The slower growth rate and the intensive competition globally makes developing countries under strong pressure and anxiety. To some extent, China is among one of them. One remedy is to enhance national competitiveness by subsizing industries, particularly high tech industries. The question is unclear whether such subsidies crowd out private investment and more importantly, whether public subsidies enhance industrial innovation over the long run. The empirical evidence is at lest needed.
The fundamental errors occur to Sichuan Province as the yearbook reports the exact same numbers on the urban employed persons and the total investment in fixed assets, which in any means and by any sense should not be be same. This might occur due to complete negligence and reckless absent-mindness among bureaucrats. Moreover, due to the extra duplicate numbers, the other numbers after that column is completely messed up. For instance, the budget revenue is a few times higher than the budget outlays, which theoretically is very nice. However, artificial adjustments for the numbers only create utopian dreams that can not stand a chance to be reality. Thirdly, the average wage among the urban employed are not correct as the numbers may indeed reflect the amount of disposable income among them, which often add other sources of income to their wages. The problem here is that there are limited ways to figure out what those numbers really mean. For the number of average wage among the urban employed, I personally offer a fix by recommending the use of the annual yearbook of sichuan province.
sep Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. dec Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. sep Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. dec Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. monthly employment:http://www.bls.gov/web/empsit/ceseesummary.htm Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft http://research.stlouisfed.org/fred2/series/NEWORDER?cid=32431 jan feb maraprmayjunejuly aug sep oct Personal consumption expenditures: Current dollars0.1 0.7 0.2-0.20.2 0.60.10.30.20.3 Chained (2009) dollars0.1 0.3 0.3 0 0.1 0.20.0 0.20.10.3 disposalbale income current dollars-5.2 1.30.3-0.10.30.3 0.30.60.5-0.2 Chained (2009) dollars-5.20.9 0.40.2 0.2 -0.1 0.20.50.4-0.2 peraonal saving rate 3.6 4.2 4.3 4.6 4.8 4.6 4.8 5.0 5.2 4.8 existing home sales tumble post first annual decline 29 months day after taper begin http://www.zerohedge.com/news/20 ... y-after-taper-begin 奥巴马再会金融巨头zerohedge发警告 https://bbs.pinggu.org/home.php?mod=spaceuid=720513do=blogid=221404 美媒：美国道德权威正在衰退 https://bbs.pinggu.org/home.php?mod=spaceuid=720513do=blogid=235288 官方力证黄金暴跌人为操纵 “头号嫌疑犯”浮出水面 http://xinyuanxiyu2010.blog.163.com/blog/static/131179796201332710523858/ 专家：钱荒凸显经济结构性问题 中国的银行缺钱 几乎在美联储宣布缩减购债规模的同时，美国传来马克斯・鲍卡斯将出任住 中国大使的消息（20日已获奥巴马正式提名）。马克斯・鲍卡斯是美国国会 参议院财政委员会主席（也有译为金融委员会的，笔者查阅后发现原文虽为 committeeon finance，原来有兼管金融和财政，后来银行和金融委员会成立 后，就只管财政了。）奥巴马任命一位并无安全背景精通财政的政治人物出任 驻华大使一职显示美国在经过一番博弈后更希望用和平的沟通方式取得中国 在美债问题上的支持，对中国十分有利（日本外相立即与中国驻华大使举行了 安倍政权上台以来的首次正式会谈，并表示日方重视对华关系，愿意努力使两国 关系重新回到战略互惠关系的原点中国驻日大使会见日本外相 http://news.sina.com.cn/o/2013-12-21/033929042968.shtml ）。而从中国的立场来看，在面临产能过剩，企业资产 负债率偏高，非金融上市公司税息折旧及摊销前利润（EBITDA）与债务规模之比 低于贷款成本，等难题的情况下也十分需要同美国开展互惠互利的经济合作。但 具体到美债问题上，虽然美国财政有巨大的改革空间，以医保为例美国用于医保的 花费远远高于OECD的平均数。但由于日本即将开始减持美债，中国增持美债的结果 是互惠双赢，还是会使外汇储备大幅贬值依然十分不确定。此外，欧元区的反应也 值得关注，今年在习近平主席访美前夕，欧盟突然决定对来自中国的光伏产品征收 反倾销税，牵制中国过分倒向美国的意图十分明显。总体上看由于美元和欧元之间 的激烈竞争中国目前处于有利地位，但由于美欧的力量都明显强于中国，加上经济 形势错综复杂，中国需要开展深入的研究和广泛的讨论，在集思广益的基础上谨慎 应对。
Aug.20, 2013, Dr. Huang Chao-huan, General Manager of Investment Division of Elephant Alliance, was invited to attend the China-Kenya Investment and Business Forum, in the Diaoyutai State Guesthouse, which was organized by the Kenyan Embassy in China and the China-African Development Fund owned by China Development Bank (CDB). The president of the Republic of Kenya, Mr. Kenyatta and the president of CDB, Mr. Zheng Zhijie had both attended and delivered opening speeches. More than 200 representatives from political circles and business sectors of Kenya and China had attended the forum. President Kenyatte said that this year is the 50th anniversary of establish ing diplomatic relations between China and Kenya and both sides have established long and firm friendship. This forum is setting up a communication and cooperation platform for the further strengthening of the investment, economic and trade cooperation and to add momentum to the cooperation. He also hoped that both sides could utilize this forum to innovate cooperation modes, broaden cooperation areas and further expand practical cooperation in the fields of investment and economic and trade. During the forum, Dr. Huang talked with the Executive General Manager of Kenya Investment Authority Dr. Moses Ikiara and introduced Elephant Alliance business model and the progress of investment and trade cooperation with African countries such as Malawi, Ghana and Mauritius. Dr. Ikiara showed strong interests and hoped both sides can establish direct contact with the Authority. Dr. Huang Chao-huan also talked with Kenya Congressman Hon. Joe Mutambu who promised to introduce the infrastructure investment projects in Kenya to Elephant Alliance by email after the meeting. The president of the Republic of Kenya, Mr. Kenyatta gave the opening speech for the Forum. Dr. Huang took a photo with Dr. Moses Ikiara, Managing Director, Kenya Investment Authority Hon. Joe Mutambu, Minge Central MP of Kenya and Dr. Huang of Elephant Alliance
June 13, 2013 morning, Indonesia Trade Counsellor Mr. Marolop met with Elephant Alliance CEO Ms. Chen Jingru, General Manager of the Investment Division Huang Chao-Huan to discuss cooperation matters. Dr. Huang first introduced Elephant Alliance’s organizational structure and business model, and the countries that Elephants Alliance is currently working with and the latest progresses. Counsellor Marolop was impressed by the brand new business model and commented that Elephants Alliance is a good concept and a good platform for international trading. Currently the world needs such a credible platform to help enterprises in the world. Counsellor Marolop also asked a lot of questions about the detail operations which were answered by Ms. Chen and Mr. Huang of Elephant Alliance. Counselor Marolop said that many Indonesia businessmen also hope to have more trades with China. There are 17,000 islands in Indonesia of which five are major islands to form six economic zones. Indonesia is the world's fourth most populous country with over 200 Million people. Indonesia is rich in mineral resources such as oil, natural gas, coal, diamond and agricultural resources including pepper, cotton, rubber, cocoa, coconut, spices, etc. Mr. Marolop said that the next step will be for him to give Elephant Alliance some specific information to prepare for the two sides to get into close cooperation. Indonesian Trade Counsellor Marolop (middle) with Elephant Alliance CEO Ms. Chen Jingru, General Manager of Investment Division Mr. Huang Chao-Huan. For details ， please click: http://www.dxlm.org
How America's Housing Non-Recovery Led To Record Income Inequality Submitted by Tyler Durden on 07/05/2013 14:04 -0400 Bond Census Bureau Creditors fixed France Great Depression Housing Starts Monetary Policy Mortgage Backed Securities recovery With bond yields soaring over fears of a Fed tapering, and 30 Year fixed mortgages on the verge of crossing 5.00%, it is inevitable that any "speculative" investment property components, driven by cheap and abundant credit, to what continues to be incorrectly labeled a housing recovery, will crash and burn in the days and weeks ahead. This was already confirmed when looking at mortgage applications, which tumbled at the fastest pace in three years . However, as the following note from CLSA's Chris Wood explains, there is another angle when a housing recovery is not a housing recovery : a surging Gini coefficient. In fact as Wood observes that " the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression ." In other words, the US now has greater income inequality than even during its worst economic episode in history. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers , which is why fixed income markets freak out when they see signs of an exit. Precisely. It also means, even simpler, that the rich are getting richer, while the poor not only can't afford to buy homes, but are getting poorer by the day. For some colorful stories of what previous episodes of such unprecedented social divergence may ultimately leads to, just speak to France circa 1788. From CLSA's Greed and Fear If housing has staged an impressive pickup in activity, GREED fear’s view remains that the recovery in American housing is different from a conventional recovery from a housing bust in that it has been jump started to a huge extent by massive investor demand in the context of the unusual circumstances provided by unconventional monetary policy , including the Fed’s buying of mortgage backed securities (MBS). The Fed’s holding of MBS totalled US$1.2tn at the end of June. The degree to which yield-seeking investors, including specialised investment funds, have driven the housing recovery is best illustrated by the extent to which the new mortgage applications index has not recovered as much as say housing starts. Thus, the US new purchase mortgage application index has so far risen by 29% from its low reached in October 2011, while US housing starts are up 91% from their April 2009 low (see Figure 5). It is, therefore, necessary to continue to watch the new mortgage applications index closely for evidence that the baton in the housing recovery will be passed from investors to end buyers. In this respect, the obvious constraints on end buyers are a lack of income to service the mortgage and, more importantly, a lack of sufficient equity in terms of what is required by banks post-crisis to have a mortgage. Indeed there is a risk that investors, on account of still attractive rental yields compared to what is available in fixed income markets, keep pushing up prices so that houses become unaffordable again. Certainly, in GREED fear’s view investors will be much less concerned by rising mortgage rates, courtesy of the recent Treasury bond sell-off, than would-be home owners. The above thesis of an investment property boom, as opposed to a conventional housing recovery, raises another consequence of unconventional orthodoxy. This is that the practical way these policies work is to lead to ever more extreme wealth distribution, as reflected in America’s Gini coefficient which measures the degree of income inequality . The Gini coefficient has risen from 0.386 in 1968 to 0.47 in 2006 and was 0.477 in 2011, according to the US Census Bureau (see Figure 6). This is because the wealthy are geared into rising asset prices, particularly prices of financial assets, whereas ordinary people are geared into average hourly earnings growth . In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression . This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit. But the point to remember is that the leverage taken on in such trades is highly risky because of the underlying deflationary trend. * * * Which is precisely why the Fed's pseudo-exit via hints of tapering is why the entire house of "housing recovery" cards is set to tumble any minute: because quite simply it was never a recovery to begin with, but merely the latest cheap credit-funded, hot potato flipping ploy conceived by the Fed to benefit its private bank backers. And, as always, it will be everyone else left to fund their bailout once this latest credit bubble pops and the TBTF card is used one more time... Average: 4.916665 Your rating: None Average: 4.9 ( 12 votes) Tweet !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisements Login or register to post comments 7753 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends Why Are Americans Driving Straight Into The Non-Recovery (And 800 On The SP)? 20 Facts About US Inequality That Everyone Should Know (With An Update On The Uber-Wealthy And Global Wealth Inequality) Guest Post: It's Always The Best Time To Buy Guest Post: What This Country Needs Now Is Hope
The Problems With Japan's "Plan (jg)B": The Government Pension Investment Fund's "House Of Bonds" Submitted by Tyler Durden on 06/03/2013 22:41 -0400 Bank of Japan Bear Market Bond California Public Employees' Retirement System Capital Markets Carry Trade Japan Kyle Bass Kyle Bass Market Crash McDonalds Monetary Policy Netherlands Nikkei Reuters Volatility “So long as public funds ultimately are governed by the government, which is controlled by representatives of the general public, risk tolerance is subject to the general public’s risk tolerance, and the general public’s risk tolerance is not necessarily high. If and when the stock market collapses and performance goes negative for some time, people, the media and politicians will complain loudly... Who exactly is responsible for the future payment of benefits? Those who make the promise today may not be the people to actually deliver on the promise in future decades . It is much easier to make a promise that somebody else is supposed to carry out. Here the future generation is not in a position to sign the contract at all. This is the critical agency problem. ” - Yuji Kage, former CIO, Pension Fund Association Now that the BOJ's "interventionalism" in the capital markets is increasingly losing steam, as the soaring realized volatility in equity and bond markets squarely puts into question its credibility and its ability to enforce its core mandate (which, according to the Bank of Japan Act "states that the Bank's monetary policy should be aimed at achieving price stability , thereby contributing to the sound development of the national economy ) Japan is left with one wildcard: the Government Pension Investment Fund (GPIF), which as of December 31 held some 111.9 trillion in assets, of which 67.3 trillion, or 60.1% in Japanese Government Bonds. Perhaps more importantly, the GPIF also held "just" 14.5 trillion in domestic stocks, or 12.9% of total, far less than the minimum allocation to bonds (current floor of 59%). What the GPIF has going for it is that with a total asset size of just about $1.1 trillion, it is the largest government pension fund in the world. It is almost equal to the size of Korea's economy, has nearly six times as much assets under management as CALPERS, the biggest US pension fund, and nearly four times as much as Europe's largest pension plan, Stichting