2 measures of economic activity
Gross National Product
Gross Domestic Product
Gross National Product
the total value of all goods and services that are produced by a national economy. For the U.S., it includes the goods and services being produced overseas by a U.S. company
Gross Domestic Product
the output of all the goods and services that are produced by labor and property located in the U.S., without regard to the origin of the producer
- includes a Toyota plant in Columbus
inflation
too much money chasing too few goods
persistent and appreciable rise in the general level of prices
what measures inflation?
the Consumer Price Index (CPI)
utility stock
highly leveraged; have significant reactions to changes in interest rates
natural gas, water, electricity
decline in prices of these securities when interest rates rise
equities to hedge against inflation
equity mutual funds, equity ETFs, variable annuities
Commodities as an Inflation Hedge
gold and silver
real interest rate
the rate of interest that a bond investor expects to receive after allowing for the decline in his purchasing power due to inflation
yield - inflation rate = real interest rate
deflation
a persistent and appreciable decline in the general level of prices.
May be caused by the supply of goods and services exceeding the demand for those items, resulting in producers lowering their prices to compete for the limited demand
4 phases of business cycle
expansion, peak, contraction, trough
when does a recession occur?
when Real GDP declines for 2 consecutive quarters
3 economic indicators
leading, coincident, lagging
leading economic indicators
Variables that predict, or lead to, a recession or recovery; examples include:
average weekly hours, manufacturing
average weekly initial claims for unempl. insurance
manufacturing new orders, consumer goods, and materials
ISM Index of New Orders
Manufact
Coincident Economic Indicators
Usually mirror the movements of the business cycle
employees on non-agricultural payrolls
personal income less transfer payments
the Index of Industrial Production
Manufacturing and Trade sales
Lagging Economic Indicators
average duration of unemployment
ratio of manufacturing and trade inventories to sales
change in labor cost per unit of output
the average prime rate charged by banks
commercial and industrial loans outstanding
ratio of consumer installment credit to pers
prime rate
what commercial banks charge their best corporate clients
discount rate
what the depository institutions are charged when they borrow from the Fed Reserve
Fed Funds Rate
what is charged on an overnight loan of reserves between member banks
Call rate
what commercial banks charge on collateralized loans to broker-dealers
from highest to lowest in terms of rates
prime rate
call rate
discount rate
fed funds rate
bond coverage ratio
EBIT/Interest Expense
do growth stocks have a high P/E ratio?
yes
do growth stocks have a high dividend payout ratio?
no
contrarian
someone who purchases value stocks
nano-cap
Below $50 Million
micro-cap
Between $50 Million and $300 Million
small-cap
Between $300 million and $2 billion
mid-cap
between $2 billion and $10 billion
large-cap
greater than $10 billion
Keynesian economics
states that government intervention in the economy is necessary for sustained economic growth and stability
who sets fiscal policy?
the President and Congress
primary focus of fiscal policy
economic growth and high employment
who controls monetary policy
the Fed
monetary policy
attempts to control the supply of money and credit in the economy
- primary focus to control inflation
easing money
increasing money supply and lowering rates
tightening money
reducing money supply and increasing rates
normal upward sloping yield curve
during periods of easy money
yields on short-term debt securities will be lower than those on long-term securities
inverted downward sloping
during periods of tight money
short-term interest rates will be higher than long-term rates
tools of the Fed
reserve requirements, discount rate, open market operations, margin requirements, moral suasion
if reserve requirements are lowered
the banks are able to extend more credit, which causes the money supply to increase and INTEREST RATES to fall
multiplier effect
the rate at which banks can create new money by re-lending deposits and, in turn, creating new deposits
discount rate
the rate charged by the for the loans that are made to its members
when the discount rate lowers,
the FRB is encouraging the borrowing from the FRB discount window, so money is injected into the system
fed funds rate
the short-term loans of excess reserves that banks lend to one another and the interest rate charged on these loans
MOST VOLATILE INTEREST RATE
what is the fed funds rate determined by
supply and demand
Federal Open Market Committee FMOC
oversees the FRB's buying and selling of U.S. government securities in the secondary market
- most frequently used tool of monetary control
when the Fed buys securities
it's injecting money into the banking system in order to stimulate investment and business activity
money is more available and interest rates tend to move downward
-easing of the money supply
-could lead to inflation
if the Fed sells securities
it's tightening the money supply
interest rates will rise
may curb inflation
repo
a contract entered into by the FRB to purchase government securities at a fixed price from dealers with the provisions for their resale back to the dealer at the same price plus a negotiated rate of interest
the FRB is lending money, and therefore increas
reverse repo
when the FRB sells securities to dealers with the intention of buying the securities back at a future date
margin requirements
the Securities Exchange Act of 1934 provides the FRB with the power to determine the amount of credit that may be extended to purchase securities
established under Reg. T
least effective method
by increasing requirements, FRB reduces the amount of money b
moral suasion
when the FRB attempts to influence bank lending policies through jawboning
the FRB exerts its influence through the public media or through the examiners who are sent to member banks
increasing bank reserve requirements
tightening
increasing discount rate
tightening
increasing margin requirements
tightening
selling government securities in the open market
tightening
spot rate
the current value of a currency
as demand for dollars increases,
the price of dollars increase. therefore, when U.S. interest rates are higher than foreign rates, it may lead to a stronger dollar.
U.S. exporters prefer
a weak dollar
U.S. importers prefer
a strong dollar