2016-30. Dangers of Money Illusion

On Monday we talked about money illusion as one of the cost of inflation. If people have money illusion and there is inflation, they make suboptimal choices.

I have just come across a paper that provides evidence:

Money Illusion and Household Finance" 
CEPR Discussion Paper No. DP11643

THOMAS ALEXANDER STEPHENS, University of Vienna – Department of Economics
Email: thomas-alexander.stephens@univie.ac.at
JEAN-ROBERT TYRAN, University of Vienna, University of Copenhagen - Department of Economics, Centre for Economic Policy Research (CEPR)
Email: jean-robert.tyran@univie.ac.at

We elicit money illusion and match it with financial and sociodemographic data from official registers on a quasi-representative sample of the Danish population. We find that people who are more prone to money illusion hold more of their gross wealth in nominal assets, including bank deposits and bonds, and less in real assets, including real estate and stocks. This bias is robust to controls for education, income, cognitive ability and other relevant characteristics. We further find that money illusion is a costly bias: 10-year portfolio returns are about 10 percentage points lower for individuals with high money illusion.

2016-29 Monetary policy in Canada, US and EU

1. In Canada "Bank of Canada Governor Stephen Poloz suggested that continued uncertainties surrounding Canada’s economic outlook have set the bar high for an interest rate change, as the central bank approaches its deliberations for next week’s rate decision."

Next week the Governing Council will be making the policy decision, as we discussed on Monday. The statment by the governor, above, suggests they will not change the interest rate. If anything, they can lower it.

Note that the governor mentions current economic outlook. The actual decision is made on the basis of expectations of inflation (the goal of the Bank) 6-8 quarters into the future (since the monetary policy works with a lag). So the talk about " uncertainties  surrounding Canada's economic outlook" stands in for: given our expectations, in 6-8 quarters inflation will not be a problem.

Note also that: "The speech was the last word from the Bank of Canada Governor prior to the bank’s next interest rate announcement, on Dec. 7. The bank always observes a “blackout” period for one week prior to its rate decisions, when no senior officials at the bank speak publicly."

This means the Bank is careful not to affect the markets ahead of the policy decision

In Brussels "European Central Bank President Mario Draghi issued a blunt warning over the risks that low interest rates [...]

The warning underlines the dearth of policy choices central banks face as they seek to further stimulate their economies after years of aggressive easy-money policies.

Speaking at the European Parliament in Brussels on Monday, Mr. Draghi said a lengthy period of low rates had created “fertile terrain” for financial-market risks, including a buildup of debt and excessive risk-taking."

In Washington "Minutes from the Fed’s November meeting, released Wednesday after the usual three-week lag, indicated officials were looking for signs of an improving economy before increasing rates. Since then, the U.S. has seen a steady stream of robust economic news and a brighter consumer outlook in the wake of Donald Trump’s election.

​With the outcome of the presidential election settled and employment and inflation on the rise, economists and market participants almost overwhelmingly expect the Fed to raise rates in three weeks’ time."

US economy is in good shape and the central bank is expected to increase interest rates. Note that the FED releases the minutes of the meeting three weeks after it has taken place. This is transparency, but a delayed one.

2016-28 Deficits, deficits, as far as the eye can see

According to Finance Canada, in the first half of 2016 the Federal government had a deficit of $7.8 billion, compared with a surplus of $1.6 billion in the first half of 2015. This is a deterioration of $9.4 billion, almost equal to the increase in program spending of $8.9 billion. In addition, interest on Federal debt fell by $1.4 billion. This means government expenditures increased by $7.5 billion (8.9-1.4) and so government revenue fell by $1.9 billion (9.4-7.5).

Here is the recent history: 

"The federal government posted a $1.9-billion surplus in 2014-15 after six straight years of deficits. The final bottom line for 2015-16 was a small deficit of $987-million."

