Kataneh Emami

In many real life scenarios, you can see the good, the bad and the ugly. Macroeconomics, regulations and government interventions are no exception to this rule. In this article, the focus is on potential bad and ugly consequences of US administration’s tariffs and trade policies.

Price of basic material and labor will undoubtedly increase in a growing economy such as US has ample demand. Now, if the price increases as growth and sales and profits increase too, wage increase boosts consumers’ purchase power. BUT if the growing price is because of disruptions such as tariffs -or even worse quotas-, growth is not the underlying cause of increasing prices. Therefore inflation happens without sufficient growth to boost wages and purchasing power. This means adverse impact on growth and wages, while prices are increasing! Even worse, to tame inflation, interest rates will have to increase, which will even put more downward pressure on growth and purchasing power. Interest rates increase, so, the value of US dollar will also increase, which means that other countries will not be able to import US goods as much as before, which causes even more downward pressure on US growth!

Now Europe is in bad shape; its growth slowed down, partly because of US threats on tariffs, and partly because of the recent protectionist movement. Also China’s growth and GDP relies on its exports (more than the US, which is mostly driven by consumer spending). This means that the global growth will be disrupted, which means that there will be less demand for US exports! In the worst case scenario, potential retaliation from US allies and importers will put downward pressure on US exports, hence growth.

So, simply the worst case scenario would be higher price of input, and lower demand for the output, hence lower growth, and finally a recession!

There is no need to panic yet, because ‘negotiations’ are still in progress, and US economy is on solid footing, with stocks still going strong offering promising future earning. But be cautious,and try to pay off your debts and pile up your savings as fast as you can and before any potential hike in interest rates. Further, if your life saving is all in aggressive assets like stocks, make sure to talk to an advisor for potential diversification.

 

Please see part 6 here:http://infiniterac.com/index.php/2018/04/28/basics-of-macroeconomics-6/

These series of articles are for those intelligent group of people whose expertise are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 7- Debt and Growth

Imagine a very simple scenario where you have a business, Orangina Inc., which uses oranges and sugar to produce orange juice. You sold $1,000,000 this year, paid $300,000 for raw material, $200,000 for labor, which will leave you with a profit of $500,000.

Now demand is growing for orange juice, and you have to add a plan with equipment to meet the increasing demand. Demand is expected to be $1,500,000 next year. Raw material and labor will grow proportionately to $450,000 and $300,000. So, profit is expected to be at $750,000. BUT to build a new plant, you need to borrow from the bank. You ask for $800,000 of loan at 10% (variable), to pay back in 5 years. This means that you will have to pay $80,000 of annual interest and $160,000 of principle or $180,000 in total.

Bank approves your request, because your growth rate is at 50% (profit is expected to grow to 750,000, or 50% higher than last year), which covers the 10% of interest rate very easily.

So, you expect to buy plant and equipments with the $800,000, and produce enough juice to meet demand and generate $750,000 of profit, that covers the loan peyment of $240,000 (principle+interest).

BUT, inflation starts rising by 5%. Therefore you will have to increase your employees’ salaries by 5% to almost 315,000. Interest rates increase in response to inflation by 5%, which means that you will have to pay 15% of interest, or almost $120,000. To make the matters worse, the increased cost of borrowing (interest rates) decrease demand for orange juice! So, your actual sales at the end of the year will be $1,200,000 instead of the estimated $1,500,000.

This means that your real profits are (1,200,000-315,000-200,000) or 685,000 instead of the expected 750,000. After paying off your loans, you will end up with only (690,000-280,000) or $310,000 of profit, which is even worse than last year.

Summary:

Businesses borrow to grow. If the rate of growth is lower than the borrowing rate, they will have problems with returning their debt. Problem manifests itself as a vicious cycle when rates increase: As interest rates increase, people buying power decrease, they buy less, companies make less money, and will therefore have less money to repay debt.

This is one of the main reasons behind lower stock prices, as interest rates increase.

(Please see a summary of the previous chapter in chapter 3, eighborhoods that will appreciate)

As summarized in this chapter, proximity to Starbucks is in fact correlated to higher house prices. But then the biggest questions are, whether Starbucks stores follow or fuel market growth, and therefore, is the market growth really an effect of Starbucks opening in an area, or a result of other criteria.

