1st video: Topics in Macroeconomics applied to asset management I

Question 1

4 types of inflation/activity regimes? (1.9)
Important to know!

Answer 1

Regime 1: Non-inflationary expansion. Expansion
-Equities
-Investment grade
-High yield (risky investments)
Regime 2: Inflationary expansion. Overheating.
-Commodities
-Housing
-Gold
Regime 3: Inflation with low growth. Stagflation
-Inflation linked bonds?
-Gold
Regime 4: Non-inflationary low growth. Recession.
-Nominal bonds (Fixed income)

Last year we had high growth and high inflation in developed economies: we were in regime 2. Now we move to regime 3. Price of commodities go down. Still gold, which is natural hedge? In developed economies, we are in regime 4. Inflation is slowing down and growth is low

Question 2

Graph 1-10 remember

Question 3

Definition of recession

Answer 3

2 successive quarters of real GDP decline (contraction).
In U.S. its also needs to have job destruction and significant increase in unemployment rate

Question 4

Drawback of GDP?

Answer 4

It is a quarterly number, that’s not satisfactory from the asset manager view, where decision have to be taken on high frequency basis. So, we need to find a higher frequency indicator, which ideally is a monthly one, or even better than monthly.

Question 5

What is a business cycle? 2.6

Answer 5

A business cycle refers to the recurring pattern of expansion and contraction in an economy. It represents the fluctuations in economic activity, including periods of growth (expansion) and downturns (contraction). The business cycle is often characterized by changes in various economic indicators, such as GDP (Gross Domestic Product), employment rates, investment levels, and consumer spending.

The business cycle typically consists of the following phases:

Expansion:
This phase is characterized by increased economic activity. Businesses are growing, employment is rising, and there’s a general sense of optimism. During this phase, GDP is expanding, and various economic indicators are positive.
Peak:
The peak is the highest point of the business cycle. It marks the end of the expansion phase and is characterized by the highest levels of economic activity. At the peak, the economy is operating at or near full capacity, and there may be concerns about inflation.
Contraction (or Recession):
This phase involves a decline in economic activity. It is marked by a decrease in GDP, rising unemployment, and a general economic slowdown. Consumer and business confidence typically decline during a contraction. If a contraction is severe and prolonged, it may be referred to as a recession.
Trough:
The trough is the lowest point in the business cycle. It marks the end of the contraction phase and the beginning of a new expansion phase. During this phase, economic indicators reach their lowest levels, but the economy is poised for recovery.

Question 6

What is real GDP

Answer 6

Real GDP is adjusted for inflation to provide a more accurate measure of economic growth. The adjustment allows for a comparison of economic output over time by removing the influence of price changes.
The formula for calculating Real GDP involves taking the nominal GDP (which does not account for inflation) and dividing it by the GDP deflator (a price index that represents the ratio of nominal GDP to real GDP).

Real GDP=(Nominal GDP /GDP Deflator)
×
100

Question 7

GDP formula? 2.7

Answer 7

Personal consumption expenditures + private investment + government expenditures + (exports - imports)
(I have to understand this well!)
GDP = C + I + G + (X - M)

(-M because GDP is gross DOMESTIC product)

Question 8

Durable goods?

Answer 8

Something we use more than a year: vehicles, books, household goods (home appliances, consumer electronics, furniture, tools, etc.), sports equipment, jewelry, medical equipment, and toys.

Nondurable goods or soft goods (consumables) are the opposite of durable goods. like food.

Question 9

GDP formula components? What entails each letter?

Answer 9

—Consumption (C):
Personal Consumption Expenditures (PCE) - Spending by households on goods and services.
—Investment (I):
Private investment involves capital expenditure by individuals and businesses in areas like machinery, technology, real estate development, business expansion, research and development, financial securities, and human capital training. These investments drive economic growth.
—Government Spending (G):
Government Consumption Expenditures - Spending by the government on goods and services for direct use (e.g., public services, defense).
Government Investment - Spending by the government on infrastructure and other capital projects.
—Net Exports (X - M):
Exports (X) - The value of goods and services produced domestically and sold abroad.
Imports (M) - The value of goods and services produced abroad and purchased domestically.

Question 10

PMI? (Purchasing Manager’s Index)

Answer 10

PMI stands for Purchasing Managers’ Index, and it is an economic indicator that provides insights into the health and direction of a country’s manufacturing sector. PMI is based on a survey of purchasing managers in the manufacturing industry and is widely used by businesses, analysts, and policymakers to assess economic conditions. The index is calculated monthly and is expressed as a numerical value, usually ranging from 0 to 100.