And here is the near future:

"Nov. 1 fiscal update projected a $25.1-billion deficit for the current 2016-17 fiscal year. The deficit has been forecast to reach $27.8-billion the next year before shrinking gradually to $14.6-billion by 2021-22. Mr. Morneau has not provided a timeline for when the federal government will return to a balanced budget."

And here is what the government promised a year ago:

"The party’s 2015 campaign platform promised “modest short-term deficits of less than $10-billion in each of the next two fiscal years” and that after that “the deficit will decline and our investment plan will return Canada to a balanced budget in 2019.” " 

Conclusions: 

1. You should vote, as you will be paying for today's deficits

2. Voting alone is not sufficient. You need to become politically active, and hold the government to its promises.

2016-27 President elect and our foreign trade

As you probably know by now, US president-elect is anti free trade. He campained on revising NAFTA , which he called the worst agreement ever.

His main concern is Mexico. A lot of US firms moved there to take advantage of  cheap labour. As a result, US trade deficit with Mexico is 60 billion dollars. The deficit with Canada is $15 billion.

So are we safe? No. Here is a list of the main problems: "Any talks with Canada, which had a trade agreement with the U.S. that predates Nafta, would likely bring up thorny issues that have long dogged relations, including softwood lumber imports from British Columbia, Canada’s support for its dairy farmers and the labeling of beef in the U.S. produced from cattle born or raised in Canada."

2016-26 Economic effects of Trump's victory so far

Bonds are falling (i.e. interest rates are increasing) and stock prices are rising

"More than $1-trillion was wiped off the value of bonds around the world this week as U.S. President-elect Donald Trump’s policies are seen boosting spending and quickening inflation."
"Global stocks gained $1.3-trillion in the same period"

So what is going on? Markets believe that Trump will deliver on the following promisses:
- tax cuts
- infrastructure spending
- reducing regulation

The first two imply that inflation will increase. Higher expected inflation implies higher nominal interest rates, i.e. lower bond prices.
The first two also imply that the economy will improve in the short to medium run. This means the FED will increase interest rates earlier than expected, and prices of bonds fall.
Reduction in regulation is likely to lead to higher profits and so stock prices rise.

What will happen long - term is difficult to say. US will have larger deficits and debt,which may lead to slower growth and still higher interest rates.

2016-25 Good economic news from the US

October sales numbers just became available and they are very good: retail sales were almost 1% higher than in September. As consumption in the US is about 70% of GDP, this means that the US economy is in good shape.

We can fit it into the IS-IC model we will be analyzing. Higher output in the US means that our exports are likely to significantly increase, as we will discuss today. This means that the IS curve will shift to the right, raising Canadian output (unless there are changes in the IC curve).

2016-24 Messing up with the monetary system

Last week,  the largest Indian notes were declared to no longer be "legal tender". The large notes, 500 and 1000 rupee notes, constituted 86% of cash in India. The goal of the operation was to reduce corruption.

What is happening now?

• people are running from one cash machine to another to get 100 rupee notes (largest available) with limited succes
• real estate transactions, which are often made in cash, are at a standstill
• low denomination notes are in short supply, with households hording small notes. This means lower spending
• potential hit to growth is large: "UBS economists wrote Tuesday that if cash supplies remain in disarray for another three weeks, as Finance Minister Arun Jaitley has suggested, 1.2 percentage points could be shaved off India’s economic growth, which at more than 7% is presently the fastest among major nations."[...]"“Everything is stopped right now,” said Sunny Narang, who helps run a steel factory near Delhi."
• What happens when cash in short supply? Barter: "In the village of Dalan Chapra, deep in India’s northern hinterland, the cash crunch is forcing residents to return to the original cashless transaction: barter. They are swapping corn and rice for lentils and vegetables, a practice once known only among the village’s poorest."
• Here are some doubts on whether the operation will be successful: "Whether forcing people to turn in their big bills once will deter them from concealing their earnings in the future is an open question. In India, wealth generated outside the taxman’s purview is also stored in property, business assets and precious metals and gems."

