Full Money Market

Posts Tagged ‘economy’

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The second lesson of two on interest rates, why they are so important to the stock market and to traders and investors in the stock, futures, and forex markets with an introduction to the Federal Reserve.

In yesterday’s lesson we began our discussion on Monetary Policy with a look at one of its primary components, interest rates. In today’s lesson we are going to continue this discussion with another look at how interest rates affect the economy and therefore the markets, and by introducing the institution which implements Monetary Policy, the Federal Reserve.

As we saw in our example yesterday, small movements in interest rates can have dramatic effects on the economy. Just as small changes in interest rates can dramatically increase the costs for individuals to own a home or borrow money to purchase other goods, they can also have a dramatic affect on the cost of doing business.

It is for this reason that when interest rates rise, making borrowed money more costly, that people will also be less likely to start or expand a business. This not only has an effect on the business owner themselves but filters throughout the entire economy as less businesses being started and expanded means less jobs, which means less people getting paychecks, which means less people spending money and on and on down the line. The opposite is of course also true for when interest rates fall and business owners take advantage of access to cheaper borrowed money.

In addition to interest rates affecting the stock market, interest rates also have direct and indirect affects on the bond, foreign exchange, and futures markets. Here are a couple of quick examples of this which we will expand on in later lessons:

The Bond Market: When interest rates rise the value of existing bonds fall as investors can now purchase the same bond with a higher interest rate and vice versa.

The Forex Market: When Interest rates it becomes more attractive from a yield standpoint to own the dollar against other currencies or to invest in interest bearing dollar based assets. This creates a demand for dollars which will many times cause the dollar to strengthen. The reverse is also true when interest rates fall.

The Commodities Market: When economies grow at a greater rate as a result of lower interest rates this will mean a greater demand for commodities so their value will rise and vice versa.

Duration : 0:5:12

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Technorati Tags: analysis, Business, economy, Forex, fundamental, futures, howto, informedtrades, interestrates, investing, stockmarket, Trade

http://www.informedtrades.com/
A lesson on the basics of fundamental analysis, the top down and bottom up, and the US Economy for traders of the stock, futures, and forex markets.

there are two ways that traders analyze the markets which are known as technical analysis and fundamental analysis. As I also mentioned in that lesson while most people who buy and sell over the short term focus on technical analysis and most people who buy and sell over the long term focus on fundamental analysis, in my opinion both technical traders, fundamental traders, and investors can all benefit from at least having an understanding of both types of analysis even if they prefer one or the other as their primary tool they use to make their trading decisions.

While technical analysis focuses solely on the analysis of historical price action, fundamental analysis focuses on everything else including things such as the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, currency or commodity using fundamental analysis there are two basic approaches one can use which are known as bottom up analysis and top down analysis. Bottom up analysis very simply means looking at the details such, as earnings if we are talking about a stock, first and then working one’s way up to the larger picture by looking at things such as the industry of the company who’s stock you are trading and then finally the overall economic picture. Top down analysis on the other hand means looking at the big picture things such as the economy first and then working one’s way down to the details such as earnings if we are talking about a stock.

While there is some debate about which method is best my personal preference is for Top Down analysis and since by starting this way we can start with the things that apply to all markets and not just the stock market this is how we will start.

The first thing that it is important to understand from a fundamental standpoint is what the economic situation is as it affects the financial instrument you are trading. As I am based in the US and the US is the World’s largest economy this is what I am going to talk about, however most of the things I discuss here apply in a broad sense to any economy. When we begin to discuss the foreign exchange market in later lessons we will go into specific details of the other major and emerging market economies from around the world.

According to Investopedia.com the definition of an Economy is “the large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. The economy encompasses everything relating to the production and consumption of goods and services in an area”

People often refer to the US Economy as a capitalist or free market economy. A capitalist or free market economy in its most basic sense is one in which the production and distribution of goods and services is done primarily by private (non government) companies and the price for those goods is set by the free market. This is in contrast to a socialist or planned economy where production and distribution of goods and services as well as the pricing of those goods and services is handled by the government.

