MICCU Training Session Macro

1
MICC-U Training Session - Macro

• Kur Robin
• President
• MICC General Meeting
• September 12, 2007

2
Topics

• Inflation
• Common Market Indicators
• Interest Rates
• Federal Reserve
• Foreign Currency Market
• Commodities
• Current Account
• Housing Market

3
Inflation

• Inflation is a general rise in prices
• For example if the price of a car rises from 20
  to 25 that is inflation
• Inflation erodes the value of the dollar because
  you need more dollars to buy a given item
• Common Indicators
• CPI (Consumer Price Index) measure of consumer
  prices
• PPI (Producer Price Index) measure of producer
  prices
• PCE (Personal Consumption Expenditures) derived
  from GDP
• Labor Productivity and Wages - used together can
  be a measure of future inflation
• If wages rise faster than productivity then
  workers are paid more in real terms and firms
  either eat the increased costs and lower profits
  or raise prices for consumers to maintain profits

4
Common Market Indicators

• GDP (quarterly)
• Retail sales (monthly)
• Can function as a leading indicator of future GDP
  
• Trade Balance
• A relatively constant deficit
• Business Fixed Investment
• Crucial indicator a drop in business investment
  was what caused the 2001 recession
• Productivity
• More output same cost good for the economy

5
Common Market Indicators Continued

• Confidence
• Michigan Survey
• Focuses more in financial/income conditions
• More forward looking
• Conference Board Survey
• Focuses more on labor conditions
• Commodities
• West Texas Intermediate Light Sweet Crude
• AKA Oil this is what Oil is known as in the
  markets
• Oil prices affect nearly every business
  (shipping, delivery, etc.)
• Higher oil prices have a ripple effect through
  the economy ? higher prices in general

6
Common Market Indicators Continued

• Jobs
• Initial Jobless Claims (weekly)
• leading measurement of unemployment
• Payroll Gains (weekly)
• One of the most followed because of its frequency
• But also one of the least accurate
• gt120,000 keeps job growth in line with population
  growth
• Unemployment
• Useful for broad macro trends, but too easily
  fooled in SR by discouraged workers

7
Common Market Indicators Continued

• Other Indicators
• Resource Utilization
• Indirect measure of inflation
• How much leeway there is for increased production
• Doesnt fluctuate much
• Housing Starts/Permits/New Homes Sales
• Three important and obvious housing market
  indicators
• Durable Goods
• Long term capital investment companies looking
  towards the future
• Also includes consumer purchases of big-ticket
  items like cars and dishwashers

8
Interest Rates

• Interest rates can thought of as the price of
  money
• Nominal interest rate is the literal interest
  rate noted on the bond
• Real interest rate is approximately the nominal
  rate of interest minus inflation i.e. r n i
• Includes risk and term premiums
• Bond price is inversely correlated with interest
  rate
• p price, FV face value of bond,
  i interest rate
• This relationship can be used to determine the
  present value of any investment (bond, asset,
  stocks, cash flows, etc.)
• Yield curve list the yield on government
  securities for the next thirty years
• Should be upward sloping
• Longer term bonds are risky so higher rate of
  return required
• The economy should grow in the long-term and
  growth is associated with higher interest rates

9
Federal Reserve

• Chairman Ben S. Bernanke
• Federal Open Market Committee (FOMC) actually
  sets rates
• 12 voting members composed of Fed Board members
  and representatives from the regional Fed banks
• Manage Economy by
• Setting Federal Funds Rate
• Rate at which banks borrow from one another
• This rate then ripples through the economy in the
  form of higher yields on treasuries, rates on
  mortgages, car loans and other borrowing
• Setting Discount Rate
• Rate at which the Fed lends to banks
• Setting Reserve Requirement
• Percent of total deposits a bank must keep on
  hand as cash
• The Feds effect on long term rates is only valid
  because of market expectations of a similar
  future Fed policy stance on inflation

10
Foreign Currency

• Basic premises behind currency market is the
  return on all assets should be equal regardless
  of location i.e. no arbitrage
• R (FV P)/ P
• Fixed vs. Floating
• Fixed exchange rates are set by the government
  (ex. China)
• Floating exchange rates are determined by market
  forces (ex. US, EU, Japan, etc.)

11
Foreign Currency Continued
12
Current Account

• Current Account is essentially Exports Imports
  plus net payments from abroad
• CA Ex Im NPA
• America has huge current account deficit which is
  financed by foreigners purchasing debt
  (treasuries, mortgages, etc.)
• Purchase of debt keeps interest rates low

13
Commodities Market

• Demand and Supply Driven
• Increases in commodity prices lead to
  inflationary pressures similar to
  wage/productivity dilemma
• Increased commodity prices drive up production
  costs
• Firms can eat cost and cut profit
• Firms can raise prices to maintain profit margins
• Oil inflationary pressures are felt immediately
• Gas prices rise so consumers fell pinch
  immediately
• Political issue because of windfall profits
• Gold a safe haven because holds value

14
Questions
????????