2016-23 meanwhile in Canada

As we have already discussed (post 2016-10) Canada is, similarly, planning a fiscal stimulus. This is "Mr. Trudeau’s plan to jump-start economic growth by running a budget deficit to fund sweeping spending on roads, schools, bridges, hospitals and other infrastructure."

So, as it turns out, our liberal government has some of the same plans as the Mr. Trump. In the Canadian case, it was called a bold move, observed by other countries. Perhaps this inspired the president - elect.

2016-22 Trump's economic policy

This article discusses what policies the president - elect may pursue. Here are some quotations

"He wants tax cuts and increased spending on infrastructure. In other words more stimulus to the economy from the government budget."

"The aftermath of the financial crisis was an important part of the background to Mr Trump's election success. The subsequent recovery has not been particularly strong. Many Americans, especially in former industrial areas, have felt that it has passed them by.

Most of the work in terms of economic policy to support that recovery has been done by the US Federal Reserve, the country's central bank."[...]"The Fed has maintained a policy of ultra-low interest rates, keeping a key rate for lending between banks rates practically zero until a year ago. That tends to keep rates low across the economy. Even now that interest rate which the Fed targets has been raised only once since the crisis and is just a little above zero.[...]The Fed also ran a programme of "quantitative easing", buying financial assets with newly-created money. That may have helped add to the downward pressure on interest rates paid by businesses and households."

"But what about support from the government budget, or fiscal policy? Tax cuts and spending can be used to provide economic stimulus. It has often been done in the past in the US and many other countries. President Obama did do that in his first term, with the American Recovery and Reinvestment Act in 2009, a programme worth $800 billion."

"[...]more recently, Fed officials are thought to have believed that more stimulus from fiscal policy (taxes and government spending) would have been useful."

"Mr Trump's plans so far suggest a stimulus to the US economy from the Federal government budget. That means the Federal Reserve is likely to feel less need to continue providing its own stimulus in the form of its exceptionally low interest rates."

"Apart from anything else, higher Fed rates would give the central bank more ammunition - more scope to cut rates later - when the US economy has another downturn, as it surely will sooner or later."

A summary

• The recovery form the Great Recession was weak. The main economic policy was the low interest rates maintained by the Federal Reserve.
• Trump's plans include tax cuts and spending on infrastructure. 
• That is a traditional fiscal policy to stimulate the economy. For example, in 2009 in the US there was a fiscal program with extra spending of $800 billion, or around 5% of GDP.
• The fiscal stimulus will reduce the need for low interest rates and will allow the FED to start raising interest rates, perhaps as early as the next policy meeting, 13-14 December.
• Higher interest rates now will allow the use of monetary policy in the future, when a new recession comes.

2016-21 Trump's win and financial markets

All predictions were that Clinton would win. As I am writing this (11pm Tuesday) it seems that the result is a surprise: it looks like Trump will win the election. Florida has just been called for Trump.

How do markets react to surprise? We have seen before that markets view Trump's win negatively. And indeed:

• Asian markets fell (except for China)
• Dow Jones futures fell 4% (700 points)
• Which country is expected to lose the most if Trump wins? Mexico. And, indeed: "The Mexican peso has plunged more than 10% to an all-time low"

What is the problem? Uncertainty. Here is a comment from the CNN:

"Investors turned to assets that are seen as safer bets in times of uncertainty. Gold jumped more than 2% and the Japanese yen surged more than 2% against the dollar."

What about the Canadian dollar? It should appreciate, especially if Americans will now move to Canada. You know: they will be selling assets in the US and buying assets in Canada.

We will see tomorrow

2016-20 A successful money manager

David Swensen has been running Yale endowment fund for a long time. This article tells his story and describes his approach. It is worth reading, especially if you aspire to have a career in finance.