Studying price of houses within quarter a mile from Starbucks, then between quarter a mile and half a mile from Starbucks in five years after Starbucks store opened shows that house prices within quarter a mile increased by 21%, while prices within quarter to half a mile increased by 17%. So, there is a correlation.

Starbucks has in fact a team (and process) for location selection. All over the world and in different countries, their analysts investigate many factors to select new location and design for their new store. They consider it not just a science, but an art.

It should be however noticed that there have been some poor judgement about the new store location too, where Starbucks closed down the location a couple of years after opening it. But more often than not, a new Starbucks store is an indicative of higher (than average) growth in the neighborhood.

PS: see the book on Amazon at Zillow Talk: The New Rules of Real Estate or directly from Zillow at https://www.zillow.com/zillowtalk/buy/

Please see part 5 here: http://www.kataneh.com/index.php/2018/04/27/basics-of-macroeconomics-5/

These series of articles are for those intelligent group of people whose expertise are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 6- Government Income and Spending

a- Governments have two main sources of income; taxes and borrowing (bonds and treasury notes). Governments spend their income on public services, national security, and to run the government. They may also use their income to boost the economy through spending on infrastructures, such as roads, bridges and highways, or to ‘protect’ and insure certain sectors and industries.

Examples of protection are financial bailouts in the late 2000’s (in form of lending to financial institutions, of course), or protecting the agriculture sector if tariffs happen to limit demand for US agriculture products.

Examples of spending are government infrastructure spending to build roads, bridges, parks and highways. If government does not spend on infrastructures, or does not contract these projects to the right contractors, public safety and welfare will be compromised.

Military is usually the biggest item on the list of government spending. Through infrastructure and military spending, money cascades down to other sectors, creates demand for more jobs, which in turn boosts wages, consumer spending, business spending, and the economy.

Government also provides health insurance or old age security to the old people or (for some governments in the developed countries) to all. Relief packages are also provided if natural (or sometimes human) disasters happen.

b-Governments increase taxes or borrow more when they need higher income.

Now, imagine that your family has $200,000 of annual income, and only $5,000 of debt. Banks easily give you a loan of $1,000,000 at prime rate or a little bit higher. But if your family’s annual income is $100,000, with $20,000 of debt, banks may ask for two or more percent higher than prime rates on only $500,000 of loan. The higher your risk is, the higher the interest on your loan/mortgage will be, and the lower the value of the loan will be. That is because the terms of loan are less favorable for riskier borrowers.

Exactly similar to this scenario, as government’s income decreases, and their debt increases, people will ask for higher interest rate from the government on government’s newly raised debts. This will, of course, cause a vicious cycle, because the higher the interest rate is, the more the government should spend to pay for its interests on the debt, which means government’s spending will be higher. To stop or reverse the vicious cycle, the government should increase taxes or decrease (infrastructure, public or military) spending to increase their income, and pay out their debt.

Governments borrow by selling government bonds, treasury notes, and similar papers.

In short, governments borrow (through selling bonds and notes) or collect taxes to spend  on public welfare and services, infrastructure, military, health care, relief efforts, and running the government. Higher spending and lower taxes are government’s fiscal policies to spur growth whenever needed.

Please see part 4 here: http://www.kataneh.com/index.php/2018/04/25/basics-of-macroeconomics-4/

These series of articles are for those intelligent group of people whose expertise are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 5- Unemployment, Wage Growth, Inflation, Interest Rates

a- Imagine that you have a pastry restaurant and your business depends on a skillful pastry chef,  a barrista, and a couple of waiters and waitresses. Your main ingredients are coffee, sugar, milk and vanilla. You could easily find the chef and the barrista when unemployment rate was high, and economy was not at its best shape. But as economy expands, more jobs are created, and unemployment rate drops. All of a sudden, your chef decides to leave. As you try to find her a replacement, you realize that your choices are limited, and the most skillful people are already hired. So, your best choice would be offering higher wage to your chef.

Also, because of economic expansion, and due to lower unemployment rate and higher wages, prices have grown too, so, you pay higher for sugar and vanilla. Also, a couple of months earlier, a tariff was imposed on cocoa beans which made their prices even higher. Now, you need to pay extra for material, and for labor. You will have to increase your prices on the menu to remain profitable.

