Tuesday, November 29, 2011

Tax policies and people’s living standard

Is tax cut conducive to economic development? Can tax reduction improve peoples living standard? When should governments reduce taxes? What effects, in the short run and in the long run, will tax cutting have in economy?
Shocked by the profound harmful influence the current European sovereign crisis exerts on the global financial markets, I cant help contemplating how come euro-countries governments had themselves entangled into such an economic black hole. What allured Italys, Greeces, and Spains governments to run an extremely high budget deficit risk? Facts tell that most European countries, during the past several decades, have invested enormous funds in public infrastructures while providing their citizens myriad and large benefits and tax credits. The aforementioned massive spending, which EU governments might believe instrumental to promote the quality peoples lives, consumes governments savings in a lightning speed. In the long term, when the saving diminishes, both the steady-state capital per labor and the income per labor will shrink. Thus, peoples living standard becomes worse off.
However, in the short run, tax cutting can be a good choice to placate peoples tough lives, especially for countries that have a high inflation rate like China. Peoples living standard in China falters because of the seemingly infinite increase in inflation. Simultaneously, Chinas currency yuan has been continuously enforced to appreciate, seriously undermining Chinas exports and shaking Chinas high growing economy. The appreciation of yuan attracts numerous foreign investors, resulting in the influx of large amounts of hot money. Facing the high demand of yuan, Chinas government is reluctant to control money supply; otherwise, the value of yuan will be further escalated for the incremental gap between demand and supply. But the aggravating inflation worsens people lives. Different with European countries, Chinas government is not in a great debt. If monetary policies are stuck, why not try the fiscal policies to soften peoples predicament. Therefore, I here propose to reduce taxes in the short run to stimulate the income growth and to boost peoples living standard.
“Too much is as hazardous as too little. Likewise, tax reduction can either be beneficial or be detrimental. It depends on the special economic state a particular country is in. It should also involve the consideration of the effects during different time length; commonly, tax reduction plays a positive role in improving peoples living standard in the short term but converse in the long term.

Judy Wang

Monday, November 28, 2011

Discussion Topic for 28/11/11 (Mon)

Topic: This past thanksgiving holiday saw a depressed stock performance versus a surging holiday sales in the U.S. market - an interesting contrast to discuss on why it happens and how it relates to global financial market.

1) http://www.brecorder.com/markets/equity/americas/36584.html
2) http://www.bloomberg.com/news/2011-11-26/consumers-in-u-s-release-pent-up-demand-amid-brisk-black-friday-traffic.html

1. What is the biggest trigger leading to the misery of stock market, although the sales of thanksgiving holiday surges dramatically?
2. Do you think the "prosperity" of consumer market this week shows a positive sign for the economy? If so, how large do you think the impact is, short term of long term? If not, why?

Saturday, November 26, 2011

Spain's Equity Story

By Rui Li

Recently i read the equity story of Spain country. I found this article very useful and would like to share it with you. Here is the summary of it.

Spain, well positioned despite adjustments

Over the last 50 years, Spanish history is a narrative of social and economic success, comparable to progress in post-war Japan or Germany. Indeed, between 1960 and 2010 Spain tripled its economic weight in Europe (EU-15) and managed to come out stronger than it went into the crises of the nineteen seventies, eighties and nineties.

Nonetheless, the present profound crisis has unveiled a series of cumulative imbalances in its economy, including high private sector debt, a large current account deficit, overvaluation of real estate assets and labour market inflexibility. The crisis has also raised national budget deficits, although less than in neighbouring countries, and mined the strength of the banking system. While of limited magnitude, this latter effect has brought to light the need for change in a financial system characterised by duality.

The challenge is to heighten the competitiveness of the national economy with measures that generate investor confidence. Three important elements will contribute to reaching that objective. Firstly, Spain has considerable strength on which to base improvements in its competitiveness. Secondly, its economic
imbalances are being corrected. Lastly, the reforms undertaken in areas such as finance, labour and the consolidation and sustainability of public accounts are among the most ambitious world-wide.
As a result of those reforms and the adjustments introduced, Spain’s market image has changed for the better in recent months, as attested by investor behaviour, and the country has succeeded in clearly decoupling the perception of its economy from the situation prevailing in other peripheral nations (Ireland,
Greece and Portugal).