Duration : 0:7:42

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Technorati Tags: analysis, Business, daytrade, economy, Forex, fundamental, futures, howto, informedtrades, investing, stockmarket, Trade, trading

Complete video at: http://fora.tv/2009/04/15/Peter_Hartcher_Whos_to_Blame_for_the_Financial_Crisis

Journalist Peter Hartcher compares the current actions of central banks to those of Alan Greenspan after the last financial crisis. He warns that “excess money always leads to some nasty pernicious event.”

—–

According to Peter Hartcher, from 1996 on, Alan Greenspan, chairman of the United States Federal Reserve Board from 1987 till 2006, knew that equity markets were overheated and should have taken concerted action to cool them. In fact, Greenspan gave one speech in December 1996 questioning the “irrational exuberance” of investors but never followed up to pop the bubble.

By 1999, Greenspan had become an out-and-out cheerleader of the so-called New Economy, in which labor productivity was rising so quickly that inflationary pressures were of minimal concern. As the steward of America’s financial markets, he should have known better, Hartcher argues, but in the face of jawboning from both Congress and the White House, Greenspan buckled under and took the easy way out. – Sydney Institute

Peter Hartcher is an Australian journalist and the Political and International Editor of the Sydney Morning Herald. He is also Chair Editor of The Diplomat, an Australian foreign affairs journal, and a visiting fellow at the Lowy Institute for International Politics in Sydney.

Duration : 0:3:24

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Schiff discusses retail sales, CPI, the markets, unfair political attacks.
Check my blog out at: http://ragingreport.blogspot.com/
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Duration : 0:10:0

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Feb. 26 (Bloomberg) — Paul Mortimer-Lee, global head of market economics at BNP Paribas SA, talks about the U.K. economy, which emerged from recession at a faster pace than previously estimated in the fourth quarter.
Gross domestic product rose 0.3 percent from the third quarter, compared with a previous calculation of 0.1 percent growth, the Office for National Statistics said today. Speaking with Bloomberg’s Andrea Catherwood in London, Mortimer-Lee also discusses the U.K.’s fiscal situation and European Central Bank policy.

Duration : 0:5:6

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Feb 2009

Here’s a headline I believe we will be seeing more of….. “Stocks fall on grim company earnings”.

A few thoughts as to why, and maybe what to do about it……..

1. Not only is the economy continuing to slump, but the appetite for risk and speculative endeavour has been castrated. Is a P/E of 10 really still cheap…. or is it actually sinking in that it means paying ten times what a company earns in a full year just for the privilege of owning a paper stock certificate?

And if the company doesn’t pay a dividend, just how does one expect to realize those earnings? Step from behind the curtain ‘greater fool theory’, you are exposed at last as being the hidden engine behind extended bull (bubble) markets.

2. The dollar strength is killing (even unchanged) foreign earnings in dollars, subduing many of the commodity stocks over and above the economic effects. This is the opposite of what we saw when the dollar was in freefall and earnings were trumpeted as being tremendous.

3. There is less money chasing more stock – companies are issuing stock to raise cash just when vast amounts of capital are disappearing into ‘money heaven’. I have read several debates about what happens to money when stocks and assets decline, “for every buyer there is a seller”, etc. The key to understanding this, I believe, is to value paper and speculative assets at zero, which is ultimately what contribution they might be making to the money in circulation.

Take four people…. A, B, C, D. Each has $100 to create a mini-economy of $400, There is $400 in circulation.

Mr A paints a picture. Mr B likes it and pays him $100 to own it.

Mr A now has a picture – he values this picture at $100. He thinks he has $100 (‘invested’).

Mr B has $200 – his original $100, plus the $100 he received from art-enthusiast Mr A.

Messrs B & C have $100 each.

Apparent total – $500 if you include Mr A’s piece of art (stock investment, house, boat, etc) but no, there is just $400 in money and a gentleman who hopes that someone, someday, will exchange at least $100 of their dollars for his investment asset.

So, if the ‘art’ market crashes and no-one wants the picture then where does Mr A’s invested money go? What about the investment dollars he is holding in that wonderful canvas that nobody wants to buy?

