Archive for the 'Stock markets' Category

Dec 03 2008

How the weak British Pound made my Himalayan ski fantasy a reality!

BBC NEWS | Business | Sterling rebounds from sharp fall

Americans, are you planning a vacation anytime soon? If so, why not visit LOVELY Great Britain! Why, you ask, would ANYONE want to visit the UK in during this wet, cold season? Well, here’s why I’m buying British this year:

I recently booked a Himalayan ski tour in Indian Kashmir organized by a British company. The price? 1400 GBP, which only three months ago was the equivalent of $2800 US! Today, with the newly weak British Pound, my ski trip to India will only cost me $2100*. In the span of just a few months, the dollar price of this amazing Himalayan ski adventure has fallen by $700! Naturally, Americans like myself now have an incentive to buy British!

POUND STERLING v UNITED STATES DOLLAR: December 2007 – December 2008

Chart

What has caused the slide of the Pound in recent months? Here’s the complicated answer:

“The environment of very weak sentiment regarding the domestic economic picture and potential rate cuts alongside equity volatility is keeping sterling very much on the defensive,” said Jeremy Stretch, strategist at Rabobank.

Strategists get paid lots of money to say stuff that 99% of people don’t understand the first time they read it. I get paid very little money to help those people better understand it, specifically, my students. Here’s what Mr. Stretch is trying to say:

A weak economy in Great Britain leads foreign investors to believe that the Bank of England may lower interest rates in the near future. Why would Britain’s central bank lower interest rates? Because lower interest rates create an incentive for consumers and businesses to take out loans from banks and spend money in the economy, which should create new jobs and help prevent a recession in the UK.

If the bank does lower interest rates, this puts “the sterling on the defensive”, in other words, leads to a weakening of the British Pound, as foreign investors looking to put their money where they can earn a decent return on it will be less likely to save in the UK when interest rates fall. “Equity volatility” is a fancy way of saying British stocks have been performing poorly, decreasing their attraction to foreign investors. When saving in British banks becomes less attractive due to expected interest rate cuts, and buying British stocks becomes risky due to their volatility, investors turn to the safest investment in the world, which is… can you guess? United States government bonds!

So how’s this all relate to exchange rates, you ask? Let’s leave this question for readers to answer and discuss in the comments:

Discussion Questions:

  1. How does the expected drop in British interest rates affect the demand for British pounds on foreign exchange markets? What does this do to the value of the pound?
  2. Why does the stability and safety of US government bonds lead to a strengthening of the dollar in times of global economic slowdowns?
  3. How has the recession in the United States further contributed to the weakening of the British pound?


*In fact, I’m too poor to take a ski trip to India this year, I will have to settle for the puny peaks here in the Swiss Alps!

20 responses so far

Oct 17 2008

Advice from an economic oracle – buy American stocks now!

Op-Ed Contributor – Buy American. I Am. – NYTimes.com

So Wall Street has recently experienced its worst shocks since the great depression. Every day the Dow Jones is like a roller coaster, DOWN 800 points, then  UP 500 points, then DOWN 200 followed by another rally of 600! In just three weeks the Dow has gone from 11,500 to below 900 points. Surely, the wise thing to do is get OUT of the stock market, right? WRONG! At least, so says the richest man in the world, Warren Buffet, someone who should know a thing or two about smart investing.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Discussion Questions:

  1. Why does holding cash seem like the smart thing to do during periods of volatile stock prices like the last month or so? Why does Mr. Buffet think that holding cash is NOT so smart?
  2. Mr. Buffet’s advice is counter-intuitive to some. Buying more of something that is falling in value (American stocks) may appear unwise… but what is Buffet’s rationale for why buying now may in fact be the smartest thing for an investor to do?
  3. Does the behavior of investors on the stock market reflect the behavior of consumers in a typical product market? In other words, do the laws of supply and demand apply to the stock market? Discuss…

12 responses so far

Sep 17 2008

So the stock markets are crashing, what’s the big deal?

How Does the Stock Market Effect The Economy? | Economics Blog

Well, a few things… Generally, the fluctuations of the stock market do not necessarily bode ill for the whole economy. Likewise, global fluctuations of stock markets does not mean there is a recession on the horizon. In fact, an old adage says that “stock markets have predicted ten out of the last three recessions.” In other words, a slump in global markets does not always precipitate a slump in the world’s economy. Here’s some impacts the market crashes of the last few days may have, however, explained nicely by Richard Pettinger, an economics teacher in the UK:

Economic Effects of Stock Market

1. Wealth Effect: The first impact is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short term losses.

2. Effect on Pensions: Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.

3. Confidence: Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourage people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.

4. Investment: Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult.

7 responses so far

Jan 22 2008

“Black Monday”

FT.com / World – Panic sparks plunge in global markets

While Americans enjoyed a national holiday in honor of Martin Luther King yesterday, its stock markets remained closed. Elsewhere, however, stock markets from Asia to India to Europe to the UK experienced the worst one-day fall since 9/11. London’s FTSE fell more on Monday than it had since 1983. In Germany the market fell 7.2%. Here in Asia the picture was equally as dismal:

In Asia, Indian shares on Monday ended 7.4 per cent lower, and trading was halted in Mumbai after the market fell 9.8 per cent in the opening minutes; Hong Kong closed down 5.5 per cent; and Japan’s Nikkei average slid nearly 4 per cent, falling a further 4.4 per cent by midday on Tuesday while South Korea’s Kospi index lost a further 3.9 per cent. In the morning session on Tuesday, Hong Kong skidded another 8 per cent while Shanghai was down over 4 per cent. Indonesian shares sank 8 per cent in morning action.

In one day, literally trillions of dollars was lost in the value of the world’s stock markets; many are already referring to yesterday as Black Monday.

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2 responses so far