Spain can draw from its strengths to face the new era

The Spanish economy has sizeable strengths on which to base the growth of its activity and productivity in the years to come.
• It is well positioned internationally.
•  It is one of Europe’s foremost markets, both in terms of GDP per capita (the fourth largest European economy) and size (fifth largest EU economy in terms of GDP).
•   It has leading companies in key industries whose wide diversity in high growth markets generates stable profits and the flexibility needed to cushion shocks.
•  It has a dense infrastructure network, the outcome of 20 years of hefty investment.
Real foreign investment indisputably provides a good measure of the country’s appeal. Moreover, Spanish companies’ international presence on high growth markets has ushered in key economic change.

Foreign investment has continued to flow into Spain

It ranks seventh on the list of world-wide investment targets, and as a percentage of GDP, these inflows double the amounts hosted by countries such as Germany or Italy. Foreign multinationals generate 10% of the country’s employment and added value. Three key factors make the Spanish economy attractive for investors: its infrastructure network, its high percentage of university graduates and its status as a strategic enclave. Spanish companies’ international leadership in key industriesSpain has not only succeeded in attracting foreign investment, but has been an active foreign investor. As a percentage of GDP, it is the third largest foreign investor world-wide, doubling Italian and U.S. rates and quadrupling Japan’s. Spain invests more in Latin America than all but one other country.It continues to strengthen its lead in industries such as renewable energies, logistics, transport, tourism and automobile manufacture, and has significant growth potential in industries of the future such as biotechnology, the environment, water treatment, ICT and aerospace. In addition, R&D+I investment in recent years has favoured development not only in the aforementioned industries, but in high technology and added value businesses such as e-health and e-government.

Structural reform underway

This reform is imperative to recover investor confi dence. Analysts are now decoupling Spain from the group of peripheral economies in light of its structural strengths and the reforms in progress.

Banking sector restructuring: building a more solvent systemAlthough the process initiated has yet to be concluded, the reforms undertaken have strengthened the financial system and aff orded it greater transparency. These measures will favour lending, although an upturn in this regard is limited by lower demand in an environment of economic adjustment. At the same time, the reform will enable these strengthened institutions to access international markets under reasonable terms.

Fiscal consolidation: stabilisation of the budget defi cit and sovereign debtSpain was in a healthy position prior to the crisis. After the crisis, a strict fiscal adjustment programme had to be implemented, thanks to which the deficit was slashed by nearly half from 2009 to 2011. This reduction, quantified as fi ve per cent of GDP, was attained by raising revenues, upping the VAT, cutting back on spending and reversing certain discretional measures adopted at the beginning of the crisis. In 2013, Spain’s defi cit will revert to levels consistent with the European Stability and Growth Pact (3% of GDP), according the offi  cial forecast. Pension reform should also contribute to the long-term sustainability of public accounts.

As the IMF notes, the Spanish economy has obvious growth potential that can be intensified by progressing in areas such as fi scaldiscipline, fortifi cation of the domestic market and reduction of administrative formalities. The beneficial effects of recent reforms that have yet to be felt and the country’s high quality production resources further contribute to that potential. This will call for ongoing correction of the pre-crisis imbalances and continuation of the reforms undertaken.

Wednesday, November 23, 2011

What sank MF Global? (1) --a big risky bet on the European sovereign debt

Similar to the shortfall of oil, which led to the sharp increase in the oil price during 1970s, a considerable decline of the exponentially increasing virtual money, which is spurred by the widening transactions and the development of financial derivatives, contributes to a significant drop in prices of financial instruments, an increase in investment costs that shakes the confidence of investors who subsequently run away from the risky financial markets. Then the financial bubble will collapse coming after investors’ fleeing, resulting in a recession.

Greek, Italy, and Spain appear to be the biggest victims in the currently prevailing European sovereign debt crisis as well as harbingers of the seemingly upcoming globally-spread recession. The inability of governments to afford its issued large amounts of debt was the initial clue implying the closure of the last-round economic thrives. Investors who sensed the slipped government credibility decisively jumped out of the swinging markets, a move that lowered trading volumes and transaction frequency. Reduced demand for euro bonds triggered the price slump and market fluctuation. The volatile market and impaired investor confidence deepened the risks; in other words, investment in euro bond markets became more expensive. The downscale trend of capital markets in Europe hinted an economic gloom.