2016-19 It is not over until it is over

No, it is not about game 7 of the World Series
It is about the Comprehensive Economic and Trade Agreement (CETA).
Now in the Netherlands they are demanding a referendum 
And they may get their wish. And kill the agreement
Here is one objection:
“TTIP and CETA are old-school trade agreements where the interests of companies are more important than the people who live in those countries,” 

2016-18 Canada's housing bubble

House prices in Canada have been increasing rapidly, in particular in Vancouver and Toronto.
This article from McLean's shows that, in comparison with the house bubble in the US which preceded the Great Recession, it looks pretty bad.

NOTE: THE ARTICLE IS AVAILABLE AND YOU SHOULD READ THE ARTICLE, NOT JUST MY BRIEF COMMENT

2016-17 It is all about milk

Here is an article from the NYT: How Dairy Farmers in Belgium Held Up a Big E.U. Trade Deal.
It describes opposition of Wallonian dairy farmers to CETA: the Comprehensive Economic Trade Agreement between Canada and EU.
What is interesting about it? The agreement will have little effect on dairy farmers in Belgium, since Canadian dairy is protected and so Canadian producers are not competitive. Also, Canada accounts for 1/500th of Wallonia trade.
So what is going on? There seems to be a significant trend away from free trade. The opposition of Wallonia is one manifestation of it.

2016-16 Since we talked about Apple products and Brexit:

As you know, the pound has been falling in value since the Brexit vote. We discussed how quickly the lower exchange rate gets reflected in prices. Well, Apple just did this. They introduced a new product, and priced it higher in the UK than in the US: 1750 pounds=over $2100, in the US $1800 (by the way, the price is Canada is CAD2300; so does the law of one price approximately hold)?
But they also took the opportunity to raise prices of their old products.
Bottom line: changes in exchange rate are not reflected right away in prices.

2016-15 News

1. CETA - still no progress
2. Skilled migrants go mostly to just four countries: US, UK, Canada and ASustralia.
3. For the first time, among highly skilled migrants the number of females exceeded the number of males.
4. The World Bank has just published a report "Doing Business 2017".
It provides information on various aspects of the ease fo doing business around the world.
Interested? It is free; you can download it here. Read it after the mid-term - it is 350 pages long.
Here are the rankings. The top countries are the usual suspects: New Zealand, Singapore, Denmark, Hong Kong, Korea, Norway, United Kingdom, United States, Sweden and FYROM (Macedonia)

Canada is 22nd, just after such powerhouses as Iceland and Lithuania.
Canada is ranked 2nd in the ease of opening a business, but you may need a generator: it is 108th in getting electricity (just after Kenya and the Republic of Micronesia). We do not do well in contract enforcement (112th - Somalia is ranked a bit ahead of us). So there are opportunities for improvement.

5. Austria has just sold bonds: maturity in 2023, yield (interest rate) -0.191%
maturity in 2086: yield 1.53%. The second was record length for sovereign bonds. The buyer will see the money tripled in 70 years.

2016-14 CETA

Canada's trade agreement with the UE - CETA - is in jeopardy
(by the way, I am writing it on Sunday but it is tomorrow's news today: the article is dated Monday 24 October 2016 01.34)
CETA - the Comprehensive Economic and Trade Agreement - has been negotiated for the last 7 years. The summit at which it was to be signed was planned for Thursday. But Wallonia - the French-speaking southern part of Belgium - said no. On the EU side the agreement must be signed by all 28 countries. Belgium is divided into 3 regions and, according to Belgian constitution, all three must agree for Belgium to sign. And Wallonia does not. It wants more protection for its farmers (obviously) and less power for the multinationals (obviously again) plus a few more things.
Here are the populations:
Wallonia: 3.5 million
Canada: 36 million
EU: 500 million.
But a rule is a rule. The visit by Trudeau on Thursday is in question. In latest news Walonia was given an ultimatum by the European commission. Agree by Monday evening, or the visit by Trudeau is cancelled.
Guess what they said.
This is part of a general move against globalization (see Brexit, Trump). I suspect that, quietly, some EU countries are not unhappy. If EU cannot agree with a friendly, benign nation such as Canada, who can they agree with? EU is facing negotiations with Britain about Brexit. The fate of CETA shows that it may not be easy, giving the EU strong negotiating position
There is (almost) always a silver lining.