The economy has collapsed, from $500 (the value including the picture as an asset) back to $400 (the fundamental value of the money and assets in the economy, as nobody now wants to speculate in art)

The $100 value of the painting never existed – it was a figment of imagination and assessment of the market. The picture is worth what someone will exchange for it. The dollars to pay come from the $400 in circulation…..unless new money is borrowed into the economy to increase it.

It takes just ONE transaction to revalue assets – all the other holders of such assets are affected even by doing nothing.

Apply that to the markets, real estate, art, cars and consumer goods and bingo – the money lost in asset values beyond their fundamental value is simply gone.

Add to that the cancelled debt (by repayment or default) which has sucked billions of dollars from the merry-go-round and it is easy to see how the amount of money chasing stocks is simply not what it was.

For sure, as the pundits assure us, there is cash waiting to reenter the market, but is it sufficient to regain old highs, or even recent rally peaks?

4. What to do (imo).

Be cautious, be patient, be independent in thought and deed. Don’t trust the opinions of experts above your own common sense, and don’t chase losses. Start again, enriched by the experience of taking a beating rather than be demoralised by it.

And, (here we go again )…. if in doubt, sell at least half.

5. Enjoy life. “Its just a ride” according to Bill Hicks – well worth viewing the short video of Bill’s closing speech…

6. I’m still thinking about a number 6. Maybe someone can add one.

best of luck.

Duration : 0:6:15

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Technorati Tags: collapse, deflation, economy, fed, housing, Inflation, money, prices

Sep 15, 2008.
The venerable Lehman Brothers investment bank said early Monday that it will file for bankruptcy, while Bank of America unveiled plans to buy Merrill Lynch — two pieces of news that profoundly alter the American financial landscape.

The fast-paced changes capped a roller-coaster Wall Street weekend and threatened to stir up U.S. financial markets already reeling from woes at other major financial firms and mortgage financing titans Fannie Mae and Freddie Mac.

“This crisis is clearly deeper than anybody had imagined only a short time ago,” Peter Stein, an associate editor at The Wall Street Journal in Asia, told CNN.

Lehman Brothers said in a statement early Monday that it plans to file for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The 158-year-old investment bank had been undermined by bad bets on real estate — the value of its shares declined 94 percent this year.

The fall of Lehman followed a wild, three-day scramble by top Wall Street executives and federal regulators, who worked around the clock to come up with a solution to a still-unfolding financial crisis.

By the end of the weekend, the Federal Reserve had stepped in to try to calm the markets by announcing plans to loosen its lending restrictions on the banking industry.

A consortium of 10 leading domestic and foreign banks agreed to create a $70 billion fund for loans to troubled financial firms.

Source:
http://edition.cnn.com/2008/US/09/15/banks.bigchanges/index.html

Duration : 0:2:20

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http://www.informedtrades.com
A lesson on the second two components of the US Economy the Private and Government Sector and how these each affect forex, futures, and stock traders.

In our last lesson we began a discussion on the different components that make up the US Economy and how these relate to trading with a look at the Natural Resources and Labor Force components. In today’s lesson we continue this discussion with a look at the Private Sector and Government components and how each of these relates to trading.

While having lots of natural resources and a large well educated labor force to produce goods and services from those natural resources is a great thing, without a way to organize these first two components of the economy, not much would get done. This is where the small, medium, and large businesses which make up the private sector come in. In addition to organizing the labor force to produce goods and services, the private sector is also responsible for raising the capital necessary to bring all these things together which they do through private investors, loans from commercial banks, the bond market, and/or the equities market.

While many people think that the US Economy is dominated by the large corporations, it may come as a surprise the large role that the small business play’s in the US Economy. According to the US Department of State:

“Of the nearly 26 million firms in the United States, most are very small—97.5 percent … have fewer than 20 employees,” the U.S. Small Business Administration says. “Yet cumulatively, these firms account for half of our nonfarm real gross domestic product, and they have generated 60 to 80 percent of the net new jobs over the past decade.”

While we will go into more details about the private sector and how this all relates to trading in later lessons, it should be obvious at this point the large effect that the private sector has on all markets as they are the ones who: 1. Raise capital through bonds and stocks that we then trade, 2. produce the goods and services which drive demand for the commodities we trade and 3. Affect the foreign Exchange markets by playing a role in what goods and services are produced domestically, which we import from overseas, as well as cross boarder mergers and acquisitions.