Unfortunately, MF Global held approximately $6 billion euro debt issued by Italy, Spain, and Portugal, a concentrated risky investment that MF could hardly survive when the European debt crisis faltered. MF’s greed overrode its sanity “Never put all eggs in one basket”. Its failure primarily comes from its abandonment of portfolio management and ignorance of risk control.

Judy Wang

Tuesday, November 22, 2011

Baby Steps in 'R'

I decided to play around with data in 'R' using the databases in FRED (Federal Reserve Economic Data).  Look at how the 5 & 10 year treasury notes have performed since I entered college in 2003. 

- Saliq Khan

Monday, November 21, 2011

Emerging Economies Export Structure Changing tendency

I had a debate on the topic of Chinese economy with Saliq recently, and I have been thinking about this for couple of days. I agree with his point that the emerging economies, the US, and the EU economies are joint together. But I think the financial market contributes more than the  merchandise goods market to this interrelation between high-income economies and emerging economies. That is the reason why I cannot agree with his point that the US can draw pressure on China effectively by reducing import from China. I am not biased to China in terms of currency exchange rate and international cooperation on crisis solving, just want to debate on the point of export structure of emerging economies.

I checked the export data of emerging economies on the World Bank website, and got some graphs to show the change in export structure.

One fact I have to admit is that the export to high-income economies contributes a lot to the GDP of emerging economies( around 45%-90% of tatal export). But game is changing today. The percentage of export to high-imcome economies to total export kept decreasing in the past decade.  While the percentage of export to developing (emerging) ecomonies kept increasing. I think this shows a tendency of more frequently trading between emerging markets. Both the demand and trades of emerging markets are spreading. Which means the dependence on export to high-income economies is weaken.

Therefore, the trade friction with high-income economies will not definitely lead to a collapse of goods sale in emerging markets. At least, they are working hard to build their own markets in order to get rid of the export dependence. 
Following are some graphs from the WBG. 

1. Export/GDP
2. Merchandise export to high-income economies(% to exports)

3. Merchandise export to emerging economies in APEC
4. Merchandise export to emerging economies outside region

-Maisy Zhou

Sunday, November 20, 2011

Can a Consumption Tax Really Save America’s Economy?

By Rui Li

In Robert J. Barro’s New York Times article “How to Really Save the Economy” (http://www.nytimes.com/2011/09/11/opinion/sunday/how-to-really-save-the-economy.html?pagewanted=all), he argues that the U.S government should impose a consumption tax to increase tax revenues. According to Barro, government deficit has reached an intolerable level and will harm the country’s long-term sustainable development.

While this idea sounds appealing, the downside includes a loss of economic activity due to the tax, and an overall welfare loss to the whole society. The fundamentals of supply and demand suggest that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand is reduced (demand curve shifts leftward), or the supply is reduced (supply curve shifts leftward). The two are functionally equivalent. Consequently, the quantity of goods purchased decreases and the price increases. Many mutually beneficial transactions will not take place due to this price change. Overall, society experiences a revenue loss. This is known as a deadweight loss which can make society worse off.

A consumption tax also places greater burden on the poor as compared to wealthier individuals. Lower-income individuals spend a higher portion of their income on necessities and thus shoulder disproportionate costs. In light of the current economic recession, a slight increase in commodity price will cause a relatively larger decrease in the quantity of commodities demanded of the commodity. In other words, more mutual beneficial transactions are lost. Any society experiencing economic decay will find this situation unfavorable. When consumers do not want to buy goods, producers cannot sell all their products and earn less profit. Small firms have to shut down and fire their employers. People lose their jobs and in turn have to cut down their spending. This vicious cycle will be a detriment to our economy.

In sum, a consumption tax cannot really save the American economy. The whole society will be worse off because of the deadweight loss. During this period of economic downturn, consumers are more responsive to a price change of necessities and deadweight loss may be even greater than usual. This situation will make it more difficult for the economy to recover and prosper. Therefore, although Barro’s proposal may help to increase the government’s tax revenue and reduce the deficit in the long run, the efficiency of imposing such a tax at this time is remains dubious. 

