Archive for the ‘Blog posts’ Category
Jul 11th 2013, 21:34 by G.I. | WASHINGTON, D.C.
Traders and economists both spend their days studying markets, yet I’m struck by how differently they approach the subject. Since traders profit from finding mispricings, they are biased to believe that prices are more often wrong than right. Fundamentals matter, but traders believe they are routinely overwhelmed by psychology, liquidity and other non fundamental factors.
Economists, by contrast, grow up believing prices are usually right. The intersection of supply and demand curves explains in elegant, intuitive and internally consistent fashion how each individual buyer and seller can have a different idea of what a price should be, yet their interactions collectively yield a single, objectively correct price. Economists don’t dispute the role of psychology – they’ve handed out Nobel prizes for precisely that – but the organizing principle of their lives is that market prices are usually an unbiased distillation of fundamental determinants.
These different world views help explain why traders have always been suspicious of quantitative easing (QE) and economists dismissive of those suspicions. Read the rest of this entry »
May 24th 2013, 18:39 by G.I. | WASHINGTON, D.C.
The Federal Reserve left a lot of people scratching their heads this week. Between Chairman Ben Bernanke’s testimony, and the release of the minutes to the May 1st Federal Open Market Committee, investors were struggling to figure whether an end to easy monetary policy was nigh. A headline in today’s The Wall Street Journal declares: “In Bid for Clarity, Fed Delivers Opacity.” Here is what I think is essential to understand about what the Fed is doing, what we learned this week, and why more crossed signals are likely ahead.
- The Fed has two exits to manage, not one. Read the rest of this entry »
Feb 28th 2013, 21:44 by G.I. | WASHINGTON, D.C.
IN THE battle between David Einhorn and Apple over the latter’s $137 billion cash hoard lies a deeper lesson about the outlook for the economy. Mr Einhorn, an activist investor, says Apple clings to its money out of a “Depression mentality”. Perhaps. But the more mundane explanation is that Apple, like many of the world’s big companies today, is generating more cash from its existing product line than it can usefully plough back into new projects.
And that’s a problem. Apple is the most creative, innovative and envied technology company of our time, yet investors clearly doubt its ability to keep churning out hits at current margins, valuing it at just 10 times this year’s earnings, a ratio more appropriate for a mature value company.
To some, this might be comforting. After all, while the Dow may be flirting with an all-time high, Apple’s valuation suggests there isn’t much irrational exuberance going around.
But in another way it’s rather distressing. Let’s go back to the spring of 2000, at the peak of the Nasdaq bubble, when Cisco Systems embodied the hype and hope of technology. Cisco was, briefly, the world’s most valued company, with a market cap of $555 billion. Unlike many dotcoms, Cisco was nicely profitable, but not nearly as profitable as investors thought it would be one day: it traded at 135 times that year’s earnings. (Click on the nearby table for a comparison.) Compared with Apple, Cisco was a veritable spendthrift. Despite sales that were barely one-sixth of Apple’s today, its R&D budget was almost as large. Its cash pile, at $20 billion, was big enough (evidence that the phenomenon of cash-rich tech giants is not new), but then, there was no widespread clamour that Cisco hand it back it to shareholders; no one doubted Cisco would find a higher returning use for it. Read the rest of this entry »
Feb 14th 2013, 23:24 by G.I. | WASHINGTON, D.C.
Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.
The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.
But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s. To understand why, consider how monetary policy influences the trade balance and the exchange rate.
Read the rest of this entry »
Jan 9th 2013, 4:04 by G.I. | WASHINGTON, D.C.
In the many years I’ve spent scrutinizing monetary policy, I had never devoted more than a thought to coins. In the scheme of all things monetary, they seemed, well, pocket change.
Needless to say, the prospect of the Treasury issuing a $1 trillion platinum coin to circumvent the debt ceiling changes that. I won’t repeat the details; you can get up to speed by reading Matthew O’Brien of The Atlantic here and my colleague here. If nothing else, unpicking the consequences is a fun exercise. I’ve concluded the economics are more complicated and more benign than appreciated, but the political consequences are graver. Read the rest of this entry »
Dec 17th 2012, 22:13 by G.I. | WASHINGTON
Dec 14th 2012, 19:54 by G.I. | WASHINGTON, D.C.
Dec 13th 2012, 2:00 by G.I. | WASHINGTON, D.C.
[Greg Ip] Low inflation and full employment have been statutory goals of the Federal Reserve since 1977, but its officials always felt more comfortable with the first than the second. After all, in theory monetary policy can’t alter unemployment in the long run.
But the stubbornly weak economy of recent years prompted some at the Fed to question their historical neglect of the second half of their mandate. “The Fed’s dual mandate … has the force of law behind it,” Charlie Evans, president of the Federal Reserve Bank of Chicago, said in September, 2011. “So, if 5% inflation would have our hair on fire, so should 9% unemployment.”
Dec 7th 2012, 16:57 by G.I. | WASHINGTON, DC
Nov 29th 2012, 21:37 by G.I. | WASHINGTON, D.C.