So, as unemployment rate declines, cost of labor and material grows, so, businesses need to ask for higher prices for their products and services to remain profitable.

b- As unemployment declines, and prices inflate, interest rates should go up to 1) keep prices from overheating, 2) match return on people’s savings in the banks with the inflated prices.

So, imagine that you had borrowed $50,000 at 5% to start your business. Now rates are higher at 7%. So, initially you paid $2500 of interest, but now you need to pay $3,500 of interest. Again, you should either increase your prices, or, your profits will decline. The same is happening to your customers. If they have $5,000 of debt on their credit, now they should pay $350 of interest instead of $250. At the same time, your prices have gone higher! This means that fewer people will be able to afford dining out, so, your sale declines, and your labor and material expenses are higher already!

Your pastry shop’s sales and profits will start to decline, which means that you should either make your business smaller, fire one of the waiters, or cut your own salary and the salary of your staff to make sure you business will keep on running.

This is how growth leads to low unemployment, higher wages, price inflation and higher interest rates, which in turn limits the growth, leads to lower wages and higher unemployment rate, hence lower interest rates, and higher growth….and the cycle goes on and on  and on and on.

Please see part 3 here: http://www.kataneh.com/index.php/2018/04/25/basics-of-macroeconomics-3/

These series of articles are for those intelligent group of people whose expertise are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 4- Interest Rates and Stock Market Valuation

a- You can purchase a basket of groceries for $100 today, but in one year from today, the same basket of groceries may cost you $105, and in 10 years the same basket might cost you $120. This means that you expect the prices to inflate by 5% in 1 year but by 20% in ten years.

Now, if you decide to invest your $100, you would want an investment that grows by 5% or better in one year, and by 20% in ten years.

This means that the higher the expected inflation is, the higher the growth should be to convince you to invest.

So, (as we learned in part 1), the higher the inflation is, the higher the interest rates will be, and therefore the higher the growth of a stock (or asset) should be to become an attractive investment.

It can be simply calculated as The Present Value of the Future Cash in n years = The Future Value divided by (1+interest rates)^n

Or, The Present Value of the Future Growth in n years = The Future Growth divided by (1+interest rates)^n.

In other words, the higher the interest rate is, the higher the future growth should be to convince you to invest.

b- Value of stocks are mainly based on how much money a company can make, or their earnings. Then for each sector and for each type of business stock price is a multiple of company’s earnings. For example in high tech sector, valuations are typically high and sometimes hundreds of times higher than the earning of the company. In some other sectors such as utilities, valuations are modest. But in average, the current price to earnings multiple of S&P500 (the index of 500 biggest US companies) is almost 25.

There is also a multiple called price to forward earnings. The price of the stock is determined based on the FUTURE earnings of the company.

Now the present value of future earnings is Future Earnings / (1+Interest Rate)^n. If interest rate goes up, the present value of future earnings goes down. Therefore in P/E (price to earning) valuation, price will have to go down, or else valuation will be too high.

In other words, as interest rates increase, -if growth in earning does not match or exceed the rate-, the stock price will diminish.

Summary of parts 1, 2, 3 and 4:

Lower interest rates cause price inflation. To tame inflation interest rates should increase.

Higher interest rates encourage savings and limit spending. The higher the interest rates are the more interest banks pay on people’s savings.

The higher the interest rate is, the higher the value of the currency is, and therefore exports will decrease, but imports increase.

Inflation might happen because of higher purchasing power, but may also happen because of limited supply. The latter case might have adverse consequences.

As interest rates rise with inflation, stock prices decline, because of the dependency of market valuation to interest rates.