Rui Li

Discussion Topic 11/21/2011 (Mon)

Topic: The IMF is inserting itself more forcefully into Europe's efforts to resolve its debt crisis, hoping to stem a contagion that is spreading worldwide and threatening global growth.

Link: http://www.huffingtonpost.com/2011/11/20/imf-europe-debt-crisis_n_1103815.html?ref=business (watch the video, it's a good one!)

1) What is your perspective on IMF's role in EU crisis, both presently and in future? Connect your answers with the article, as well as recent updates in europe.
2) What impact do you think the emerging market will continues to have on EU market, and how? (Recall what we talked about the role of emerging market on a global scale last Saturday)

Saturday, November 19, 2011

More green jobs...with even higher costs!

President Obama’s Green Energy agenda recently has been the subject of heated debate. By investing tens of billions of dollars into the renewable energy industry, the President intended to stimulate the economy by creating more job opportunities. Skeptics, including Daniel Indiviglio, believe that this scheme cannot deliver on its promises[1]. As he puts it, “the funding could poison the green energy movement in the long run”.

It is true that renewable energy generates positive externalities besides economic benefits, but the effect won’t have much of an effect in the short run, especially during the current economic downturn. Some would argue that the government should support renewable energy because it creates incentives for companies to advance clean energy technology and improves social welfare. It is reasonable for government to subsidize the renewable energy industry for the extra marginal social benefits. However, it takes a long time for the benefits to actualize. Since the country has not yet recovered from economic recession, firms are cutting costs and consumers are holding back. Investors tend to aim at short-term benefits rather than long-term gains. It is simply impossible to expect the industry to boom under the current economic downturn.
The Green Energy agenda involves the unrealistic goal of creating five million green jobs in ten years, unlikely since green jobs require highly skilled workers that necessitate large sums of inputs. It is calculated that one more “green job” requires an additional input of $2.7 million. Since early 2009, the government has set aside 500 million dollars to train workers for careers in energy efficiency and renewable energy fields, but the newly trained pool of workers remains inadequate for renewable energy enterprises.
Overall, the idea of “creating green jobs to stimulate economy” might not work because companies cannot gain profits from the renewable energy industry in the short-term. It is understandable that, during times when unemployment rate is as high as nearly 10 percent, framing the problem with “increasing more job opportunities” might gain support from the general public. Nevertheless, it doesn’t make sense when you start to think about the other side of the problem, where an incredibly large amount of money is needed for innovations of the renewable energy technology, recruiting and training workers to utilize the high-tech power plants, etc.
In his article, Daniel Indiviglio argues that government should back off and let private sectors handle the problems by themselves. I do not agree. The renewable energy industry is so fragile and unpredictable. Although it is tricky to handle renewable energy during economic recession, it would be worse to do nothing. I suggest that the government stop investing money directly in creating green job opportunities, and instead put more money in tax credits for the renewable energy. The key difference is the flexibility companies may have to adjust inputs of labor and infrastructure based on their capacity. After all, what truly helps is not desperately looking for “more green jobs”, but to assist renewable energy companies in realizing what they need.
- Cathy Xuege Lu

Friday, November 18, 2011

Challenges and Trends in Infrastructure Investing in Emerging Markets

This past week, I attended three (3) SAIS events.  They were all very interesting in their own peculiar way.

1.      “Challenges and Trends in Infrastructure Investing in Emerging Markets (Brazil)”
-          Mr. Benjamin Sessions, Managing Director of Global Environment Fund and a SAIS graduate.

2.      “Prudent Development: Realizing the Potential of North America’s Abundant Gas and Oil Reserves”
-          Mr. Jan W. Mares, Senior Policy Advisor for Resources for the Future and former U.S. Assistant Secretary of Commerce for Import Administrations.

3.      “Borderless Economics: Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism”
-          Mr. Robert Guest, Global Business editor of the “The Economist” and the author of “Borderless Economics: Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism”.

The one thing that stuck out to me was you must do your due diligence before making any financial investment.  For this blog, I will only discuss the main take away from the “Challenges and Trends in Infrastructure Investing in Emerging Markets” discussion.