Pensioenfonds ABP of the Netherlands. Which means that the mere whisper of capital reallocation sends assorted asset classes scrambling. It is this massive potential buying dry powder that has led to numerous hints in the press (first in Bloomberg in February , then in Reuters last week , and then in the Japanese Nikkei this morning all of which have been intended to serve as a - brief - risk-on catalyst) that a capital reallocation in the GPIF is imminent to allow for much more domestic equity buying, now that the threat of the BOJ's open-ended QE is barely sufficient to avoid a bear market crash in the Nikkei in under two weeks. There are some problems, however. The first of which, is that GPIF appears to be a "jack of all trades" when it comes to its potential utility. It was only in March that HSBC wrote in " Japan's trillion dollar bond rotation " that " there is clearly a bias to shift more public funds into international markets ", and that "Crucially, the GPIF is conducting a review to accelerate divestments in domestic bonds in favour of EM ." Wait, reallocation from domestic bonds into international markets, and specifically bonds? Oh yes, that's because back then Europe needed backstopping and the mere threat of a Japanese carry trade tsunami was sufficient to send peripheral bond yields plunging to near record lows (despite Europe's imploding economy). Fast forward to today, when we now learn that this mythical reallocation from domestic into international bonds has been put on hiatus (PIIGS yields plunging notwithstanding), and has been replaced by a new narrative - one which is suddenly the much more critical, and Abenomics preserving one: reinvesting out of domestic bonds and into domestic stocks, thus providing a backstop to the BOJ. Problem is, cry capital-reallocating wolf enough times, and soon someone will demand to see proof before taking you at your word. This problem is compounded by another problem : as we wrote several years ago, in 2010, due to the demographic crunch of Japanese society, the GPIF became, for the first time ever, a net asset seller . This can be seen on the charts below. Worst of all, and as can be very vividly seen on the charts below, not only has the GPIF been consistently leaking assets in the past four years, it has already been actively reallocating away from bonds : in fact, at 60.1% of total assets, the JGB holdings as of December 31 a % of total assets are the lowest they have been in decades (and just above the 59% threshold), while the allocation to domestic stocks has soared from 12.3% in Q3 to 14.5% in Q4: the highest in two years. Just how much dry powder does this pension fund really have before it literally bets the bank on the riskiest of all asset classes, and - in the off chance it bets incorrectly - dooms tens of millions of people to retirement in poverty? So the GPIF needs a reallocation program? Sounds to us like it needs to invest more into JGBs ! Total GPIF assets: Relative GPIF assets: So will the GPIF indeed scramble to reallocate into equities or is this merely the latest bluff in a long series of pseudo-political gambits? Here are some thoughts from HSBC on this issue: Domestic equities might be an obvious target for the reallocation of assets, especially if the impressive rally in the Nikkei continues. But Japanese investors will be very reluctant to immediately pile into the local stock market. The asset bubble that burst more than 20 years ago left its mark. More than half of households’ USD15trn financial assets were kept in cash as of September 2012 and only 6% in equities, according to BoJ data. O ther significant domestic holders of JGBs such as banks and pension funds will also be constrained to match liabilities and meet regulation requirements, implying bond investments, including overseas bonds, are more likely than equity investments. Well that's great for Spanish bonds, but does nothing to help what may soon be the next great Japanese equity market bubble. But wait, it gets worse. As we have been showing over the past several weeks, suddenly a far bigger problem that has emerged for Japan is not what happens to the Nikkei, but whether it suffers an out of control collapse in its bond market, and sees a rapid, vicious and sharp sell off in the JGB complex as nearly happened on May 23, the day when the the Nikkei225 crashed. It is this that is the biggest structural threat to Abenomics, not whether or not Mrs. Watanabe will have generated enough money daytrading to avoid the 20% price surge in McDonalds. So if indeed the GPIF does reallocate into equities (a very big if considering its multi-functional usage depending on the dry-powder threat need du jour), it will have to sell JGBs. Even more than it has sold so far. Which will then precipitate yet another rout in the JGB market, from where we go into such issues as the " VaR shock " we described two weeks ago (a topic the FT caught up with today), and all too real capital losses for Japanese banks who mark JGBs on a MTM basis. Here is what HSBC had to say on this issue: There is also an asymmetric risk to JGB yields in the very long term (ie beyond the next couple of years), making diversification compelling on a risk-adjusted basis. If official policies in Japan begin to bite and inflation rises on a more sustainable basis, this would place pressure on interest rates and materially reduce the value of JGBs held by banks. Yet, given the scale of such holdings, reducing exposure to JGBs would be difficult. Japanese financial institutions hold a substantial amount of JGBs. According to the BIS, Japanese banks hold 90% of their tier 1 capital in JGBs. Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets Wait, what? Let's read more from the FT, shall we: Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it. ...The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure. Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then? Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets. So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late. Finally, for those who just can't get enough, we recommend the following piece by James Shinn for Institutional Investor which should explain all lingering questions about what really goes on at Japan's Plan B. Average: 4.77778 Your rating: None Average: 4.8 ( 9 votes) Tweet - advertisements - Login or register to post comments 11705 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: The Plot Thickens: How Will Japan's Largest Pension Fund Find Room To Maneuver? Guest Post: Next In Line For Implosion: Pension Plans Kyle Bass Vindication Imminent? Largest Japanese Pension Fund Begins To Sell JGBs When Herding Cats Fails: A Visual Tale Of Two QEs Guest Post: Dangerous Economic Misconceptions
A Short History Of Currency Swaps (And Why Asset Confiscation Is Inevitable) Submitted by Tyler Durden on 05/05/2013 14:55 -0400 Belgium Ben Bernanke Central Banks Creditors default EuroDollar European Central Bank Eurozone Federal Reserve Foreign Central Banks France Germany Guest Post Hungary Investment Grade Italy Lehman Mark To Market Monetary Base national security Purchasing Power Reserve Currency Sovereign Debt Sovereign Risk Sovereign Risk Sovereigns Trade Deficit World Trade Submitted by Martin Sibileau of A View From The Trenches blog , I want to offer today an historical perspective on the favorite liquidity injection tool: Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now… To read this article in pdf format, click here: May 5 2013 With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing... Which fiduciary portfolio manager can still afford to hedge? Any price to hedge seems expensive and with no demand, the price of protection falls almost daily. The CDX NA IG20 index (i.e. the investment grade credit default swap index series 20, tracking the credit risk of 125 North American investment grade companies in the credit default swap market) closed the week at 70-71bps. The index was at this level back in the spring of 2005. By the summer of 2007, any credit portfolio manager that would have wanted to cautiously hedge with this index would have seen a further compression of 75% in spreads, completely wiping him/her out. It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. In anticipation to the next and perhaps final attempt, I want to offer today an historical perspective on the favorite liquidity injection tool: Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now… How it all began Let me clarify: By currency swaps, I refer to a transaction carried out between two central banks. This means that currency swaps cannot be older than the central banks that extend them. On the other hand, foreign exchange swaps between corporations may date back to the late Middle Ages, when trade began to resurface in the Italian cities and the Hansastdte . Having said this, I believe that currency swaps were born in 1922, during the International Monetary Conference that took place in Geneva. This conference marked the beginning of the Gold Exchange Standard, with the goal of stabilizing exchange rates (in terms of gold) back to the pre-World War I. According to Prof. Giovanni B. Pittaluga (Univ. di Genova), there were two key resolutions from the conference, which opened the door to currency swaps. Resolution No. 9 proposed that central banks “… centralise and coordinate the demand for gold, and so avoid those wide fluctuations in the purchasing power of gold which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves… ” Resolution No. 9 also spelled how the cooperation among central banks would work, which “…should embody some means of economizing the use of gold maintaining reserves in the form of foreign balance, such, for example, as the gold exchange standard or an international clearing system… ” In Resolution No. 11, we learn that: “…The convention will thus be based on a gold exchange standard.” (…) “ …A participating country, in addition to any gold reserve held at home, may maintain in any other participating country reserves of approved assets in the form of bank balances, bills, short-term Securities, or other suitable liquid assets …. when progress permits, certain of the participating countries will establish a free market in gold and thus become gold centers ”. Lastly, gold or foreign exchange would back no less than 40% of the monetary base of central banks. With this agreement, the stage was set to manipulate liquidity in a coordinated way to a degree the world had never witnessed before. The reserve multiplier, composed by gold and foreign exchange could be “managed” and through an international clearing system, it could be managed globally. How adjustments worked under the Gold Standard Before 1922, adjustments within the Gold Standard involved the free movement of gold. In the figure below, I show what an adjustment would have looked like, as the United States underwent a balance of trade deficit, for instance: Gold would have left the United States, reducing the asset side of the balance sheet of the Federal Reserve. Matching this movement, the monetary base (i.e. US dollars) would have fallen too. The gold would have eventually entered the balance sheet of the Banque of France, which would have issue a corresponding marginal amount of French Francs. It is worth noting that the interest rate, in gold, would have increased in the United States, providing a stabilizing/balancing mechanism, to repatriate the gold that originally left, thanks to arbitraging opportunities. As Brendan Brown (Head of Economic Research at Mitsubishi UFJ Securities International) explained ( here ), with free determination of interest rates and even considerable price fluctuations, agents in this system had the legitimate expectation that key relative prices would return to a “perpetual” level. This expectation provided “…the negative real interest rate which Bernanke so desperately tries to create today with hyped inflation expectations…” There is an excellent work on the mechanics of this adjustment published by Mary Tone Rodgers and Berry K. Wilson, with regards to the Panic of 1907 (see here ). The authors sustain that the gold flows that ensued from Europe into the United States provided the liquidity necessary to mitigate the panic, without the need of intervention. This success in reducing systemic risk was due to the existence of US corporate bonds (mainly from railroads) with coupon and principal payable in gold, in bearer or registered form (at the option of the holder) that facilitated transferability, tradable jointly in the US and European exchanges, and within a payment system operating largely out of reach from banksters outside of the bank clearinghouse systems. The official story is that the system was saved by a $25MM JPM-led pool of liquidity injected to the call loan market. How adjustments worked under the Gold Exchange Standard During the 1920s and particularly with the stock imbalances resulting from World War I, the search for sustainable financing of reparation payments began. Complicating things, the beginning of this decade saw thehyper inflationaryprocesses in Germany and Hungary. By 1924, England and the United States rolled out the Dawes Plan and between 1926 and 1928, the so called Poincaré Stabilization Plan in France. The former got Charles G. Dawes the Nobel Prize Peace, in 1925. As the figure below shows, against a stable stock of gold, fiat currency would be loaned between central banks. In the case of a swap for the Banque de France, US dollars would be available/loaned, which were supposedly backed by gold. The reserve multiplier vs. gold expanded, of course: With these transactions central banks would now be able to influence monetary (i.e. paper) interest rates. The balancing mechanism provided by gold interest rate differentials had been lost. As we saw under the Gold Standard before, an outflow of US dollars would have caused US dollar rates to rise, impacting on the purchasing power of Americans. Now, the reserve multiplier versus gold expanded and the purchasing power of the nation that provided the financing was left untouched. The US dollar would depreciate ( on the margin and ceteris paribus ) against the countriesbenefitingfrom these swaps. Inflation was exported therefore from the issuing nation (USA) to the receiving nations (Europe). The party lasted until 1931, when the collapse of the KreditAnstalt triggered a unanimous wave of deflation. How the perspective changed as the US became a debtor nation Fast forward to 1965, two decades after World War II, and currency swaps are no longer seen as a tool