 

See part 2 here:http://www.kataneh.com/index.php/2018/04/24/basics-of-macroeconomics-2/

These series of articles are for those intelligent group of people whose expertise are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 3- Interest Rates, Debt, Growth and Inflation

a- Imagine that you were unemployed, so, you couldn’t spend much. But all of a sudden you find a job, so, you start spending more, and to make things even better, your spouse gets 10% of raise. So, you will start spending even more and won’t care if you pay a bit extra. Exactly similar to this trend, when unemployment rate decreases and salaries increase, prices increase or inflate. So, the lower the unemployment rate is, and the higher the salaries are, the higher the inflation will be.

b- Now imagine that you borrowed $20,000 when the interest rates are 1%, and that you have the option of paying the interest only for as long as you wish. At 1% your annual payment will be $200. Now imagine that rates increase to 2%, which means that you need to pay $400 of interest rate, every year. Now, if your income grows as the interest rate grows, you shouldn’t have any problem with the extra payment. But if your income doesn’t grow at a comparable rate, you will have to either limit your other expenses, or withdraw from your savings to cover the higher rates, or in the worst case, default on your loan, and declare bankruptcy!

So, as interest rates increase, salaries should increase too, otherwise savings will decline, spending will decline, investments will decline, and finally people and businesses will default on their debt.

IF inflation is caused because of growth in  salaries, rise of interest rates can be well tolerated. Otherwise, if inflation caused for other reasons, when salaries did not grow, there might be consequences.

C- Now imagine for example that the production of oil gets limited, while people still use the same amount of oil (demand doesn’t change). It means that because the supply of oil is lower, its price will go higher, or inflates. This is another scenario that ends up to inflation, but people’s income has not increased!

This means that inflation is because of limited supply, and not because of people’s higher purchasing power.

So, the more limited the supply is, the higher the price will be, and the higher the inflation rate will be. 

The conclusion is, if lower unemployment rate and higher salaries improve people’s purchasing power, and cause price inflation, followed by rise  of interest rates, inflation and rate increases are backed by growth. But if the inflation is because of limited supply, while demand is unchanged or higher, then inflation may not be healthy.

Summary of parts 1, 2 and 3:

Lower interest rates cause price inflation. To tame inflation interest rates should increase.

Higher interest rates encourage savings and limit spending. The higher the interest rates are the more interest banks pay on people’s savings.

The higher the interest rate is, the higher the value of the currency is, and therefore exports will decrease, but imports increase.

Inflation might happen because of higher purchasing power, but may also happen because of limited supply. The latter case might have adverse consequences.

 

 

See part 1 here: http://www.kataneh.com/index.php/2018/04/05/basics-of-macroeconomics-1/

These series of articles are for those intelligent group of people whose experties are not economics or finance, but are still interested to understand the impact of macroeconomic monetary and fiscal policies such as interest rates, taxes or spending on the overall course of economy, their businesses, their employers, investments and of course their daily life.Therefore, in these articles, I have knowingly avoided using economic and finance terms and jargon, as much as possible.

The impact of different macroeconomics monetary and fiscal policies on each other, economy and growth are complicated and may cause vicious, benign or virtuous cycles. It is like a polynomial equation with many different interactive factors and coefficients. Changing the value of each factor and each coefficient will not only generate a different result, but may even change the value of some other factors in that same equation! And of course, changing one factor may generate multiple or totally different results for different values of another factor.

Knowing all those facts, in this article, discussion is kept very simple and to the point. At any time, we focus on one causal impact of one factor only if ALL other factors are assumed to remain constant.

Part 2-  Interest Rates, Currency and Imports/Exports

a- Mr. Max lives in Gondor where the interest rate is 1%, and therefore banks pay $1 of interest on every $100 in a saving account. But Mrs. Ruby lives in Arnor where the interest rate is 10%, and therefore $10 of interest is paid on every $100 in the bank.

Miss Louise lives in Mordor and has $100 to invest. Obviously, she prefers to receive higher return on her savings. So, she prefers Arnor with 10% of interest rate. Miss Louise will have to convert Mordor currency to Arnor currency and save in the bank or Arnor. This means that demand for Arnor money will increase, which again means that the value of Arnor currency will increase, because (all else remained unchanged) as demand grows, prices grow too. So, the higher the inflation is, the higher the interest rates are, and the higher the value of the currency is. 

b- Imagine that Arnor and Gondor are neighbor countries. Arnor currency is more valuable than Gondor. It means that the purchasing power of Arnor money is more than Gondor’s. So, Arnorians can buy from Gondor much more than Gondorians can buy from Arnor! This means that Arnorians import easily from Gondor, but Gondorians export to Arnor. Therefore, the higher the inflation is, the higher the interest rates are, and the higher the value of the currency is, and the higher the imports are, and the lower the exports are.