No silver lining in our trade numbers below

Canada's Exports
United States	73%	76%
European Union	9%	8%
China	4%	4%
Mexico	2%	2%
Canada's Imports
United States	63%	66%
European Union	10%	10%
China	6%	7%
Mexico	3%	3%

How many times bigger to the US?

Exports	2010	2015
European Union	7.9	10.1
China	20.9	18.5
ROW	8.0	8.8
Imports	2010	2015
European Union	6.4	6.8
China	9.8	9.3
ROW	5.7	7.4

Roughly speaking, US, EU and China + Mexico are each around 25% of the world economy, So if foreign trade intensity was the same, all numbers in the last table would be 1. 

Not only is our intensity of trade with anyone but US very small, but except for China it is declining.

2016-13 Bank of Canada interest rate decision

will be announced today, together with Monetary Policy Report.
The Bank of Canada makes an interest rate decision 8 times a year, and publishes Monetary Policy Report four times a year.The interest rate is a short - term rate at which banks lend and borrow money from each over overnight. The idea is that this rate determines the cost of funds to banks, and affects other interest rates.
The Bank is expected to keep the rate unchanged.
We will study the policy of the bank of Canada later in the course.

2016-12 Back from the UK

Over the break I was in London. UK was consumed by a dispute between Unilever and Tesco. Because of depreciating pound, Unilever, a big producer of foodstuffs wanted to raise wholesale prices. Tesco, the biggest supermarket chain, rejected the increase and stopped ordering from Unilever.
The result: a tragedy. Just look at this picture:

Only one jar of Marmite!!!!!!

Now here is the exchange rate since the brexit vote

Here is a story of an Englishman. What is wrong with his economic reasoning?

Philip Walker spreads Marmite on his daily crumpet and stockpiles jars of the yeast spread. He’s a fan, and he’s upset at plans to raise the price of this icon of the British breakfast table.

Love it or hate it, Marmite has become the most visible sign yet of Britain’s decision to leave the European Union after consumer giant Unilever sought to raise wholesale prices for its products by a reported 10% following a sharp drop in the pound.

Tesco, the U.K.’s biggest supermarket chain, has rejected the increase and removed many Unilever products from its website. #Marmitegate was not far behind.

“I am more angry at Unilever than I am at Tesco,” said Walker, a 43-year-old regional manager for St. John Ambulance. “It seems Unilever is using Brexit as an excuse to hold Tesco customers to ransom.”

2016-11 Since we are talking about exchange rates

here is an article on the falling pound
The pound is falling because of Brexit: the vote in a British referendum in June to leave the European Union.
The pound lost 13% since the vote and 20% in one year compared to the US dollar and 20% in a year in terms of the Euro.
What are the consequences? Since prices changed little during this period, the real exchange rate of the pound fell and so

• foreign holidays for Brits became more expensive
• holidays in Britain became cheaper

The article also says that imported goods will cost more. Sure, but it may take some time. It depends on the exchange rate pass-through: the speed with which changes in the real exchange rate are reflected in prices. Initially, sellers try to keep prices from increasing too much by reducing profits.

Similarly, British goods will become cheaper abroad, but it will take some time: sellers will happily book higher profits. 

2016-10 Canada’s Big Bet on Stimulus Draws Global Attention

In yesterday's WSJ there was a long article on Canada's stimulus program.
Some background:

• after the Great Recession, growth in most developed countries has been slow. In Canada in recent years the additional break on growth was the decline in resource prices
• to get out of recession, most countries relied on monetary policy.  Central banks reduce interest rates to near zero. Interest rates remained at record lows ever since. This means that monetary policy is not as useful as it once was, as interest rates cannot be reduced much.

We will be discussing it in more detail at the end of the course (chapter 10)

• As debts increased during the recession and its aftermath, there was little stimulus spending. Many countries introduced austerity policies to reduce deficits.