to temporarily “stabilize” the financing of flows, like balance of trade deficits or war reparation payments, but stocks of debt. By 1965, central bankers are already worried with the creation of reserve assets, just like they are today; with the creation of collate ral (see this great post by Zerohedge on the latter). Indeed, 48 years ago, the Group of Ten presented what was called the Ossola Report , after Rinaldo Ossola , chairman of the study group involved in its preparation and also vice-chairman of the Bank of Italy. This report was specifically concerned with the creation of reserve assets. At least back then, gold was still considered to be one of them. In an amazing confession (although the document was initially restricted), the Ossola Group explicitly declared that the problem “… arises from the considered expectation that the future flow of gold into reserves cannot be prudently relied upon to meet all needs for an expansion of reserves associated with a growing volume of world trade and payments and that the contribution of dollar holdings to the growth of reserves seems unlikely to continue as in the past…” Currency swaps were once again considered part of the solution. Under the so called “currency assets”, the swaps were included by the Ossola Group, as a useful tool for the creation of alternative reserves. Three months, during a Hearing before the Subcommittee on National Security and International Operations, William McChesney Martin, Jr., at that time Chairman of the Board of Governors of the Federal Reserve System, acknowledged a much greater role to currency swaps, in maintaining the role of the US dollar as the global reserve currency. In McChesney Martin’s words: “…Under the swap agreements, both the System (i.e. Federal Reserve System) and its partners make drawings only for the purpose of counteracting the effects on exchange markets and reserve positions of temporary or transitional fluctuations in payments flows. About half of the drawings ever made by the System, and most of the drawings made by foreign central banks, have been repaid within three months; nearly 90 per cent of the recent drawings made by the System and 100 per cent of the drawings made by foreign central banks have been repaid within six months. In any event, no drawing is permitted to remain outstanding for more than twelve months. This policy ensures that drawings will be made, either by the System or by a foreign central, bank, only for temporary purposes and not for the purpose of financing a persistent payments deficit. In all swap arrangements both parties are fully protected from the danger of exchange-rate fluctuations. If a foreign central bank draws dollars, its obligation to repay dollars would not be altered if in the meantime its currency were devalued. Moreover, the drawings are exchanges of currencies rather than credits. For instance, if, say, the National Bank of Belgium draws dollars, the System receives the equivalent in Belgian francs; and since the National Bank of Belgium has to make repayment in dollars, the System is at all times protected from any possibility of loss. Obviously, the same protection is given to foreign central banks whenever the System draws a foreign currency. The interest rates for drawings are identical for both parties. Hence, until one party disburses the currency drawn, there is no net interest burden for either party. Amounts drawn and actually disbursed incur an interest cost, needless to say; the interest charge is generally close to the U.S. Treasury bill rate…” My graph below should help visualize the mechanism: Essentially, with these currency swaps, foreign central banks that during the war had shifted their gold to the USA, became middlemen of a product that was a first-degree derivative of the US dollar, and a second-degree derivative of gold. On September 24th 1965, someone called this Ponzi scheme out. In an article published by Le Monde, Jacques Rueff publicly responded to this nonsense, under the hilarious title “ Des plans d’irrigation pendant le déluge ” (i.e. Irrigation plans during the flood). He minced no words and wrote: “… C’est un euphénisme inacceptable et une scandaleuse hyprocrisie que de qualifier de création de “liquidités internationales” les multiples operations, tells que (currency) swaps…” “C’est commetre une fraude de meme nature que de présenter comme la consequence d’une insuffiscance générale de liquidités l’insufficance des moyens dont disposent les Etats-Unis et l’Anglaterre pour le réglement de leur déficit exterieur” My translation: “…It is an unacceptable euphemism and an outrageous hypocrisy to qualify as creation of “international liquidity” multiple transactions, like (currency) swaps…”…“…In the same fashion, it is a fraud to present as the consequence of a general lack of liquidity, the lack of means available to the USA and England to settle their external deficits …” Comparing the USA and England to underdeveloped countries, Rueff added that these also lack external resources, but those that are needed cannot be provided to them but by credit operations, rather than the superstition of a monetary invention disguised as necessary and in the general interest of the public (i.e. rest of the world). With impressive prediction, Rueff warned that the problem would present itself in all its greatness, the day these two countries decide to recover their financial independence by reimbursing with their dangerous liabilities (i.e. currencies). That day, said Rueff, international coordination would be necessary and legitimate. But such coordination would not revolve around the creation of alternative instruments of reserve, demanded by a starving-for-liquidity world. That day would be a day of liquidation, where debtors and creditors would be equally interested and would share the common responsibility of the lightness with which they jointly accepted the monetary difficulties that are present ….Sadly, Rueff’s call could not sound more familiar to the observer in 2013… How adjustments work today, without currency swaps Until the end of the Gold Exchange Standard, even if the reserve multiplier suppressed the value of gold (like today), gold was still the ultimate reserve and had in itself no counterparty risk. After August 15th, 1971, when Nixon issued the Executive Order 11615 (watch announcement here ), the ultimate reserve was simply cash (i.e. US dollars) or its counterpart, US Treasuries. And unlike gold, these reserve assets could be created or destroyed ex-nihilo. When they are re-hypothecated, leverage grows unlimited and when their value falls, valuations dive unstoppable. Because (and unlike in 1907) the transmission channel for these reserves today is the banking system, when they become scarce, counterparty risk morphs into systemic risk. When Rueff discussed currency swaps, he had imbalances in mind. In the 21st century, we no longer have time to worry about these superfluous things. Balance of trade deficits? Current account deficits? Fiscal deficits? In the 21st century, we cannot afford to see the big picture. We can only see the “here and now”. Therefore, when we talk about currency swaps, the only thing we have in mind is counterparty risk within the financial system. The thermometer that measures such risk is the Eurodollar swap basis, shown below (source: Bloomberg). As the US dollar became the carry currency, the cost of accessing to it became the cornerstone of value for the rest of the asset spectrum, widely known as “risk”. In the chat below, we can see two big gaps in the Eurodollar swap basis. The one in 2008 corresponds to the Lehman event. The one in 2011 corresponds to the banking crisis in the Eurozone that was contained with a reduction in the cost of USDEUR swaps and with the Long-Term Refinancing Operations done by the European Central Bank. In both events, the financial system was in danger and banks were forced to delever. How would the adjustment process have worked, had there not been currency swaps to extend? In the figure below, I explain the adjustment process, in the absence of a currency swap. As we see in step 1, given the default risk of sovereign debt held by Eurozone banks, capital leaves the Eurozone, appreciating the US dollar. We see loan loss reserves increase (bringing the aggregate value of assets and equity down). As these banks have liabilities in US dollars and take deposits in Euros, this mismatch and the devaluation of the Euro deteriorates their risk profile Eurozone banks are forced to sell US dollar loans, shown on step 2. As they sell them below par, the banks have to book losses. The non-Eurozone banks that purchase these loans cannot book immediate gains. We live in a fiat currency world, and banks simply let their loans amortize; there’s no mark to market. With these purchases, capital re-enters the Eurozone, depreciating the US dollar. In the end, there is no credit crunch. As long as this process is left to the market to work itself out smoothly, borrowers don’t suffer, because ownership of the loans is simply transferred. This is neutral to sovereign risk, but going forward, if the sovereigns don’t improve their risk profile, lending capacity will be constrained. In the end, an adjustment takes place in (a) the foreign exchange market, (b) the value of the bank capital of Eurozone banks, and (c) the amount of capital being transferred from outside the Eurozone into the Eurozone. How adjustments work today, with currency swaps Let’s now proceed to examine the adjustment –or better said, lack thereof- in the presence of currency swaps. The adjustment is delayed. In the figure below, we can see that the Fed intervenes indirectly, lending to Eurozone banks through the ECB. Capital does not leave the US. Dollars are printed instead and the US dollar depreciates. On November 30th, of 2011, upon the Fed’s announcement at 8am, the Euro gained two cents vs. the US dollar. As no capital is transferred, no further savings are required to sustain the Eurozone and the misallocation of resources continues, because no loans are sold. This is bullish of sovereign risk. The Fed becomes a creditor of the Eurozone. If systemic risk deteriorates in the Eurozone, the Fed is forced to first keep reducing the cost of the swaps and later to roll them indefinitely, as long as there is a European Central Bank as a counterparty for the Fed , to avoid an increase in interest rates in the US dollar funding market. But if the Euro zone broke up, there would not be any “safe” counterparty –at least in the short term- for the Fed to lend US dollars to. In the presence of a European central bank, the swaps would be bullish for gold. In the absence of one, the difficulty in establishing swap lines would temporarily be very bearish for gold (and the rest of the asset spectrum). Final words Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. This occurred in two steps: First at a global level, with the irredeemability of gold: The world could no longer devalue. Second, at a local and inter-temporal level, with zero interest rates: Countries can no longer produce consumption adjustments. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation. Average: 4.78261 Your rating: None Average: 4.8 ( 23 votes)
Real Estate Investment Trusts (REITs) This chapter discusses the history and current operations of real estate investment trusts (REITs). The resurgence of REITs in the early 1990s is another indication of the extent that real estate has become "securitized." Compared with traditional methods of investing, real estate–backed securities appear to be gaining in importance because of their marketability, the public accountability of management, and numerous other reasons. REITs, which provide a structure similar to that of mutual funds for common stock investors, allow investors to participate in a portfolio of properties that may be geographically diversified and professionally managed. Further, REITs are usually tax-exempt and must pass through as dividends to investors most of the cash flow produced from managing the portfolio. Accounting practices for depreciation and amortization and the resultant effects on net income may allow a portion of the tax on REIT dividends to be deferred. Today, the market value of REITs exceeds $190 billion, and many of the premier real estate operators in the United States are operating within the REIT format, so market research and analysis for individual REITs and the industry are widely available from investment banks and other investment firms.
Single Family Housing: Pricing, Investment, and Tax Considerations 家庭住宅：定价、投资和税收 Readers will gain a general understanding of the determinants of house prices and appraisal procedures used for residential mortgage lending. We will provide techniques for determining the appreciation rates in house prices and on equity, as well as federal income tax treatment for homeowners and comparisons with the cost of renting. We will also review the three approaches used by appraisers to estimate the market value of residential properties. Various issues involving housing bubbles and investing in distressed properties will be discussed. Lenders and investors should be familiar with these concepts and with the assumptions made by each and their effects on value.
Job Title：Quantitative Developer Employment Type：Part time Employment Type： It is an excellent opportunity to join the dynamic equity equities derivatives and cross-asset hedge fund platform of Everbright Securities which is a listed leading Chinese investment bank (601788 SH) based in Shanghai with presence in China and offshore Job Description： Develop, deploy and manage market data and trading systems in the areas including but not limited to cash equities, ETFs, index futures and options. Qualification and Requirements: 1. Solid background in computer science or engineering disciplines and in-depth knowledge of financial instruments and market data; 2. Extensive experience in processing and analyzing large data sets, and good knowledge of time series database and database programming; 3. Strong command of programming languages such as C/C /C#, Java , Excel (VBA), Matlab/R; 4. Working knowledge of Linux and Windows operating systems; 5. Understanding of exchanges and market structures; 6. Previous experience as a front-office developer supporting quant trading or market making, within a financial institution is preferred; 7. Integrity and excellence, team-work spirit, passion for technology and quantitative investment, out-of-box thinking and readiness to succeed in a fast-paced environment.