Duration : 0:5:44

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Technorati Tags: analysis, Business, daytrade, economy, Forex, fundamental, futures, howto, informedtrades, investing, stockmarket, Trade, trading

http://www.informedtrades.com/
A lesson on open market operations and how the federal reserve increases and decreases the money supply in order to move interest rates and what this means for traders of the stock, futures, and foreign exchange markets.

In our last lesson we looked at the structure of the Federal Reserve and the components of the FOMC, the portion responsible for implementing Monetary Policy. Now that we have an understanding of this, we can look further into exactly how monetary policy is facilitated and what happens to markets under differing scenarios.

Monetary Policy very simply is anything which relates to action by the Federal Reserve to influence the amount of money and credit available in the economy. To understand exactly what this means, one first must understand the concept of fiat monetary systems.

Fiat Monetary Systems: The United States, like most major economies, has what is known as a fiat monetary system. A Fiat Monetary system very simply is any system which uses a monetary unit (in this case the US Dollar) which is not convertible to some commodity, in general a precious metal such as gold.

Fiat money, is money that is backed by the credit of some entity, normally a government, and the value for which is derived from its relative scarcity and the faith placed in it by the population which uses it.

This is important to us as traders because the fact that the Dollar is not convertible to a commodity such as gold gives the Federal Reserve the ability to increase or decrease the money supply as it sees fit, or in other words to enact Monetary Policy.

With this in mind the 3 tools available to the Fed for enacting monetary policy are:

• Open Market Operations
• The Discount Rate
• Reserve Requirements

The most common tool that the Fed uses, and therefore the one that we will cover, is Open Market Operations. Once we have an understanding of this and how increases or decreases in the supply of money affect demand and prices, the other two less commonly used tools will be more easily understood.

Through something which is known as the Open Market Committee, the Fed increases and decreases the supply of money by buying and selling US Government securities.

When The Fed wishes to reduce interest rates they will increase the supply of money by buying government securities using money that was not available in circulation before they made their purchase. As with anything, when additional supply is added and everything else remains constant, price normally falls. In this case the price that we are referring to is the cost of borrowing money or interest rates.

Conversely, when the fed wishes to increase interest rates they will instruct the open market committee to sell government securities thereby taking the money they earn on the proceeds of those sales out of circulation and reducing the money supply.

Duration : 0:4:6

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Technorati Tags: Business, daytrade, economy, fed, federalreserve, Forex, futures, howto, informedtrades, investing, stockmarket, Trade, trading

Thanks to ‘tradergee1″ for bringing attention to this video: http://www.youtube.com/user/tradergee1

Link to article: http://www.marketskeptics.com/2009/12…

2010 Food Crisis for Dummies

If you read any economic, financial, or political analysis for 2010 that doesnt mention the food shortage looming next year, throw it in the trash, as it is worthless. There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

The 2010 Food Crisis Means Financial Armageddon

Over the last two years, the world has faced a series of unprecedented financial crises: the collapse of the housing market, the freezing of the credit markets, the failure of Wall Street brokerage firms (Bear Stearns/Lehman Brothers), the failure of Freddie Mac and Fannie Mae, the failure of AIG, Icelands economic collapse, the bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler), etc In the face of all these challenges, the demise of the dollar, derivative markets, and the modern international system of credit has been repeatedly forecasted and feared. However, all these doomsday scenarios have so far been proved false, and, despite tremendous chaos and losses, the global financial system has held together.

The 2010 Food Crisis is different. It is THE CRISIS. The one that makes all doomsday scenarios come true. The government bailouts and central bank interventions, which have held the financial world together during the last two years, will be powerless to prevent the 2010 Food Crisis from bringing the global financial system to its knees.

Financial crisis will kick into high gear

So far the crisis has been driven by the slow and steady increase in defaults on mortgages and other loans. This is about to change. What will drive the financial crisis in 2010 will be panic about food supplies and the dollars plunging value. Things will start moving fast.

http://www.youtube.com/watch?v=AFvRpIQULMc Original video uploaded so that it will reach other people.

Duration : 0:8:13

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