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.