China's Economy "Bottoming Out"? - Not So Fast! Submitted by Tyler Durden on 12/04/2012 14:27 -0500 China Fitch Gross Domestic Product Michael Pettis ratings Reuters While China's equity index continues to plumb new depths, the macro data of the past two weeks has been the crutch for US equity bulls losing faith in the fiscal cliff negotiations - growth is up, investment is up, and inflation is down - with analysts hailing the news as evidence that the Chinese economy has "truly bottomed out." As Michael Pettis, of China Financial Markets , notes though "I think we need to be very cautious and refrain from allowing ourselves to get too caught up in the huge sigh of relief that the sell side is heaving . Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all." His perspective is simply that Beijing cannot afford 'politically' to allow the transition/adjustment/reforms to take place too fast - and occasionally needs "to step on the investment accelerator." The bottom-line, he notes, is that " you can get as much growth as you like if you expand credit, but once expanding credit has become the problem, it cannot also be a permanent solution to slower growth . The country’s balance sheet continues to deteriorate – and the most recent growth spurt implies faster deterioration – and this, ultimately, is the main constraint of the Chinese growth model." SHCOMP vs HSI or Industrial Output vs PMI Via Michael Pettis, China Financial Markets : The big news in the past two weeks has been the slew of economic data suggesting that China has firmly turned the corner on its economic closedown. ... I think we need to be very cautious and refrain from allowing ourselves to get too caught up in the huge sigh of relief that the sell side is heaving . Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all. They simply represent the fact that Beijing cannot afford politically to allow the adjustment to take place too quickly , and from time to time Beijing is are going to step on the investment accelerator to speed things up temporarily. More credit Doing so of course will only make the adjustment longer and more painful , but given how difficult politically the transition to a balanced economy is likely to be, we would be crazy to expect otherwise. ... You can get as much growth as you like if you expand credit , but once expanding credit has become the problem, it cannot also be a permanent solution to slower growth. The country’s balance sheet continues to deteriorate – and the most recent growth spurt implies faster deterioration – and this, ultimately, is the main constraint of the Chinese growth model. Within the banking sector we are seeing all kinds of strains as companies and banks stretch for liquidity. Large-company receivables are growing quickly, as are payables (no one, it seems, wants to part with cash), loans simply are not getting repaid, and deposits are no longer growing, perhaps because flight capital is more than enough to offset China’s very high trade surplus. ... Remember that thanks to disguised flight capital and commodity stockpiling the surplus is almost certainly a lot larger than reported, and yet banks are still feeling the liquidity squeeze . And for all their happy noises, the authorities nonetheless are worried, at least about certain parts of the banking system. ... Most worrying of all Charlene Chu, perhaps the only analyst who actually understand what is happening in the banking system, released a new report with Fitch Ratings that is described in a Reuters article : Fitch Ratings says faster growth of broad credit in Q312 was one factor behind the recent improvement in Chinese economic data . In a comment published today, the agency highlights that, after slowing from Q411 to Q212, broad credit is back on track to surpass CNY17trn (USD2.7trn) in 2012. Fitch’s measure of broad credit includes shadow and offshore sources omitted from the central bank’s official total societal financing metric. “ This marks the fourth year in a row that net new credit will exceed one-third of GDP ,” said Charlene Chu, Head of Chinese banks’ ratings at Fitch. At current growth rates, by 2013 China’s banking sector assets will have expanded by nearly USD14trn since 2008. This is equivalent to replicating the entire US commercial banking sector in just five years . Such massive balance sheet expansion has limits, according to the agency. You can accelerate investment forever It is, to me, astonishing that China in just five years is “replicating the entire US commercial banking sector”, and yet so many analysts are expressing delight with China’s return to growth. Of course you can generate growth if you force such a tremendous expansion in credit, but this is simply unsustainable. I know I’ve said this many times, and I apologize for boring regular readers, but while I expected that politics would require a jump in growth over the rest of this year and the beginning of the next, this “good growth” tells us nothing about the health of the underlying economy. It only tells us how difficult politically the transition is likely to be. My guess is that the more difficult the consolidation of power, the longer the period of above 7% growth – so the happier the sell-side analysts are, the more worried long-term investors should be. At some point growth will start dropping rapidly again, and of course the same analysts who are now hailing the return to rapid growth will assure you, when growth begins to slow sharply again, that this was part of Beijing’s plan and was fully predictable. China is slowing because Beijing wants it to slow, they will say, and that’s a good thing. Meanwhile the fact that China is speeding up is also a good thing. ... I also published for Foreign Policy last week a longer piece on the challenges facing the new leadership in China . My main argument in the Foreign Policy piece is that both historical precedents and a common sense understanding of the rebalancing process suggest that politics, not economics, will determine China’s success . So far Beijing has succeeded largely because of its ability to collect and control the total savings of the country, and unleash waves of investment whenever necessary. Many countries have done the same things, but once credit expansion is no longer efficiently invested, few countries have made the transition to a different growth model . Powerful groups who benefitted from the old growth model – in China they are referred to generically as “vested interests” – have always succeeded in diluting or preventing the necessary reforms. The rebalancing always occurs anyway, either in the form of a debt crisis and negative growth or in the form of a long period of no growth and slow rebalancing. Some times – very rarely – the country completes the rebalancing and then moves swiftly on to becoming a developed country, but this doesn’t happen often. Of the dozens of developing economies that have experienced investment-driven growth miracles in the past 100 years, the only ones that have managed the transition to developed country status are South Korea, Taiwan, and maybe Chile. This is a pretty limited success ratio. China’s previous success, in other words, tells us noting about how it will manage the next stage, and the precedents give us little reason to assume that the country can’t help but advance to the next stage of development. In fact the more confident Beijing is that it will manage the transition successfully, the less likely it is to succeed, which is why I am delighted that policy advisors seem so much more pessimistic than sell-side analysts. What happens to China will be determined largely by the political decisions it will make in the next few years, and it is foolish to assume we know how things will turn out. Average: 4.8 Your rating: None Average: 4.8 ( 5 votes) Tweet Login or register to post comments 5183 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: The Three Toughest Questions For China Bulls Charting The Undoing Of Credit-Fueled Globalization The Far More Important 'Election' Part 1: China's Political Process Why The Real Earnings Picture Is Bad And Getting Worse Guest Post: Ceilings, Cliffs And TAG - 3 Immediate Risks
Will LGIVs Be The 'Straw' To Break China's Credit-Fueled Growth 'Back'? Submitted by Tyler Durden on 11/23/2012 19:55 -0500 Barclays Bond China We presented a detailed look into China's credit bubble earlier this week and why serial-extrapolators may well have to adjust their strategy calls sooner rather than later; but the more we look around in the detritus of China's non-centrally-issued datasets, the more concerned we become. To wit, the major issuance of local government investment vehicles (LGIVs) in the last few months to stabilize growth amid falling fiscal revenue growth . The unintended consequence of PBoC-sponsored debt restructurings (as Barclays notes, rolling over debt via the issuance of new products or buyouts by asset management companies) is creating a false sense of security for these instruments, reinforcing the belief of an 'implicit government guarantee' . We tend to agree with Barclays when they conclude that the underestimation of the credit risks in both the trust loans and bond markets could induce excessive risk-taking - and warrants extremely close monitoring. Average: 4.714285 Your rating: None Average: 4.7 ( 7 votes) Tweet Login or register to post comments 3481 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Frontrunning: October 10 Barclays Wins Euromoney's Best Global Debt, Best Investment Bank, And Best Global Flow House Of The Year Awards West vs East Banker Pay Comparison: JPM's Jamie Dimon: $23,000,000; ICBC's Jiang Jianqing: $308,000 Frontrunning: October 25 Faber: "Middle East Will Go Up In Flames" ... "Have To Be In Precious Metals And Equities"
Chapter 6 Investment Decision Rules 6.1 NPV and Stand-Alone Projects 1) Which of the following statements is false? A) About 75% of firms surveyed used the NPV rule for making investment decisions. B) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. C) To decide whether to invest using the NPV rule, we need to know the cost of capital. D) NPV is positive only for discount rates greater than the internal rate of return. Answer: D Diff: 1 Skill: Conceptual 2) Which of the following statements is false? A) In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the IRR, the NPV will be positive. Answer: D Explanation: D) If the cost of capital estimate is more than the IRR, the NPV will be negative. Diff: 1 Skill: Conceptual Chapter 6 Investment Decision Rules 105 Use the table for the question(s) below. Consider a project with the following cash flows: Year Cash Flow 0 -10,000 1 4,000 2 4,000 3 4,000 4 4,000 3) If the appropriate discount rate for this project is 15%, then the NPV is closest to: A) $6,000 B) -$867 C) $1,420 D) $867 Answer: C Explanation: C) NPV = -10,000 + 4000 / (1.15)1 + 4000 / (1.15)2 + 4000 / (1.15)3 + 4000 / (1.15)4 = 1419.91 Diff: 1 Skill: Analytical Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 4) The NPV of project A is closest to: A) 12.0 B) 12.6 C) 15.0 D) 42.9 Answer: A Explanation: A) NPV = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04 Diff: 1 Skill: Analytical 106 Berk/DeMarzo · Corporate Finance 5) The NPV of project B is closest to: A) 12.6 B) 23.3 C) 12.0 D) 15.0 Answer: A Explanation: A) NPV = -73+ 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.6494 Diff: 1 Skill: Analytical Use the information for the question(s) below. The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year One Year Two Year Three Year Four $200,000 $225,000 $275,000 $200,000 The appropriate discount rate for this project is 16%. 6) The NPV for this project is closest to: A) $176,270 B) $123,420 C) $450,000 D) $179,590 Answer: A Explanation: A) NPV = -450000+ 200,000 / (1.16)1 +225000 / (1.15)2 + 275000 / (1.15)3 +200,000 / (1.15)4 = 176,265 Diff: 1 Skill: Analytical Chapter 6 Investment Decision Rules 107 Use the table for the question(s) below. Consider the following two projects: Project Year 0 C/F Year 1 C/F Year 2 C/F Year 3 C/F Year 4 C/F Year 5 C/F Year 6 C/F Year 7 C/F Discount Rate Alpha -79 20 25 30 35 40 N/A N/A 15% Beta -80 25 25 25 25 25 25 25 16% 7) The NPV for project alpha is closest to: A) $20.96 B) $16.92 C) $24.01 D) $14.41 Answer: B Explanation: B) NPV = -79+ 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92 Diff: 2 Skill: Analytical 8) The NPV for project beta is closest to: A) $24.01 B) $16.92 C) $20.96 D) $14.41 Answer: C Explanation: C) NPV = -80+ 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 + 50 / (1.16)6 + 25 / (1.16)7= 20.96 Diff: 2 Skill: Analytical 108 Berk/DeMarzo · Corporate Finance Use the information for the question(s) below. Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larryʹs personal cost of capital is 10% per year. 9) The NPV of Larryʹs three movie Larry Boy offer is closest to: A) 3.5 million B) -1.6 million C) 1.6 million D) -1.0 million Answer: C Explanation: C) NPV = 14 + -5 / (1.10)1 + -5 / (1.10)2 + -5 / (1.10)3 = 1.57 Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 109 Use the information for the question(s) below. Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderadoʹs discount rate is 10%. 10) The NPV for Boulderadoʹs snowboard project is closest to: A) $228,900 B) $46,900 C) $51,600 D) $23,800 Answer: C Explanation: C) CF0 = -250,000 CF1 = -250,000 CF2 = -250,000 CF3 = -250,000 CF4 = +200,000 CF5 = +200,000 CF6 = +200,000 CF7 = +200,000 CF8 = +200,000 CF9 = +200,000 CF10 = +200,000 CF11 = +200,000 CF12 = +200,000 CF13 = +200,000 I = 10 Compute NPV = 51,588 Diff: 2 Skill: Analytical 6.2 Alternative Decision Rules 1) Which of the following statements is false? A) The IRR investment rule will identify the correct decision in many, but not all, situations. B) By setting the NPV equal to zero and solving for r, we find the IRR. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) The simplest investment rule is the NPV investment rule. Answer: D Diff: 1 Skill: Conceptual 110 Berk/DeMarzo · Corporate Finance 2) Which of the following statements is false? A) It is possible that an IRR does not exist for an investment opportunity. B) If the payback period is less than a pre-specified length of time you accept the project C) The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity you should undertake the investment opportunity. D) It is possible that there is no discount rate that will set the NPV equal to zero. Answer: C Diff: 2 Skill: Conceptual 3) Which of the following statements is false? A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B) An IRR will always exist for an investment opportunity. C) A NPV will always exist for an investment opportunity. D) In general, there can be as many IRRs as the number of times the projectʹs cash flows change sign over time. Answer: B Diff: 2 Skill: Conceptual 4) Which of the following statements is false? A) The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. B) The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. C) Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. D) There are situations in which multiple IRRs exist. Answer: C Diff: 2 Skill: Conceptual Chapter 6 Investment Decision Rules 111 5) Which of the following statements is false? A) In general, the IRR rule works for a stand-alone project if all of the projectʹs positive cash flows precede its negative cash flows. B) There is no easy fix for the IRR rule when there are multiple IRRs. C) The payback rule is primarily used because of its simplicity. D) No investment rule that ignores the set of alternative investment alternatives can be optimal. Answer: A Diff: 2 Skill: Conceptual 6) Which of the following statements is false? A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV. B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C) For most investment opportunities expenses occur initially and cash is received later. D) Fifty percent of firms surveyed reported using the payback rule for making decisions. Answer: B Diff: 2 Skill: Conceptual 7) Which of the following statements is false? A) The distinction between simply making money and creating value is the essence of the NPV calculation. B) The concept of economic profit has been popularized recently under the name Economic Value Added (EVA). C) EVA is a measure of value created over the life of a project. D) The EVA investment rule can be stated as accept any investment opportunity in which the present value of all future EVAs is positive. Answer: C Diff: 2 Skill: Conceptual 112 Berk/DeMarzo · Corporate Finance Use the table for the question(s) below. Consider a project with the following cash flows: Year Cash Flow 0 -10,000 1 4,000 2 4,000 3 4,000 4 4,000 8) Assume the appropriate discount rate for this project is 15%. The payback period for this project is closest to: A) 3 B) 2.5 C) 2 D) 4 Answer: B Explanation: B) Payback = 10000 / 4000 = 2.5 Diff: 1 Skill: Analytical 9) Assume the appropriate discount rate for this project is 15%. The IRR for this project is closest to: A) 21% B) 22% C) 15% D) 60% Answer: B Explanation: B) CF0 = -10000 CF1 = 4000 CF2 = 4000 CF3 = 4000 CF4 = 4000 Compute IRR = 21.86% Diff: 1 Skill: Analytical Chapter 6 Investment Decision Rules 113 Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 10) The payback period for project A is closest to: A) 2.0 years B) 2.4 years C) 2.5 years D) 2.2 years Answer: D Explanation: D) Payback period. It is clear that the project is not paid off after two years since we have only received 90 toward the 100 investment. To calculate the fraction of the third year, we take the $10 yet to be repaid ($100 investment - $40 (year 1) - $50 (year 2)) / $60 (cashflow in year 3) = .166667 so the payback is 2.166667 years. Diff: 2 Skill: Analytical 11) The payback period for project B is closest to: A) 2.5 years B) 2.0 years C) 2.2 years D) 2.4 years Answer: D Explanation: D) Payback = 73 / 30 = 2.43 years Diff: 1 Skill: Analytical 114 Berk/DeMarzo · Corporate Finance 12) The internal rate of return (IRR) for project A is closest to: A) 7.7% B) 21.6% C) 23.3% D) 42.9% Answer: B Explanation: B) CF0 = -100 CF1 = 40 CF2 = 50 CF3 = 60 Compute IRR = 21.64% Diff: 2 Skill: Analytical 13) The internal rate of return (IRR) for project B is closest to: A) 21.6% B) 23.3% C) 42.9% D) 7.7% Answer: B Explanation: B) CF0 = -73 CF1 = 30 CF2 = 30 CF3 = 30 CF4 = 30 Compute IRR = 23.34% Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 115 14) Which of the following statements is correct? A) You should accept project A since its IRR 15% B) You should reject project B since its NPV 0 C) Your should accept project A since its NPV 0 D) You should accept project B since its IRR 15% Answer: A Explanation: A) NPVA = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04 NPVB = -73+ 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.65 IRR A CF0 = -100 CF1 = 40 CF2 = 50 CF3 = 60 Compute IRR = 21.64% IRR B CF0 = -73 CF1 = 30 CF2 = 30 CF3 = 30 CF4 = 30 Compute IRR = 23.34% Diff: 3 Skill: Analytical 15) The maximum number of IRRs that could exist for project B is: A) 3 B) 1 C) 2 D) 0 Answer: B Diff: 1 Skill: Conceptual 116 Berk/DeMarzo · Corporate Finance Use the table for the question(s) below. Consider the following two projects: Project Year 0 C/F Year 1 C/F Year 2 C/F Year 3 C/F Year 4 C/F Year 5 C/F Year 6 C/F Year 7 C/F Discount Rate Alpha -79 20 25 30 35 40 N/A N/A 15% Beta -80 25 25 25 25 25 25 25 16% 16) The payback period for project Alpha is closest to: A) 3.2 years B) 2.9 years C) 3.1 years D) 2.6 years Answer: C Explanation: C) It is clear that the project will not be paid off until sometime after year 3. After the cashflow in year three there will still be $4 remaining to be paid back in year four (79 - 20 - 25 - 30) = 4 To find the fractional year take 4 / 35 = .1143 so payback is 3.11 years Diff: 2 Skill: Analytical 17) The payback period for project beta is closest to: A) 2.9 years B) 3.1 years C) 2.6 years D) 3.2 years Answer: D Explanation: D) Payback = 80 / 25 = 3.2 Diff: 1 Skill: Analytical Chapter 6 Investment Decision Rules 117 18) The internal rate of return (IRR) for project Alpha is closest to: A) 25.0% B) 22.2% C) 24.5% D) 22.7% Answer: D Explanation: D) CF0 = -79 CF1 = 20 CF2 = 25 CF3 = 30 CF4 = 35 CF5 = 40 Compute IRR = 22.68 Diff: 2 Skill: Analytical 19) The internal rate of return (IRR) for project Beta is closest to: A) 25.0% B) 22.7% C) 24.5% D) 22.2% Answer: C Explanation: C) PV = -80 PMT = 25 FV = 0 N = 7 Compute I = 24.52 Diff: 2 Skill: Analytical 118 Berk/DeMarzo · Corporate Finance 20) Which of the following statements is correct? A) You should invest in project Beta since NPVBeta 0 B) You should invest in project Alpha since IRRAlpha IRRBeta C) Your should invest i project Alpha since NPVAlpha 0 D) You should invest in project Beta since IRRBeta 0 Answer: A Explanation: A) NPV Alpha NPV = -79 + 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92 NPV Beta NPV = -80 + 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 + 25 / (1.16)6 + 25 / (1.16)7= 20.96 IRR Alpha CF0 = -79 CF1 = 20 CF2 = 25 CF3 = 30 CF4 = 35 CF5 = 40 Compute IRR = 22.68 IRR Beta PV = -80 PMT = 25 FV = 0 N = 7 Compute I = 24.52 Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 119 Use the information for the question(s) below. The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year One Year Two Year Three Year Four $200,000 $225,000 $275,000 $200,000 The appropriate discount rate for this project is 16%. 21) The payback period for this project is closest to: A) 2.1 years B) 3.0 years C) 2 years D) 2.2 years Answer: A Explanation: A) It is clear that the project will not be paid off after 2 years. The balance due after the second year is equal to 450000 - 200000 - 225000 = $25,000, so to find the fractional year we take 25000/275000 = .0909 so the payback period = 2.09 years Diff: 1 Skill: Analytical 22) The IRR for this project is closest to: A) 18.9% B) 22.7% C) 34.1% D) 39.1% Answer: C Explanation: C) CF0 = -450000 CF1 = 200000 CF2 = 225000 CF3 = 275000 CF4 = 200000 Compute IRR = 34.12% Diff: 1 Skill: Analytical 120 Berk/DeMarzo · Corporate Finance Use the information for the question(s) below. Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larryʹs personal cost of capital is 10% per year. 23) The IRR for Larryʹs three movie deal offer is closest to: A) 3.5% B) 1.6% C) -3.5% D) -1.6% Answer: A Explanation: A) CF0 = +14 CF1 = -5 CF2 = -5 CF3 = -5 Compute IRR = 3.53% Diff: 2 Skill: Analytical 24) Larry should: A) Reject the offer because the NPV 0 B) Accept the offer even though the IRR 10%, because the NPV 0 C) Reject the offer because the IRR 10% D) Accept the offer because the IRR 0% Answer: B Explanation: B) NPV = 14 + -5 / (1.10)1 + -5 / (1.10)2 + -5 / (1.10)3 = 1.57 CF0 = +14 CF1 = -5 CF2 = -5 CF3 = -5 Compute IRR = 3.53% Diff: 3 Skill: Analytical Chapter 6 Investment Decision Rules 121 Use the information for the question(s) below. Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderadoʹs discount rate is 10%. 25) The IRR for Boulderadoʹs snowboard project is closest to: A) 10.4% B) 10.0% C) 11.0% D) 15.1% Answer: C Explanation: C) CF0 = -250,000 CF1 = -250,000 CF2 = -250,000 CF3 = -250,000 CF4 = +200,000 CF5 = +200,000 CF6 = +200,000 CF7 = +200,000 CF8 = +200,000 CF9 = +200,000 CF10 = +200,000 CF11 = +200,000 CF12 = +200,000 CF13 = +200,000 Compute IRR = 11.01% Diff: 2 Skill: Analytical 122 Berk/DeMarzo · Corporate Finance 26) Calculate the IRR for the snow board project and use it to determine he maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged. The maximum deviation allowable is closest to: A) 11.0% B) 0.0% C) 2.5% D) 1.0% Answer: D Explanation: D) CF0 = -250,000 CF1 = -250,000 CF2 = -250,000 CF3 = -250,000 CF4 = +200,000 CF5 = +200,000 CF6 = +200,000 CF7 = +200,000 CF8 = +200,000 CF9 = +200,000 CF10 = +200,000 CF11 = +200,000 CF12 = +200,000 CF13 = +200,000 Compute IRR = 11.01% Maximum deviation = IRR - Cost of Capital = 11.0% - 10.0% = 1.0% Diff: 3 Skill: Analytical Use the information for the question(s) below. Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larryʹs personal cost of capital is 10% per year. 27) Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larryʹs three movie deal offer. Answer: The NPV rule will always give the right decision. In this problem, Larry starts with the cash up front, a positive cash flow, then followed by three negative cash flows. This is the exact opposite as what we want with the IRR. The IRR assumes that we start with a negative outflow followed by Inflow(s). Since we start with a positive cash inflow, the IRR rule cannot be trusted to give the correct answer. Diff: 3 Skill: Conceptual Chapter 6 Investment Decision Rules 123 28) You are considering an investment in an everlasting gobstopper machine. This machine will cost $10 million and will produce cash flows of $1 million and the end of every year forever. The appropriate cost of capital is 8%. Compute the economic value added (EVA) for this project. Calculate the PV of the EVAs for this project. Answer: The EVA in every year is: Cn - 10r = 1 - 10r Using the perpetuity formula, the present value of these EVAs is PV(EVA) = 1 - 10r (1 + Σ .08)n = 1 - 10(.08) .08 = 1 .08 - 10 = $2.5 million Diff: 2 Skill: Analytical 29) You are considering purchasing a new automated forklift system for your firmʹs warehouse. The automated forklift will cost $500,000 and generate cash flows of $125,000 per year. The forklift will depreciate evenly over the five years, at which point it must be replaced. The cost of capital is 8% per year. Based upon the EVA investment rule, should you invest in the automated forklift? Answer: The EVA is calculated as follows (all values in thousands): Year 0 1 2 3 4 5 Capital 500 400 300 200 100 0 Cash Flow 125 125 125 125 125 Capital Charge -40 -32 -24 -16 -8 Depreciation -100 -100 -100 -100 -100 EVA -15 -7 1 9 17 PV of EVA -13.89 -6.00 0.79 6.62 11.57 Sum of PV(EVA) -0.91 For example, EVA1 = $125 - 8%($500) - $100 = -15 Since the PV(EVA) = -91,000 0 you should not invest. Diff: 3 Skill: Analytical 6.3 Mutually Exclusive