2018-21 Cryptocurrencies are declining in value

This CNBC article from a few days ago discusses the decline in the price of cryptocurrencies: 80% below the peak at the beginning of the year. It also mentions the issue with a cryptocurrency called tether. The promise of tether is that the issues hold equal amount of US dollars as backing so that one tether is worth one US dollar. The problem is that there has been no independent audit of the company and it is not clear they indeed hold the amount in US dollars they claim. Furthermore, it seems that large quantities of tether were exchanged at various time for bitcoin and there is suspission that this involved price manipulation.

The article summarizes two problems with cryptocurrencies: a) their value is unstable, b) and their setup is opaque.

ad a) the value of crytocurrencies is very unstable, and so it is not useful to buy goods and services. For example, an item that cost 1 bitcoin in January costs now 5 bitcoins. That is the rate of currency depreciation faster than any this year. 

ad b) there is a lot of fraud, or suspected fraud in the cryptocurrency markets. In contrast, there is no fraud with regular currencies. Furthermore, their value is quite stable: as we have seen, over 100 years on the average the Canadian dollar lost 3% per year; in the last 20 years the loss was between 1% and 3% per year, and close to 2% per year.

Unless these, and other problems, are resolved, cryptocurrencies are not going to replace actual currencies.

2018-20 Imperfect inflation target may need overhaul: Bank of Canada

According to Carolyn Wilkins, the Senior Deputy Governor of the Bank of Canada and Laurier BA in economics gradate, the inflation targeting framework is going to be revised
The Bank is considering a few options

• setting a higher target at time of economic stress
• longer-range inflation target
• shifting to targeting growth
• introducing dual mandate: targeting both inflation and GDP growth or employment.

Problem: in the current environment of low interest rates, the Bank may not have enough room to maneuver if the next recession hits. Before the Great Recession the policy rate was 4.25%; now it is only 1.75%.

Additional tools of monetary policy:

• negative interest rates
• purchasing long-term assets.

The second approach is called quantitative easing. It raises the price of long-term assets and lowers long-term interest rates.

In preparation for the renewal of the Bank framework in 2021, the Bank will look at alternative approaches and will try to see if any are better.

 

2018-19 China Rules

There is a cycle of articles in the New York Times on the growth of China. Today's article shows how fast it grew, and makes a point that the US dream: becoming well of even when born poor - is more likely in China than in the US.
The comparisons below use exchange rates. If we used PPP exchange rates, the picture would be a bit different

Income per capita, PPP exchange rates
US:     $59 500
China: $16 700
Income per capita, Nominal exchange rates
US:     $59500
China  $  8800

Where we stand with the Chinese opportunity:
Proportion of exports: biggest customer and China
Canada           US 77%, China 4.3%
Finland Germany 14%, China 5.7%
Australia:  China 33.5%
Germany:        US 8.8%, China 6.8%
UK:              US 13.2%, China 4.8%
US:        Canada 18.3%, China 8.4%

2018-18 Past performance is no guarantee of future results

Yesterday there was a mid-term election in the US.
I do not know how it ended when I am writing this, but it does not matter about what follows.
When people look at stock markets, they try to learn from history. Here is an interesting bit
Following every mid-term election since WWII, stock prices went up, a lot:
"The numbers tell the story. Since 1946, in years with midterm elections, the Standard & Poor’s 500-stock index has gained a median of 18.4 percent in the nine-month period from Sept. 30, just ahead of voting, through June 30 of the following year, according to data compiled by Ned Davis Research. In that same period in nonvoting years, the index gained 4.9 percent."

Check at the end of June if this happened again.

2018-17 Unemployment

An excellent, and timely, article appeared in Friday's Wall Street Journal. It covers our discussion of the labour market in chapter 7 and unemployment in chapter 8. I am not sure if you can access it, so here is a fairly detailed summary
1.  "Strong hiring and low unemployment are delivering U.S. workers their best pay raises in nearly a decade."
High demand, low supply = increase in the real wage.

What happened last month? Employment increased by 250 000 - while only 188 000 was expected. Nominal wages increased by 3.1%, and unemployment remained unchanged at 3.7%.

Why did employment increase but unemployment did not fall?

An economists remarked that more people join the labour market as wages rise. Indeed, labour force participation is the highest since 2010. It is still lower than before the Great Recession. It is not clear whether decline in labour force participation is permanent.

Is the increase of unemployment just that? Not necessarily. In September hurricane Florence hit, and hiring in September was weak. So it may be that some of the jobs increase is delayed hiring from September.

Low - skilled workers seem to benefit from the strong labour market. Since 2010:

- weakly wages for high school dropouts increased 23.4%

- wage growth for college graduates was 14.4%

Ok, so are workers better off?

Nominal wages do not tell you enough. We need to compare it with the inflation rate.

Inflation this year is around 2%. So this year real wages increased by over 1%

The increase in prices (you can calculate it from data here between January 1, 2010 and January 1, 2017 was 14.2%. Adding the inflation since January 2017 we can conclude that while real wages of high-school dropouts have increased, those of college graduates fell.

Why is the labour market in such a good shape? According to Nomura Securities, it is because of fiscal stimulus: tax cuts introduced last year. Nomura expects hiring to slow down in the future.

The strong labour market leads to expectations of interest rate increases by the FED. We will talk about it in a couple of weeks.

But wage growth is slow compared to a similar period of low inflation in early 2000s and late 1960s. Reason: perhaps slow productivity growth.