Mr. Sessions gave countless examples of when his company was receiving yearly 25% ROI financial investments in Brazil but due to Brazilian government pressures the firms ROI was reduced to 8%.   Mr. Sessions was hit with a real dilemma; he promised his investors he would make over 20% on the ROI, now he was only making 8%.  Mr. Sessions mentioned that when his company first started doing business in Brazil, the government helped foster business relationships within the country.  Now, because Brazil is getting a lot of foreign investors, and there is a new president in Brazil, the business environment has changed.  Mr. Sessions stressed you must continuously do your due diligence to understand both the macroeconomic and micro-economic factors in the region you are working in.  Global Environment Fund is looking to do business in other countries in South America (i.e., Chile, Peru, and Argentina) where business investments are more attractive.

Ben Brock

Thursday, November 17, 2011

Video Session with Legg Mason

With all respect and honors, the equity analyst team took a tour in the Legg Mason Investment counsel trading room and hold a talk with their principal senior fixed income trader.

The principle trader Philip Yakim gave us a brief introduction on their daily job, which includes gatherng market news, managing clients' portfolioes, and trading.
The Investment Counsel has five traders, each specific in one field, they get information from each other, working as a team. Philip is focusing on fixed income trading, but he also has equity and other investments in his porfolio. When he needs to trade on equities, he can send his message to any trader he wants through their awesome trading system.

Except for their trading system, which shocked me most is his amzing bloomberg skills. I don't even know there are so many sectors and functions in bloomberg before this tour. They even have a "crisis" templete, which makes it much more easier to check the bond yields and CDS of the GILLP. I tried this on bloomberg tonight, it makes everything simple.
I have saw the urgency to improve our bloomberg skills. We need to know which commands and indexes are mostly focued by traders, then we will gathering information much more efficiently.

Therefore, I sincerely suggest we spare some time to learn bloomberg together during the Saturday meeting, since the bloomberg is the most important tool to a trader, we should also be familiar with it if we want to get a job in this industry. I am also wondering whether Nathan can give us an introduction on this?


SIFIs: Too Big To Fail

November 17, 2011

This month, the Financial Stability Board (FSB) released a list of systemically important financial institutions (SIFIs), and the list includes:

 8 U.S. banks:
Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo.

17 European banks:
UK: Royal Bank of Scotland PLC, Lloyds Banking Group PLC , Barclays PLC, HSBC Holdings PLC;
France: Credit Agricole SA , BNP Paribas SA , Banque Populaire, Societe Generale SA
Germany: Deutsche Bank AG , Commerzbank AG
Italy: Unicredit Group SA
Switzerland: UBS AG , Credit Suisse AG
Belgium: Dexia SA
Netherlands: ING Groep NV
Spain: Banco Santander SA
Sweden: Nordea AB

3 Japanese institutions
Mitsubishi UFJ FG , Mizuho FG, Sumitomo Mitsui FG

1 bank from China
Bank of China

Those 29 banks will have to raise their core tier 1 capital ratios above Basel III mandates. The FSB foresees five "buckets", requiring extra capital of 1%, 1.5%, 2%, 2.5% and 3.5%. The more important the SIFI, the higher the surcharge it will have to pay. In addition, those institutions are being strongly encouraged to increase their internal supervisory measures, for governments to safeguard taxpayers’ benefits in case of bailing out institutions deemed too big to fail. Obviously, those requirements would be a big challenge for most of those 29 banks, as surcharges and strict regulation may restrict their ability to lend to the economy, as well as influence competition with their rivals.

Lorena Li

Discussion Topics on 11/18/2011 (Fri)

Topic: The Dow dropped 190.57 points to close at 11905 after Fitch ratings released a report saying that US banks could be "greatly affected" if Europe's debt crisis continues to spread



1) What are the reasons behind Fitch's report saying "the credit outlook for U.S. banks could worsen unless the euro zone's debt crisis isn't resolved in a 'timely and orderly' manner"? To be specific, is Fitch referring to any particular european country or incident happened recently in the debt crisis? 

2) Some remain optimistic towards U.S. market, saying "the U.S. could set a positive tone for the rest of the world markets by the end of the year even though Europe continues to be a problem". Do you agree or disagree, why or why not? Base your answers on the latest performance in U.S. financial market. 

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