We will be discussing it in more detail at the end of the course (chapter 11)

• In Canada, there was a significant increase in fiscal spending in 2009-2010 ($47 billion).
• With the exception of Japan, few countries are engaged in fiscal stimulus.
• Unlike other countries, the new Canadian  government embarked on significant stimulus spending: $10 billion a year for  10 years. A big portion will be on infrastructure
• Why such a long horizon? Two reasons:

- Canada is in for a long period of slow growth. So it needs a long period of fical stimulus;
- a long horizon will allow to choose good projects;

• Other countries are looking at how things would work in Canada. Interest rates are at record low, so it is a good time for the government to borrow to stimulate the economy.

2016-09 The US presidential debate

Since we are not too serious today, here is an interesting article on how to figure out the financial market's assessment of the presidential debate on Monday.
Easy. Just look at the exchange rate of the Mexican peso.

• if Mr. Trump becomes the president, he will likely do some things that would hurt the Mexican economy. While the famous wall is unlikely, he can repudiate NAFTA and do other things which are hard to predict, but which may be detrimental to the economy of Mexico
• If Ms. Clinton wins, this will not happen.

After the debate, the Mexican peso appreciated. This means the FOREX traders thought Trump lost the debate and his chances of winning fell.

Remember post 2016-02? It stressed that markets respond to unexpected news. As soon as new information arrives about future events, markets react. So if the debate decided the outcome of the election, all changes would have happened now, and none at the time of the election. But of course the outcome is still uncertain.

Let us wait for the second debate.

2016-08 A rare bird - bank CEO penalized

The scandal at Wells Fargo, considered by many the best US bank, involved employees opening accounts, and issuing credit cards to customers without customers asking for it. Why did they do it? Because they were given high targets on account/credit card openings. So they faked it, "met" the targets and received bonuses. As a result, the bank fired 5300 employees. 
What is unusual is that the CEO of the bank had part of his compensation clawed back. Not a small part: he lost 40 million dollars, a quarter of what he earned during his almost 35 years at the bank.
What was happening with banking scandals before? A bank would agree to pay a penalty for malfeasance, without admitting guilt. So, in effect, the executives would have been rewarded for malfeasance through the bonuses they received, and shareholders paid the price since any penalty imposed at a bank would be reflected in its share prices.
So the executives got the upside and none of the downsides.
To reflect this, a term was coined: banskters. Unlike gangsters, who eventually are caught and sent to jail, banksters are not.
Hence the song: Damn It Feels Good To Be A Bangsta.
For more details, see post 2014-20.

2016-07 What did FED do last week

As expected, the FED did not change the interest rate but issued a guidance to what it would do in the future:

The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives.

As the author argues, there will be no change next time the FED meets, as this is one week before the Presidential election. The central bank cannot make an impression of being partisan.

2016-06 Inflation rate falling

As in many other countries, inflation in Canada is declining. While the goal is as close as feasible to 2%, and between 1% and 3%, the inflation rate is only 1.1% and decreasing.
Not a huge problem, but the Bank of Canada is unlikely to increase interest rates in the near future.

2016-05 The strange world of negative interest rates

The Bank of Japan announced a new policy today. Faced with persistent deflation (i.e. falling prices) it announced the goal for monetary policy will be keeping the return on 10 year bond equal to zero. The response was immediate: the return on a 10-year bond went from -0.06% to -0.03%.
Until now, the main tool of Japanese monetary policy was through widespread asset purchases. 
Here is a graph from the WSJ on how much they were buying:

2016-04 Is US unemployment rate getting too low?

As you have seen in the first year course, monetary policy is, in principle, simple. If the central bank predicts  inflation will rise, it raises interest rates and vice versa. In practice, of course, it is much more complicated. This article discusses what the FED may do in the next meeting . Its policy-making body, FOMC (Federal Open Market Committee) is holding a meeting tomorrow and on Wednesday.
So what is happening? With interest rates at record low, the US economy has been growing reasonably well and the rate of unemployment is now 4.9%. This means that it is near the so called "natural rate of unemployment" - a rate below which unemployment is so low that it leads to increasing inflation.

