How Information Influences Finances

The things which contribute to price levels and action in the financial markets are numerous and diverse, and their influences can vary through time, and across different markets. This article identifies the different types of Economic Data influences and the role they play.

There are two ways economic information can influence prices. The first is in the macro sense. Macroeconomic inputs include:

Interest Rates
Economic Growth (GDP)
Government Budget Surpluses/Deficits
Trade Balances
Commodity Prices
Relative Currency Exchanges Rates
Inflation
Corporate Earnings (both for individual companies and the broad collection)

These elements will generally all have long-term inputs in to the pricing of any given market. They do not tend to move in sharp, dramatic fashion, so their influences also tend to be seen over longer periods of time.

That said, the release of economic data related to the above can be seen to have serious impact in the short-term activity in the markets. This comes primarily in the form of data releases. Some of the most important are:

Employment Data
Trade Data
GDP growth figures
Consumer & Producer Inflation rates
Retail and Wholesale Sales
Confidence & Sentiment Readings (U. Michigan survey, etc.)
Income & Spending
Production
Interest Rate policy decisions
Earnings releases

The markets can react in very, very dramatic fashion to these releases when they are out of line with expectations. The foreign exchange market, namely the EUR/USD exchange rate, provides a striking example.

On one Friday morning at 8:30 Eastern the monthly Non-Farm Payrolls report hit the wires. This report (released on the first Friday of each month) probably provides the most short-term volatility across all market sectors of any regular economic release. When the data comes in well off of market expectations, fireworks can ensue, as was the case in the example. Over the course of about 2-3 minutes EUR/USD fell more than 20 pips, turned around and rose about 60 pips, then fell back down to near where it had been before the data was announced (a pip being 1/10,000 of a Dollar). It then proceeded to run nearly 100 pips higher in fairly steady fashion over the course of the next hour.

Here is another example, this time of T-Bond futures.

When those payroll figures were released at 8:30 the market dropped more than two full points. One point on the T-Bond futures contract is worth $1000, so each contract fell more than $2000 in about two minutes. Consider that the margin on a contract at the time was probably around $2500. That means a trader could have lost more than 80% on the trade in the blink of an eye.

It is also important to understand that in the futures pits such data events often result in fast market conditions. This means that the action is so hectic that there may literally be trading going on at several different prices in different parts of the pit. This is a risk of having open positions at the time of a major news release. The market may snap back fairly quickly, as in the chart above, but in the meantime the trader’s positions may have been liquidated on a stop order at a substantial loss.

Fortunately, all major economic releases are well documented. They are done on a pre-announced calendar which is readily available on any number of web sites, and of course in the business news media. In the vast majority of cases, one can also find out ahead of time from any number of sources what the expectations are for the release.

Foreknowledge of pending data events may not prevent losses which may result from unexpected figures. It will, however, allow the trader to recognize and understand when risks are increased. Make sure, especially if you are a short-term trader, to know what data is coming out. It can make a difference in your performance.

Online Personal Finance tools, the easy way for managing money

First the easy questions, do you know where all your hard earned money is going? How much Tax you have to pay this financial year? If you can, then let’s take the next test, can you say how much you spent on food last week? Or say, on travel last month? Though these questions may seem irrelevant, answering all these will help you managing money better. The secret to Personal Financial Success and Independence lies in managing your accounts, because you can never manage money unless you can measure it. While managing money and measuring accounts may seem to be a difficult task for some, help is never far away. There are numerous sites and software that help you manage money without asking of you to be an accountant of sorts.

In the current economic downturn, people are realizing that in order to cut costs and manage money it is imperative for them to know how much they spent on various items, what are their sources of income, all this, and more to figure out how to cut costs without greatly affecting one’s lifestyle. Managing money and measuring one’s finances is relatively easy, however, few people actually try to do so themselves. Are you one of them? Managing money will allow you to cut spending on unnecessary items and over a period of time will endow you with immense self-confidence to be able to meet financial goals.

At a macro level, paying taxes is one of the prime reason people track their finances, however that itself is just one of the reasons for you in managing money. At a micro level, few people track their finances, and even if they do so they finally cannot make long term decisions like budgets, tracking flow of cash, etc. Thus, while tracking is still possible, budgeting and effectively managing money needs more dedicated time and effort in order to get a grip on ones finances.