Investment Opportunities 1) Which of the following statements is false? A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. B) The IRR is affected by the scale of the investment opportunity. C) Multiple incremental IRRs might exist. D) The incremental IRR rule assumes that the riskiness of the two projects is the same. Answer: B Diff: 2 Skill: Conceptual 124 Berk/DeMarzo · Corporate Finance 2) Which of the following statements is false? A) The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives. B) When a manager must choose among mutually exclusive investments, the NPV rule provides a straightforward answer. C) The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule. D) Problems can arise using the IRR method when the mutually exclusive investments have differences in scale. Answer: C Diff: 2 Skill: Conceptual 3) Which of the following statements is false? A) When using the incremental IRR rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. B) Picking one project over another simply because it has a larger IRR can lead to mistakes. C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. D) When the risks of two projects are different, only the NPV rule will give a reliable answer. Answer: A Diff: 2 Skill: Conceptual 4) Which of the following statements is false? A) The incremental IRR need not exist. B) If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR. C) Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly. D) When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs. Answer: B Diff: 2 Skill: Conceptual Chapter 6 Investment Decision Rules 125 5) Consider two mutually exclusive projects A B. If you subtract the cash flows of opportunity B from the cash flows of opportunity A, then you should A) take opportunity A if the regular IRR exceeds the cost of capital. B) take opportunity A if the incremental IRR exceeds the cost of capital. C) take opportunity B if the regular IRR exceeds the cost of capital. D) take opportunity B if the incremental IRR exceeds the cost of capital. Answer: B Diff: 1 Skill: Conceptual 6) You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is: A) NPV B) Profitability index C) IRR D) Incremental IRR Answer: A Diff: 1 Skill: Conceptual 126 Berk/DeMarzo · Corporate Finance Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 7) Assume that projects A and B are mutually exclusive. The correct investment decision and the best rational for that decision is to? A) Invest in project A since NPVB NPVA B) Invest in project B since IRRB IRRA C) Invest in project B since NPVB NPVA D) Invest in project A since NPVA 0 Answer: C Explanation: C) NPVA = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04 NPVB = -73+ 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.64 IRR A CF0 = -100 CF1 = 40 CF2 = 50 CF3 = 60 Compute IRR = 21.65% IRR B CF0 = -73 CF1 = 30 CF2 = 30 CF3 = 30 CF4 = 30 Compute IRR = 23.34% Diff: 3 Skill: Analytical Chapter 6 Investment Decision Rules 127 8) The incremental IRR of Project B over Project A is closest to: A) 12.6% B) 23.3% C) 1.7% D) 17.3% Answer: A Explanation: A) First we need to find the incremental cash flows by taking cashflows of A - cashflows of B. IRR A - B CF0 = (-100 - -73) = -27 CF1 = (40 - 30) = 10 CF2 = (50 - 30) = 20 CF3 = (60 - 30) = 30 CF4 = (0 - 30) = -30 Compute IRR = 12.63% Diff: 3 Skill: Analytical 9) The maximum number of incremental IRRs that could exist for project B over project A is? A) 1 B) 2 C) 0 D) 3 Answer: B Diff: 3 Skill: Conceptual 128 Berk/DeMarzo · Corporate Finance Use the table for the question(s) below. Consider the following two projects: Project Year 0 C/F Year 1 C/F Year 2 C/F Year 3 C/F Year 4 C/F Year 5 C/F Year 6 C/F Year 7 C/F Discount Rate Alpha -79 20 25 30 35 40 N/A N/A 15% Beta -80 25 25 25 25 25 25 25 16% 10) Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rational for that decision is to? A) Invest in project Beta since NPVBeta 0 B) Invest in project Alpha since NPVBeta NPVAlpha C) Invest in project Beta since IRRB IRRA D) Invest in project Beta since NPVBeta NPVAlpha 0 Answer: D Explanation: D) NPV Alpha NPV = -79 + 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92 NPV Beta NPV = -80 + 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 + 50 / (1.16)6 + 25 / (1.16)7= 20.96 IRR Alpha CF0 = -79 CF1 = 20 CF2 = 25 CF3 = 30 CF4 = 35 CF5 = 40 Compute IRR = 22.68 IRR Beta PV = -80 PMT = 25 FV = 0 N = 7 Compute I = 24.52 Diff: 3 Skill: Analytical Chapter 6 Investment Decision Rules 129 11) Assume that projects Alpha and Beta are mutually exclusive. Which of the following statements is true regarding the investment decision toolsʹ suitability for deciding between projects Alpha Beta. A) The incremental IRR should not be used since the projects have different lives. B) The incremental IRR should not be used since the projects have different discount rates C) The incremental IRR should not be used since the projects have different cash flow patterns. D) Both the NPV and incremental IRR approaches are appropriate to solve this problem. Answer: B Diff: 2 Skill: Conceptual Use the table for the question(s) below. Consider two mutually exclusive projects with the following cash flows: Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 A $(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A B $(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 12) You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A B. How many potential incremental IRRs could there be? A) 3 B) 0 C) 2 D) 1 Answer: A Explanation: A) Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 A ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0 B ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 B - A ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000 Note that there are three sign changes hence there potential IRRs. Diff: 2 Skill: Analytical 130 Berk/DeMarzo · Corporate Finance 13) If the discount rate for project A is 16%, then what is the NPV for project A? Answer: NPV A CF0 = -41,215 CF1 = 12,500 CF2 = 14,000 CF3 = 16,500 CF4 = 18,000 CF5 = 20,000 I = 16 Compute NPV = $9,999.50 Diff: 2 Skill: Analytical 14) If the discount rate for project B is 15%, then what is the NPV for project B? Answer: NPV B CF0 = -46,775 CF1 = 15,000 CF2 = 15,000 CF3 = 15,000 CF4 = 15,000 CF5 = 15,000 CF6 = 15,000 Compute NPV = $9,9992.24 Diff: 2 Skill: Analytical 15) What is the incremental IRR for project B over project A? Would you feel comfortable basing your decision on the incremental IRR? Answer: Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 A ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0 B ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 B - A ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000 Compute IRR = 8.95%, no since there are multiple sign changes in the incremental cash flows. Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 131 16) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why? Answer: NPV A CF0 = -41,215 CF1 = 12,500 CF2 = 14,000 CF3 = 16,500 CF4 = 18,000 CF5 = 20,000 I = 16 Compute NPV = $9,999.50 NPV B CF0 = -46,775 CF1 = 15,000 CF2 = 15,000 CF3 = 15,000 CF4 = 15,000 CF5 = 15,000 CF6 = 15,000 Compute NPV = $9,9992.24 Take A, since NPV of A NPV of B and both are positive. Diff: 3 Skill: Analytical 6.4 Project Selection with Resource Restraints 1) Which of the following statements is false? A) If there is a fixed supply of resource available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. B) Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. C) If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision. D) The profitability index is calculated as the NPV divided by the resources consumed by the project. Answer: A Diff: 2 Skill: Conceptual 132 Berk/DeMarzo · Corporate Finance 2) Which of the following statements is false? A) The profitability index measures the value created in terms of NPV per unit of resource consumed. B) The profitability index is the ratio of value created to resources consumed. C) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. D) The profitability index measures the ʺbang for your buck.ʺ Answer: C Diff: 2 Skill: Conceptual 3) You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space? A) IRR B) Payback period C) NPV D) Profitability index Answer: D Diff: 1 Skill: Conceptual Chapter 6 Investment Decision Rules 133 Use the table for the question(s) below. Consider a project with the following cash flows: Year Cash Flow 0 -10,000 1 4,000 2 4,000 3 4,000 4 4,000 4) Assume the appropriate discount rate for this project is 15%. The profitability index for this project is closest to: A) .14 B) .22 C) .60 D) .15 Answer: A Explanation: A) NPV = -10,000 + 4,000 (1.15)1 + 4,000 (1.15)2 + 4,000 (1.15)3 + 4,000 (1.15)4 = $1420 PI = NPV / investment = 1420 / 10000 = .1420 Diff: 1 Skill: Analytical 134 Berk/DeMarzo · Corporate Finance Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 5) The profitability index for project A is closest to: A) 0.12 B) 21.65 C) 0.17 D) 12.04 Answer: A Explanation: A) PI = NPV / Investment (or resources consumed) NPV = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04 So, PI = 12.04 / 100 = .1204 Diff: 2 Skill: Analytical 6) The profitability index for project B is closest to: A) 23.34 B) 12.64 C) 0.17 D) 0.12 Answer: C Explanation: C) PI = NPV / Investment (or resources consumed) NPV = -73 + 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.64 So, PI = 12.64 / 73 = .1732 Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 135 Use the table for the question(s) below. Consider the following list of projects: Project Investment NPV A 135,000 6,000 B 200,000 30,000 C 125,000 20,000 D 150,000 2,000 E 175,000 10,000 F 75,000 10,000 G 80,000 9,000 H 200,000 20,000 I 50,000 4,000 7) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions? A) Profitability Index B) Incremental IRR C) NPV D) IRR Answer: A Diff: 1 Skill: Conceptual 8) Assuming that your capital is constrained, which project should you invest in first? A) Project C B) Project G C) Project B D) Project F Answer: A Explanation: A) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 Diff: 2 Skill: Analytical 136 Berk/DeMarzo · Corporate Finance 9) Assuming that your capital is constrained, what is the fifth project that you should invest in? A) Project H B) Project I C) Project B D) Project A Answer: A Explanation: A) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 Diff: 2 Skill: Analytical 10) Assuming that your capital is constrained, which project should you invest in last? A) Project A B) Project I C) Project D D) Project C Answer: C Explanation: C) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 Diff: 2 Skill: Analytical Chapter 6 Investment Decision Rules 137 11) Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which project should you invest in and in what order? A) CBFH B) CBGF C) BCFG D) CBFG Answer: A Explanation: A) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000 on the table uninvested. By replacing G with H the full $600,000 is invested and the NPV of the combination of projects is increased by $11,000. Therefore you should invest in projects CBFH. Diff: 3 Skill: Analytical 138 Berk/DeMarzo · Corporate Finance 12) Assume that your capital is constrained, so that you only have $600,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to: A) $65,000 B) $80,000 C) $69,000 D) $111,000 Answer: B Explanation: B) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000 on the table uninvested. By replacing G with H the full $600,000 is invested and the NPV of the combination of projects is increased by $11,000. Therefore you should invest in projects CBFH. The NPV = NPVC + NPVB + NPVF + NPVH = 20000 + 30000 + 10000 + 20000 = $80,000. Diff: 3 Skill: Analytical Chapter 6 Investment Decision Rules 139 13) Assume that your capital is constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to: A) $111,000 B) $69,000 C) $80,000 D) $58.000 Answer: B Explanation: B) Project Investment NPV Profitability Index Rank A 135,000 6,000 0.0444 8 B 200,000 30,000 0.1500 2 C 125,000 20,000 0.1600 1 D 150,000 2,000 0.0133 9 E 175,000 10,000 0.0571 7 F 75,000 10,000 0.1333 3 G 80,000 9,000 0.1125 4 H 200,000 20,000 0.1000 5 I 50,000 4,000 0.8000 6 The optimal combination based upon PI rankings is CBFG, so the total NPV = 20000 + 30000 + 10000 + 9000 = $69,000 Diff: 3 Skill: Analytical 140 Berk/DeMarzo · Corporate Finance Use the information for the question(s) below. The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year One Year Two Year Three Year Four $200,000 $225,000 $275,000 $200,000 The appropriate discount rate for this project is 16%. 14) The profitability index for this project is closest to: A) .44 B) .26 C) 0.39 D) .34 Answer: C Explanation: C) PI = NPV / Investment NPV = -450000 + 200000/(1.16)1 + 225000/(1.16)2 + 275000/(1.16)3 + 2000000/(1.16)4 = 176,265 So, PI = 176265 / 450000 = 0.39 Diff: 1 Skill: Analytical Chapter 6 Investment Decision Rules 141 Use the information for the question(s) below. Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below: Business Name Square Feet Required Expected Monthly Cash Flow Videos Now 4,000 70,000 Gords Gym 3,500 52,500 Pizza Warehouse 2,500 52,500 Super Clips 1,500 25,500 30 1/2 Flavors 1,500 28,500 S-Mart 12,000 180,000 WalVerde Drugs 6,000 147,000 Multigular Wireless 1,000 22,250 15) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why? Answer: Business Name Square Feet Required Expected Monthly Cash Flow C/F per S.F. Project Rank Videos Now 4,000 70,000 17.5 5 Gords Gym 3,500 52,500 15 7 Pizza Warehouse 2,500 52,500 21 3 Super Clips 1,500 25,500 17 6 30 1/2 Flavors 1,500 28,500 19 4 S-Mart 12,000 180,000 15 8 WalVerde Drugs 6,000 147,000 24.5 1 Multigular Wireless 1,000 22,250 22.25 2 So we select projects based upon their ranking until we run out of space. The optimal combination is shown below: WalVerde Drugs 6,000 147,000 24.5 1 Multigular Wireless 1,000 22,250 22.25 2 Pizza Warehouse 2,500 52,500 21 3 30 1/2 Flavors 1,500 28,500 19 4 Videos Now 4,000 70,000 17.5 5 Total 15,000 $320,250 Diff: 3 Skill: Analytical 142 Berk/DeMarzo · Corporate Finance 16) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why? Answer: Business Name Square Feet Required Expected Monthly Cash Flow C/F per S.F. Project Rank Videos Now 4,000 70,000 17.5 5 Gords Gym 3,500 52,500 15 7 Pizza Warehouse 2,500 52,500 21 3 Super Clips 1,500 25,500 17 6 30 1/2 Flavors 1,500 28,500 19 4 S-Mart 12,000 180,000 15 8 WalVerde Drugs 6,000 147,000 24.5 1 Multigular Wireless 1,000 22,250 22.25 2 So we select projects based upon their ranking until we run out of space. This combination is shown below: WalVerde Drugs 6,000 147,000 24.5 1 Multigular Wireless 1,000 22,250 22.25 2 Pizza Warehouse 2,500 52,500 21 3 30 1/2 Flavors 1,500 28,500 19 4 Videos Now 4,000 70,000 17.5 5 Total 15,000 $320,250 But notice that this combination leaves 1,000 square feet unleased. We therefore should look to see if there is a combination that leases more space and offers a higher monthly cash flow. If we forgo renting to Videos Now and instead rent to both Super Clips and Gords Gym we will obtain a higher monthly cash flow. The optimal combination is shown below: WalVerde Drugs 6,000 147,000 24.5 1 Multigular Wireless 1,000 22,250 22.25 2 Pizza Warehouse 2,500 52,500 21 3 30 1/2 Flavors 1,500 28,500 19 4 Super Clips 1,500 25,500 17 6 Gords Gym 3,500 52,500 15 7 Total 16,000 $328,250 Diff: 3 Skill: Analytical Chapter 6 Investment Decision Rules 143 17) Consider the following list of projects: Project Investment NPV A 405,000 18,000 B 600,000 90,000 C 375,000 60,000 D 450,000 6,000 E 525,000 30,000 F 225,000 30,000 G 240,000 27,000 H 600,000 60,000 I 150,000 12,000 J 270,000 30,000 You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order will you select them, and why? Answer: Project Investment NPV PI Rank A 405,000 18,000 0.0444 9 B 600,000 90,000 0.1500 2 C 375,000 60,000 0.1600 1 D 450,000 6,000 0.0133 10 E 525,000 30,000 0.0571 8 F 225,000 30,000 0.1333 3 G 240,000 27,000 0.1125 4 H 600,000 60,000 0.1000 6 I 150,000 12,000 0.0800 7 J 270,000 30,000 0.1111 5 Beginning Project Cost Ending 1,800,000 C 375,000 1,425,000 1,425,000 B 600,000 825,000 825,000 F 525,000 300,000 300,000 J 270,000 30,000 Normally we would want to take projects CBFG. However, we can do better by dumping G and taking J instead. Allow it has a lower profitability index, it has a higher NPV and allows more capital to be invested. Diff: 3 Skill: Analytical
http://www.huffingtonpost.com/2012/09/17/tax-cuts-for-the-rich_n_1889686.html?utm_hp_ref=business A new study by the nonpartisan Congressional Research Service has found that over the past 65 years, tax cuts for the rich have not led to economic growth and instead are linked to greater income inequality in the United States. The study found that cutting taxes for the rich does not increase saving, investment, or productivity growth . "The top tax rates appear to have little or no relation to the size of the economic pie," the study said. Two graphs show the lack of connection between tax rates for the rich and economic growth: The authors noted that top-tier tax rates could have an effect on "how the economic pie is sliced." The study noted that in 1945, when the richest families had to pay a marginal tax rate of more than 90 percent, the top 0.1 percent of U.S. families accumulated 4.2 percent of all income gains. In 2007, in contrast, when the top marginal tax rate was 35 percent (which it still is), the top 0.1 percent of U.S. families captured 12.3 percent of all income gains. Two graphs from the study show a clear connection between higher taxes for the rich and less income inequality: Those findings are inconvenient for the Romney campaign. In a continuation of trickle-down economic theory, the Republican presidential nominee has argued that cutting taxes for the rich would "stimulate entrepreneurship, job creation, and investment," thus "breathing life into the present anemic recovery." Romney has said he wants to extend all of the Bush tax cuts , while President Obama wants to extend those tax cuts only on the first $250,000 of taxable income. Romney also wants to slash marginal tax rates and taxes on investment income , as well as eliminate the estate tax -- all of which would disproportionately benefit the rich . A recent study by Owen Zidar, a PhD student in Economics at the University of California at Berkeley, also found that tax cuts for the rich are not correlated with economic growth . But Zidar did find that tax cuts for the bottom 90 percent of income earners can stimulate economic growth and job creation. (Hat tip: the New York Times' David Leonhardt .)
Gold investment statistics commentary Quarterly statistics commentary Q2 2012 Download this document (0.2 MB) from world gold council http://www.gold.org/investment/research/regular_reports/investment_statistics_commentary/ Overview This commentary summarises gold's price performance in various currencies, its volatility statistics and correlation to other assets in the quarter. It provides macroeconomic context to the investment statistics files published at the end of each quarter and highlights emerging themes relevant to gold's future development. Review: key macroeconomic themes during Q2 2012 Gold prices declined in most currencies during the second quarter with the exception of the euro, Swiss franc and Indian rupee, in part due to a strong US dollar. Despite a 3.8% decline in Q2 to US$1,598.50/oz on the London PM fix, gold was up 4.4% during the first half of the year. Volatility remained elevated amidst a busy event-risk period. However, gold generally outperformed risk assets. Global inflation eases but underlying trends supportive for gold: A substantial drop in energy and some agricultural commodities during the period has eased inflation pressures in many parts of the world and put downward pressure on gold prices. Reassessing "risk-free" assets: Even assets traditionally considered safe are under pressure. German Bunds interest rates climbed in June. The Swiss franc, yen and US Treasuries are also facing issues – challenging their role as assets of last resort. Despite pressures on the price of gold, its lack of credit risk, its liquidity and hedging characteristics has made gold an attractive vehicle for long-term wealth preservation. Outlook: emerging macroeconomic themes in H2 2012 Deflationary concerns in some countries provide room for further fiscal and monetary stimulus. This may lead to a further debasement of currencies through unconventional monetary policy and an increased risk of future inflation. These factors should provide support for future gold investment . The underlying structural issues that affect the euro zone remain unresolved, despite advances in the formation of more comprehensive burden-sharing mechanisms. In such an environment of uncertainty and higher market volatility, gold will continue to be an asset that investors use to diversify risk and preserve capital. The flight to the US dollar as a safe-haven in the first half of 2012 could be reversed. The US debt ceiling debate in Q3 and federal elections in November, followed by the necessity to confront a US$1.3tn budget deficit will prove challenging to the US dollar. With most currencies under pressure in one form or another, gold is likely to provide a hedging mechanism for investors. Chart 1: Performance of gold (US$/oz) price and volatility during Q2 2012 Chart 1: Performance of gold (US$/oz) price and volatility during Q2 2012 - click to enlarge Table 1: Summary of major market events during Q2 2012 Table 1: Summary of major market events during Q2 2012 Table 2: Performance of gold with respect to various currencies Table 2: Performance of gold with respect to various currencies - click to enlarge Global inflation falls but underlying trends supportive for gold A global growth slowdown with consumer retrenchment and steeply falling energy prices (Chart 2) has led to a slowdown in inflation (also referred to as “disinflation”) in major economies at rates reminiscent of the early days of the financial crisis in 2009. While inflation in many major economies has been falling (Chart 3), the potential for more extreme inflation-related environments looms large. On one hand, deflationary (negative inflation) risks are increasing. These risks provide legroom for further government stimulus measures to fuel economic growth which, on the other hand, increases longer-term inflation concerns. Further, a reactivation of economic activity in emerging markets coupled with extreme outcomes of deflation or high inflation should provide support for gold demand going forward. Chart 2: Oil and industrial commodity prices and Chart 3: Headline CPI inflation has dipped in 2012 Chart 2 and Chart 3 - click to enlarge The ongoing euro area crisis has dented consumer and business confidence while increasing fiscal restraint and lending reticence by banks. The contagion outside the region is also increasingly visible. Leading indicators of growth suggest that Europe is in recession, with Germany, the stalwart of stable growth, also succumbing (Chart 4). While consumer price indices in Europe have yet to fall considerably, economic activity indicators suggest that they will do so. The European Central Bank (ECB), perennially one of the most hawkish central banks, recently declared that “inflation expectations remain well anchored and there is no inflation risk in any euro-area country”. 1 Switzerland has also been affected, with its consumer price index (CPI) falling for eight consecutive months. The Swiss economy is still in relatively good shape, but persistent currency strength and deflation will raise fears of postponed spending. Chart 4: Euro-area slowdown: bank lending, German factory orders, Eurozone IP Chart 4: Euro-area slowdown: bank lending, German factory orders, Eurozone IP - click to enlarge The slowdown in Europe has spilled over to the US and the UK, and has affected demand from emerging markets. From China and India to Brazil and Russia, the effects of the global slowdown are evident through both domestic growth and local prices. Notably, India currently faces a bout of stagflation (high inflation coupled with slower economic growth) as supply-side factors and currency weakness have supported sticky inflation. It is not a simple task to estimate how long this higher inflation environment will last. However, prices should stabilise as consumer demand slows, as has occurred in other countries. Falling prices can put downward pressure on gold prices, on the back of its role as an inflation hedge. However, this simplification does not capture the full depth of the situation. As shown in “ The impact of inflation and deflation in the case for gold ” by Oxford Economics, gold is useful to investors in various economic scenarios, not only during high inflation periods. The research found that while deflation leads to a rise in the US dollar – a potential headwind for gold – it maintained that the destructive impact of deflation on traditional assets was likely to outweigh the US dollar effect and provide a boost to gold. In fact, the analysis showed that gold would outperform equities and housing in a deflationary scenario. Additionally, a disinflationary (and ultimately deflationary) environment provides central banks with more room to manoeuvre on stimulus. For example, on 5 July, the Bank of England (BoE), People’s Bank of China and the ECB acted in unison by announcing accommodative measures in response to weak economic numbers.2 These accommodative measures should fuel the risk of consumer price inflation further down the line while providing a temporary boost both to asset prices and capital flows to emerging markets. Further, the apparent dependency on central bank support for an ailing global economy highlights its chronic weakness. The combined weight of uncertainty and hope of central bank action will maintain higher asset price volatility. Therefore, while inflationary pressures may be receding in various regions, there are underlying trends to suggest that deflation risk has increased. This