For my Canadian friends, do you remember when Canadian dollar was traded above parity with the US dollar and Torontonians made cross border trips to shop in the US, but Canadian export and manufacturing hurt?

On a side note, do you remember when China was accused of engineering the devaluation of its currency to increase exports, and when Mr. Mnuchin said that the value of the US dollar is too high, which was IMMEDIATELY translated by investors as an indication of limiting the rise of interest rates?

Summary of parts 1 and 2:

Lower interest rates cause price inflation. To tame inflation interest rates should increase.

Higher interest rates encourage savings and limit spending. The higher the interest rates are the more interest banks pay on people’s savings.

The higher the interest rate is, the higher the value of the currency is, and therefore exports will decrease, but imports increase.

 

Ten interesting and fun blockchain links:

1- Visualization of the structure of bitcoin blockchain: http://dailyblockchain.github.io/

2- Live monitoring of Ethereum blockchain: http://ethviewer.live/

3- Top 100 blockchain insiders: https://richtopia.com/inspirational-people/blockchain-top-100

4- 10 interesting uses of blockchain technology: https://www.entrepreneur.com/article/305859

5- 11 Myths about blockchain: https://www.forbes.com/sites/forbestechcouncil/2018/03/27/11-common-myths-about-blockchain-and-cryptocurrency-you-shouldnt-believe/#3c70f3d5a33f

6- Top 4 Blockchain etfs: http://www.etf.com/sections/features-and-news/comparing-4-blockchain-etfs?nopaging=1

7- Digital bitcoin nodes distribution all over the world: https://bitnodes.earn.com/

8- The top 100 influential blockchain companies: https://www.rise.global/blockchain-100

9- Top 24 Industries to be disrupted by blockchain:https://www.investinblockchain.com/blockchain-transform-industries/

and finally

10- The major investors in blockchain: https://bitrazzi.com/top-blockchain-investors/

 

 

(Please see a summary of the previous chapter in Chapter 2: Rent or Buy)

This chapter outlines the criteria that affect the future price of properties. Using and mining extensive data, Zillow algorithms forecast the one-year or longer term surge in prices. Forecast is possible, because real estate value in major cities follow similar patterns, which are predictable now.

The three main criteria are: proximity and access, gentrification and hosing stocks.

a) Neighborhoods adjacent to city center increase in value faster than the city center itself, until, over time the difference in price shrinks until the outlying areas become of similar value to city center in a decade or two. Trend is rather complicated mainly because there is no full insight into the underlying reasons. Furthermore, even within the concentric rings that surround city centers, specific hot areas grow faster than other spots.

Trend starts with high demand for downtown with restaurants, cafes, nightlife and facilities, so prices increase. Then some people start coming to the adjacent more affordable neighborhood which is close enough or (if not physically close) along transit lines for easy access to the prime area’s charms. As more people move into the surrounding area, restaurants, cafes and small businesses pour in, and this neighborhood becomes a hot spot itself, with prices similar to city center. Zillow calls this the “halo effect”. Please note that even though this effect is observed very often, it may not be true for every city. Trend is more pronounced in diverse cities than in homogeneous ones.

b) Cheap neighborhoods with less refined population become attractive to specific class of more refined people who would be willing to live in the area because of affordability and despite the cultural difference. Consequently more people get attracted to this new hotspot of culture, which brings with itself a new wave of change, and entices investors and builders, hence spurs growth in the area with even more upper-middle class residents (or gentry) moving in. Gentrification has been a controversial phenomenon. Details are out of the scope of this summary.

Spencer claims that Zillow has insight into some forces that propel gentrification:

c) A couple of decades before gentrification starts, early signs can be detected. Areas with older houses, lower home ownership rates and access to more popular areas are the likeliest candidates for gentrification (and I would argue also halo effect).

In short a combination of older houses, lower home-ownership, shift in median income and rate of new investment and redevelopment are major drivers of gentrification in a neighborhood.

PS: see the book on Amazon at Zillow Talk: The New Rules of Real Estate