Financial tools both online and offline are considered alien by the general public, While most Indians track their income and expenses to manage money at some level, few actually venture beyond either their bank statements or their daily dairies, That is where tools like Onyem come in. Onyem is an attempt to make managing money online simpler, easier and in fact fun to use as well. Not only is it an easy money management tool, it also provides you with numerous opportunities to understand your spending and earning patterns.

Most Indians have multiple bank accounts; Unfortunately, few techniques used provide such people with a single point to view all their bank accounts to manage money, others prefer to maintain accounts in the paper form, which is liable to get misplaced, or even lost. Not to mention the complexity and the redundancy in maintaining accounts in a paper format. Onyem attempts to solve this problem by ensuring reliable data that can be updated and viewed from anywhere.

So are you ready to become a pro at managing money?

THINKING ABOUT FINANCE…DIFFERENTLY

Have you wondered why it is that Asians, even the ones who are affluent, have a lower quality of life than the average guy from the developed world? Now why would that be so? Critics might say that this is due to bad infrastructure; population being very high etc. etc.; implying that the services available need to be shared by many. But the fact is that all our lives we save and save for a better tomorrow – but better tomorrow for whom?

Going by text book economics, savings is the best thing that would lead to long-term economic growth right? Refer back to the oft used equation; Savings (S) = Investment (I). Although I have tried to be an ardent economics student, apart from mugging this for exams, I have never really understood the practical implications of this. In a single country model, this might work. Statistics also bear fruit to this. Savings rate of China and India are one of the highest, 14% and 27% respectively and that is perhaps one of the reasons why these economies are the fastest growing in the world. But let’s delve a bit deeper since we are definitely not living in a single country world.

It’s a well known fact that the average Asian saves a huge amount. Where do savings come from? It means we produce more than we consume. We produce goods and services. The fact that we don’t consume all of it means we export the excess. We get paid for the services in foreign currency. The central bank keeps some of this foreign currency and injects an equivalent amount of rupees in the system. Then they devise ways to mop up the excess liquidity since they start fearing inflation. So far so good right? Confused? So am I. Let’s use simple numbers then.

Say we produce 100kg of rice as a nation. We consume 50kg of it ourselves and export the balance. The international market pays us USD 50 for that exported rice. We sell this to a bank and get Rs. 2500 to be spent on our other requirements. But we are middle class Asians, so instead of saving a little we set aside a substantial amount of this in our savings account. Moreover, the central bank buys back a part of this USD 50 from the bank, say USD 20. Although there are several reasons why they do so, the primary reason is to build foreign exchange reserves. Since the central bank pays the bank in Rs. for the amount of USD bought, they inject an additional Rs. 1000 in the monetary system.

Now we have all heard of the multiplier effect in the financial sector right? This Rs. is further lent by the bank to borrowers, which in turn is further deposited in an iterative manner and the effective value of the money keeps growing to a much larger amount. Since the Central Bank is now worried about stoking inflation they ask banks to park part of this back with them via cash and government bonds so that this money does not multiply indefinitely.

Now comes the question of what does the Central Bank do with the USD 20 they had bought from the bank. They go and invest in US government bonds since that’s perceived to be the safest asset. When all Asian countries do the same (which is definitely a fact), the US and other developed country governments get to enjoy the cash from all the hard work we had originally put in to produce the goods. Even after consuming them, they effectively borrow back some of the money they had paid for the goods via a long term loan. As long as the perception is that they are of superior credit rating and therefore our USD 20 is safe, they continue to use our money, to provide among others, healthcare and developmental benefits to their citizens. So while it is true that we are partly saving for our future, we are also effectively saving for the developed world.

Two questions come to my mind, a micro and a macro. The micro question is very critical – Why do we save so much? The most common answer I have received is that “Unlike the West, the Government here does not provide us healthcare and retirement benefits and we need to have enough for a rainy day”. Very logical answer but what constitutes a rainy day? If we are hard-working and most importantly healthy then we should always be able to produce (not procreate mind you but earn for oneself and family). So if health and life are the two biggest risks, doesn’t it make sense to have large life & health insurance policies (accompanied with things like critical illness covers) so that we cover all the potential “rainy day” situations? And once we have done that we can then enjoy the money that we have without saving any further.

