in the present vs consumption in the future. If this ratio is lower, consumption is preferred in the present, conversely, if higher, then consumption is preferred in the future.
A bond is simply a debt instrument. It allows firms, or Govts, to raise capital, to wit, borrow the money, to expand operations. Investors will purchase these financial instruments to obtain a certain fixed percentage yield from the bond, as this income payout takes place until the maturity of the bond.
Since the bond yield is fixed, as it pays an income stream over time, if the interest rate rises, investors simply want to seek other investment opportunities away from bonds that will yield a better ROI. If the interest rate is lower, the fixed income stream, from the bond, works better, for the investor, in a lower interest rate environment.
In a lowered interest rate environment, capitalists will seek to acquire more equipment, spend more money to invest in their business, expand operations, and etc. This activity includes the intense purchase of bonds, as they are a means of raising capital.
This marvelous ebb and flow interplay between Bonds and interest rates creates arbitrage opportunities for investors, as interest rates rise and fall.
This quick analysis is an introduction into the notion of business cycle theory, as interest rates play a vital role in this process.

Monday, March 6, 2017

Can Yellen Keep the Boom Going?

Can Yellen Keep the Boom Going?: Yellen, like notorious previous Fed chiefs including Strong, Martin, and Greenspan, can now claim success in having prolonged and strengthened an asset price inflation which otherwise may well have been about to enter its severe end phase.

Wednesday, March 1, 2017

Florida's Government Built a Train — And It Didn’t Go Well

Most of these Government sponsored projects, wait, all of them, never make an economic profit. Of course, proponents of these deals will always cite the revenues that the municipalities will earn from these projects. The revenue projections maybe correct, yet these proponents never cite the actual economic cost for these projects.

The tax dollars to underwrite these projects come from the Federal Government, namely, the Dept of Transportation. After those dollars flow to the local municipalities, the locals will have a planning organization to work with the Civil Engineers, and the like, to facilitate the project's creation. Since none of these individuals work for free, the costs mount up just from the planning stage. Include the cost to acquire the materials, and the economic costs continue to rise. Oh yes, there needs to be land to construct the rails for the train....enter eminent domain, hence raising the cost exponentially.

Once the project is completed, behind schedule, on average, the local politicians assume that charging ZERO for the fares, the rail project will make money. Econ 101 tells us that lowering prices will increase demand for that good or service, but in this case, it does not cover the sunk cost of construction. In short, the project continues to lose money, yet all the individuals involved are paid handsomely.

In conclusion, these projects are simply a wealth transfer from the tax payers, to the folks involved in the construction and maintenance of the rail project.

The Article is listed here:

Florida's Government Built a Train — And It Didn’t Go Well: "The state of Florida is well known for many things: beautiful beaches, outrageous headlines, and being the setting for the wacky antics of the Golden Girls."