The other factors they will be looking at are:

• They say some measures of labor market slack suggest there are still gaps to be closed. The share of prime-age workers participating in the labor force—those 25 to 54 years old—is still below where it was before the crisis, at 81.3% in August, compared with 82.9% in August 2007.

• At the same time, the Fed’s preferred inflation gauge continues to run below its 2% objective, and inflation expectations have softened.

Below is a graph of what happened in the past.

So perhaps unemployment is still not too low, and in any case there are no signs that inflation will be increasing in the near future.

On Wednesday (unfortunately after class) we will know what they have done.

2016-03 Mylan's executive compensation

Mylan is a company in the news. Over the last several years it raised the price of epipen - the life-saving injector used in allergy attacks - from $100 to $600
Guess where the money went
Even the readers of the Wall Street Journal are incenced

2016-02 Interest rates and stock prices

Here is an article that makes some useful points about the relationship between interest rates and stock prices, and the effect of the US central bank (FED) on the world

1.Broader sentiment has swung alongside speculation over the U.S. Federal Reserve’s upcoming rate decisions

This is the second point. The FED will make its monetary policy decision next week. The main element is the short-term interest rate. Some people say it should be increases, some that it should stay unchanged.

2. Rates that remain close to ultra-low levels established during the financial crisis have helped to sustain the bull market in stocks.

Stingy bond yields have made stocks more attractive by comparison, while cheap money has encouraged investors to take on risk in general.

In other words: since 2008, interest rates have been very low. This led to low returns on bonds, making stocks relatively more attractive, and leading to a bull market in bonds.

3. Fuelling the current uncertainty are equity valuations that appear high relative to history, but are difficult to value at a time when interest rates, by many measures, have never been lower.

The problem with assessing the situation is that it wi without precedent. Yes, shares are expensive. But interest rates are at record lows. So it is hare to figure out whether shares are too expensive, too cheap or priced just right.

One thing for certain: if the FED unexpectedly increases the interest rate, share prices will fall.

Think about why the "unexpectedly" matters. What would happen with stock prices if everyone expected an interest rate increase and  the FED would, indeed, increase interest rates?

2016-01. A 14 Billion dollar question.

While (at least some of) you are getting excited about the unveiling of new Apple products,  in other news the European Union ordered Apple to pay Ireland USD14 billion in past taxes. It is a record amount. The Bloomberg article tells you everything you may want to know about the case, so you should read it.

What is going on? Apple is making a ton of profits. Unlike many other companies, thea very large portion of profits is attributable not to what Apple produces, but to its intellectual property. That allows Apple to book profits more or less wherever it wants. So all profits from European sales were booked in Ireland, which has a very low tax rate on profits: only 12.5%, as opposed to 35% in the US.

Apparently this was not enough. So Apple created a "head office" which existed only on paper but to which Apple attributed most of its profits. The neat trick was that the "head office" was not subject to Irish tax. This was a special arrangement between Apple and the Irish tax authority which was not available to other companies. By EU rules, all companies must be treated the same. This rule was broken by the special agreement hence the order for Apple to pay what it saved compared to a situation in which it would have been treated as any other company.

According to reports, Apple rarely paid more than 1% of its profits in taxes, and one year it paid 0.01%. How much is that? Imagine that your income is already above the tax-free amount and, in your summer job, you get $10 000. If your tax rate had been 0.01%,  you would have paid...

Hey, I am not going to do the hard work for you. One thing I want to teach you in this course is doing some arithmetic in your head. Calculating 0.01% of something is not obvious. Do it yourself.

Answer: not a lot.

Here is the second question: someone tells Apple to give you 14 billion dollars. What do you do?
Well, if you are the Irish government, you go to court in order not to receive it. Go figure. Seriously, try to figure out why they would do it.