A related question might arise. Since we don’t save enough how do we ensure a better future for our children? The answer to that is also quite simple. Instead of saving if we consume, we would effectively be creating more demand for the products that we buy, thereby creating more jobs for the whole country. Economics teaches us money multiplier, but what about people’s skills multiplying. We are a nation who can leverage people much more than we can leverage capital and that is where our focus should be. As more people get skills, their capacity to innovate increases, therefore the productivity per individual also increases. That way if all of us consume more today, we would as an aggregate nation ensure a better future for our kids. But yes, only “I” saving more than my next door neighbor would give my kids a better head-start than that of my neighbors. So by excessive saving more aren’t we being selfish, thinking myopic?

The macro question that needs to be answered is – What is a logical end to this conundrum? The developing countries are saving, subsequently investing in the developed countries at low fixed bond returns. Using that same money, the developed countries are re-deploying that back but not in low fixed returns, but attractive equity returns via foreign direct investments and institutional flows. Who is the winner? I don’t think I need to answer that. The more hard work we put in to increase the profitability of our companies, a significant part of it is enjoyed by the developed nations while we continue to earn 2% long term US treasury bond returns? The logical end-game is that over time the US currency should depreciate, thereby ending this balance. But here again our Central Banks would be the biggest losers since they are holding huge amount of US assets. Which means that we will continue to further invest in the US (to support the currency) and the cycle might continue indefinitely?

While bashing the government and central bank may seem simple and fashionable, given the fact that we have had balance of payments crisis and the fact that we are a poor nation, the task of the government and central banks is not so easy. Even they think of “rainy days”. Increasing exports and thereby increasing our reserves was definitely a good strategy for the better part of the last two decades. But now that we have enough reserves, even the Central Bank should stop worrying about excessive saving of foreign currency.

As for us citizens, we should also learn to handle our “rainy day” situations better. Not by saving most of what we earn, but by removing the risks with adequate insurance protection. Save, but a prudent amount, not an excessive amount. Capital starved countries saving more than capital rich countries is something that has to and should change quickly. Going back to our simple numerical example, we should ourselves consume a significant part of the excess 50 kg of rice that we have been exporting all this while. The exports should just be sufficient to ensure that it covers the cost of our imports (like oil etc.) and nothing more. So let’s go out and buy the cars and dream houses that we have always wanted to instead of saving for the developed nations.

Asian Stocks Fall on China Bank Lending Concern, Yen Strength

Asian Stocks Fall on China Bank Lending Concern, Yen Strength
March 4 (Bloomberg) — Asian stocks fell for the first time in five days, led by finance companies and Japanese exporters, on concern a slowdown in Chinese bank lending and a stronger yen will drag on regional economic growth.

Read more on Bloomberg

Economics Today: The Macro View plus MyEconLab plus eBook 1-semester Student Access Kit

Product Description
Readers learn best when they see a concept applied in the context of examples they understand. That is why Economics Today: The Macro View is so successful when readers hail from a wide variety of backgrounds. An abundance of relentlessly current, news-worthy examples motivate every chapter and reflect the interests of today’s diverse reader population.

Introduction: The Nature of Economics; Scarcity and the World of Trade-Offs; Demand and Supply; Extensions of Demand and Supply Analysis; The Public Sector and Public Choice; Taxes, Transfers, and Public Spending; Introduction to Macroeconomics and Economic Growth: The Macroeconomy: Unemployment, Inflation, and Deflation; Measuring the Economy’s Performance; Global Economic Growth and Development; Real GDP Determination and Fiscal Policy: Real GDP and the Price Level in the Long Run; Classical and Keynesian Macro Analyses; Consumption, Real GDP, and the Multiplier; Fiscal Policy; Deficit Spending and the Public Debt; Money, Stabilization, and Growth: Money, Banking, and Central Banking; Money Creation and Deposit Insurance; Domestic and International Dimensions of Monetary Policy; Stabilization in an Integrated World Economy; Policies and Prospects for Global Economic Growth; Global Economics: Comparative Advantage and the Open Economy; Exchange Rates and the Balance of Payments.

For all readers interested in principles of macroeconomics.

Economics Today: The Macro View plus MyEconLab plus eBook 1-semester Student Access Kit