challenging environment tends to be conducive to gold investment. In addition, the current lower level of inflation has cleared the path for further monetary and fiscal easing. The scope for further quantitative easing and fiscal support will raise future inflationary risks but might also catalyse global growth – painting a backdrop that is typically supportive of gold demand. Reassessing “risk-free” assets Over the past year, two national bond markets have provided shelter from turbulence in global risk assets: US Treasuries and German Bunds (Chart 5). Additionally, the US dollar, the Japanese yen and the Swiss franc have benefited from de-risking flows. These positions have allowed investors to preserve capital while risk assets have floundered (performance measures in various currencies can be found in the investment statistics ). However, being an asset of last resort is not without consequences. In particular, the investors seeking more “safe” assets must also recognise that the ever-increasing supply of both currency and debt deplete the value of these assets. Furthermore, as declining yields approach zero, they create very skewed pay-off structures with much more downside risk. Unlike currencies and bonds, gold does not carry a liability, thus a rise in its value has no detrimental effect on other parties. Moreover, gold is a highly liquid asset – often times used as a de-facto currency – which forms an integral part of the monetary system. Therefore, while gold has been negatively impacted by a stronger US dollar this year, it remains an important alternative to investors seeking to preserve capital over the longer time horizon. Charts 5-6: Depletion of safe-havens Charts 5-6: Depletion of safe-havens- click to enlarge The euro crisis has highlighted the depth and breadth of the problems facing the global economy. Financial market integration and fiscal irresponsibility across the globe have left investors with few choices for capital preservation. In fact, the Bank of International Settlements (BIS) – often referred to as the central bank for central banks – in its most recent annual report included commentary devoted to the topic of Sovereigns’ loss of their “risk-free” status and the implications for financial markets. 3 Developments in the euro-area crisis during Q2 2012 have led markets towards the realisation that most outcomes in this ongoing saga will be painful not just for the peripheral countries, but also to core economies – particularly Germany. Whether through its contributions to the European Financial Stability Facility (EFSF) and the European Stability Mechanism or through its potential liabilities for losses in its banking system, Germany appears to be on the brink of sharing the burden of the peripheral countries’ woes, which may run the risk of affecting its credit rating. A brief but sharp drop in German and the troubled peripheral government bonds, alarmed some investors during the second quarter. Although other factors may have been at play,4 it highlighted the fact that whatever the outcome in the euro area saga, Germany’s liabilities are large and likely to increase as a result of greater burden sharing. Further, the EU summit agreements reached on 28 June, which contributed to an across-the-board positive reaction by markets have, at the very least, exceeded reluctant but necessary concessions made by Germany. While this may finally put Europe on a path towards a unified solution, it also increases the pressure on the Bund’s “asset of last resort” status. US Treasuries have provided investors with consistent returns so far this year. However, while yields are at, or close to, record lows – reflecting their safe-haven status – the Treasury market faces significant risks. Investors are bracing for another round of debt-ceiling negotiations; during 2011, those drew a negative outlook warning from Standard and Poor’s rating agency. In addition, as the US presidential elections loom, a decision on how to deal with the “fiscal cliff” will have to be made to avert a sizeable drag on growth. As the US holds the world’s reserve currency and has a resilient and dynamic economy, questions over its debt sustainability may be unwarranted. However, interest rates risks lie increasingly to the upside to the detriment of risk averse investors, especially in a negative real yield environment. In Japan, safe-haven flows to the yen have resulted in a spate of interventions by authorities over the last 18 months to quell the rise in the currency, with their 1 June 2012 statement denouncing currency market volatility and declaring a readiness to continue their policy. Interventions during 2011, which incurred large volume spikes, had the desired immediate effect of weakening the yen, though have yet to significantly dent the upward trend. A stronger yen fuels continued deflation and a fall in export competitiveness has seen the Japanese economy experience the deepest contraction since the 1930s. The yen may provide a safe-haven for many investors but can also be recognised as a drag to the Japanese economy. In addition, Switzerland, which exports more than half of its goods and services to its neighbours in Europe, has been dealt a double blow with its currency being considered a “safe-haven”. Persistent disinflation and strong currency flows prompted the central bank to intervene and peg the currency to the euro. For Swiss investors, gold performed better than might have been expected due to the aforementioned pegging. Investors increasingly look for alternative assets to preserve capital in the face of a potential depletion of safe-haven assets. Gold’s intrinsic characteristics such as lack of credit and counterparty risk, coupled with a deep and liquid market, can provide long-term protection to investors’ capital. Correlation between gold and risk assets falls toward long-term averages Gold’s role as a diversifier was scrutinised during Q1 2012 as correlations increased; however, its correlation to equities and commodities fell closer to long-term averages during Q2. Global growth slowed during the period as a slew of economic numbers suggests that the US recovery is stalling, China’s growth is waning and that the euro area is slipping into recession. Each of these contributed to gold’s lower correlation to equities. Gold maintained a higher than average correlation with global bonds as a by-product of a strong US dollar. In a continuation of its recent trend, gold’s negative correlation to the US dollar remained significantly stronger than its long-term average. This was partly caused by investors flocking to US Treasuries and selling their portfolio holdings, including gold. Gold was not the only asset that was affected by the dollar, as shown in Chart 8; most assets had a stronger inverse correlation to the dollar. US Treasuries, on the other hand, had a strong positive correlation to the dollar – suggesting that interest in dollars is based on safe-haven flight rather than a particularly bullish view on US prospects for growth. Charts 7-8: Correlation to global assets, gold v US dollar Charts 7-8: Correlation to global assets, gold v US dollar - click to enlarge Looking back to Q1 2012, gold had a higher correlation to global equities, emerging markets and commodities than the long-run average; however, this correlation was not indicative of a direct economic relationship. In our Investment statistics commentary for Q1 2012 , we observed that this correlation to equities was spurious. When viewing gold’s return in relationship to a strong US dollar, the relationship between equity and gold returns decreased significantly. Consequently, gold’s increased correlation to equities was due to the indirect effect of a weaker global economy coupled with a stronger US dollar. The flight to the US dollar in the first half of 2012 could reverse in the second half of the year and will likely bring some challenges to the US dollar that could prevent continuation of the consistent inflows it has experienced so far. The US debt ceiling debate in Q3 and federal elections in November, followed by the necessity to confront a US$1.3tn budget deficit will prove challenging to the US dollar. Therefore, we expect gold’s correlation to most assets to remain low and gold to act as a currency hedge in the international monetary system, particularly against the US dollar. This will be especially prevalent if see-sawing risk aversion and fluctuations in global growth expectations persist. 1 Mario Draghi, 15 June 2012. 2 The BoE announced further quantitative easing as inflation is falling and as the euro area fallout threatens to impact British investors. In equal measure, Chinese authorities lowered the benchmark borrowing rate as they are also better placed to act with price increases slowing. Similarly, the ECB cut its benchmark borrowing rate by 0.25% to a record low of 0.75%. 3 http://www.bis.org/publ/arpdf/ar2012e.htm 4 Excessive long positioning and a ruling by Danish pension authorities enabling domestic funds to cut bond positions – of which Bunds would have been a sizeable proportion. Investment statistics commentary archive The quarterly Investment Statistics Commentary succeeded the Gold Investment Digest (GID), which was published between Q3 2006 and Q2 2011 and examined trends in price, investment markets and the macro-economy relating to gold and other assets typically found in an investor portfolio. The Commentary complements the investment statistics analysis updated on a regular basis. Investment statistics commentary Q1 2012 Full year 2011 - Download this document (0.2 MB) Gold Investment Digest - archive 2011 Q2 (PDF 2.4 MB) Q1 (PDF 2.3 MB) 2010 Q4 (PDF 2.9 MB) Q3 (PDF 1.3 MB) Q2 (PDF 1.2 MB) Q1 (PDF 1.0 MB) 2009 Q4 (PDF 1.1 MB) Q3 (PDF 1.1 MB) Q2 (PDF 0.9 MB) Q1 (PDF 0.5 MB) 2008 Q4 (PDF 0.6 MB) Q3 (PDF 0.6 MB) Q2 (PDF 0.7 MB) Q1 (PDF 0.4 MB) 2007 Q4 (PDF 0.3 MB) Q3 (PDF 0.4 MB) Q2 (PDF 0.3 MB) Q1 (PDF 0.4 MB) 2006 Q4 (PDF 0.3 MB) Q3 (PDF 0.8 MB) The World Gold Council's Gold Investment Digest (GID) examined price and volatility trends for gold and other assets typically found in an investor portfolio. It also looked at the primary macro-economic drivers behind gold’s performance and preliminary trends on demand and supply. GID was organised into four sections: Price trends – Gold price and volatility performance in multiple currencies and its relation to other global financial assets including most liquid commodities. Investment trends – Trends in the most active gold investment markets including ETFs, futures and options, and over-the counter products. Economic trends – An analysis of the most important macro-economic factors that influenced gold’s performance during the period. Gold market trends – Gold demand and supply statistics as of the last available World Gold Council Gold Demand Trends publication, and discussion on preliminary reports on recent trends and their effect on gold’s performance. Additionally, GID included a concise key data summary - financial statistics on gold and various assets including price, volatility and correlation measures. All of which, and more continue to be provided within our investment statistics files. Explanatory text... Also in this section Regular reports Gold Demand Trends Gold Demand Trends - Japanese Investment statistics commentary Commentary Q1 2012 Research summaries Featured research 日本の投資家向けレポート Thematic research Portfolio diversification For European investors For UK investors Gold and alternatives Gold and inflation Impact of inflation and deflation Investors guide to the gold market (European edition) Investitionsführer Gold (Europische Ausgabe) Gold and the dollar Wealth protection Hedging against tail risk Country case studies Gold and commodities The gold market Central banks Related Investment statistics commentary, Full Year 2011 Read more... (PDF 1.3 MB) Gold Investment Digest - archive Read more...
What to Except as an analyst within an investment bank Pursuing a career within an investment bank or any profession for that matter is an important decision a crucial life changing decision. It is decision to taken with as much information as possible to hand-high quality and relevant information should make for a better informed decision. Investment banking is a tough job whether it is markets or IBD. The jobs are different, the stresses, strains and rewards are also different. So what to Except: Challenging hard work To be stretched To learn, to grow and develop To react A lot of jargon Intense competition and an ambitious working environment To be flexible in terms of you work, your social life and your career To work long hours Diversity in terms of your work, your clients and the people you work with and for To enjoy it — otherwise what is the point To be rewarded for good work Don`t Except: A pat on the back every time you do something well A stress-free existence A cotton wool working environment An easy ride… 学习 PE 估值建模 学习投行估值建模
标签: Investment经管大学堂：名校名师名课
京公网安备 11010802022788号
论坛法律顾问：王进律师
知识产权保护声明
免责及隐私声明