Question 11

M2?

Answer 11

Real Money Supply, often denoted as M2, is an economic indicator that measures the total supply of money in an economy, adjusted for changes in the price level. M2 is a broader measure of money supply compared to M1, as it includes not only physical currency and demand deposits but also certain types of savings accounts and time deposits.

The components of M2 typically include:

Currency (C):
Physical money, such as coins and paper bills, held by the public.
Demand Deposits (D):
Checking accounts and other types of deposits that can be withdrawn on demand.
Savings Deposits (S):
Savings accounts, which often have limitations on the number of withdrawals allowed within a certain period.
Time Deposits (T):
Certificates of Deposit (CDs) and other time deposits with fixed maturity dates.
The formula for calculating M2 is as follows:

M2=C+D+S+T

Question 12

What does smoothing mean in leading indicators graphs? 2.11

Answer 12

“Smoothing” in leading indicators graphs means making the data look less jumpy or noisy, so we can see the main trends more easily. When you see “3MMA,” it’s like taking the average of the current month and the two months before it. This helps remove the ups and downs that might happen from month to month.

Here’s a simpler example: Imagine you’re tracking how much you save each day, and some days you save a lot, while other days you don’t save anything. If you use a 3-day average, you’d add up your savings for today and the two previous days, then divide by 3. This way, you get a smoother picture of how your savings are changing without being influenced too much by the fluctuations of each day.

Question 13

EMEU and EMEA? 2.15

Answer 13

Emerging markets Eastern Europe / Europe, Middle East, and Africa

Question 14

Consumer sentiment?2.18

Answer 14

Consumer sentiment refers to the overall attitude, outlook, and confidence that consumers have about the state of the economy, their personal financial situations, and their willingness to spend money. It is a key indicator of consumer behavior and can influence economic activity. Consumer sentiment is often measured through surveys, with respondents providing their opinions on various aspects of the economy and their personal finances. High consumer sentiment often translates into increased consumer spending. When consumers feel optimistic about the economy and their personal financial situations, they are more likely to make purchases and contribute to economic growth. Conversely, low consumer sentiment may lead to reduced spending and economic contraction.

Question 15

What are coincident activity indicators?

Answer 15

Coincident activity indicators are economic indicators that provide real-time or near-real-time information about the current state of economic activity. These indicators move in conjunction with the overall economic cycle, reflecting changes in the business cycle as they happen. Unlike leading indicators, which provide signals about future economic trends, coincident indicators give a snapshot of the current economic situation.

Coincident indicators offer a snapshot of the current health of the economy. They provide insights into whether the economy is expanding, contracting, or in a stable phase at the present moment.
Examples of Coincident Indicators: Industrial Production Index: Measures the output of the industrial sector, providing a snapshot of current manufacturing activity.
Employment Levels: The number of people currently employed in the economy is a key coincident indicator.

Coincident indicators differ from leading indicators, which provide signals about future economic trends, and lagging indicators, which confirm trends that have already occurred.

He says that these coincident are less informative, because they are not forward looking!!!

Question 16

ISM meaning? Institute for Supply Management 2.19

Answer 16

SM Manufacturing refers to the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI), a widely followed economic indicator in the United States. The ISM Manufacturing PMI is a survey-based index that provides insights into the health of the manufacturing sector. It is released on a monthly basis and is considered a leading economic indicator.
Components of the ISM Manufacturing PMI:
New Orders: Indicates the level of new orders for manufactured goods.
Production: Reflects the level of manufacturing output.
Employment: Measures manufacturing employment levels.
Supplier Deliveries: Assesses the delivery times of suppliers’ materials.
Inventories: Reflects the levels of raw materials and finished goods inventories.

Question 17

Supply driven (cost push) vs demand driven (demand pull) inflation? 2.22 seems important graph

Answer 17

Inflation can be categorized into two broad types based on the underlying factors that contribute to the rise in prices: demand-pull inflation and cost-push inflation. These classifications help in understanding the different dynamics that drive inflationary pressures in an economy.

Demand-Pull Inflation:
Explanation: Demand-pull inflation occurs when the overall demand for goods and services exceeds the available supply. In other words, it is driven by strong consumer demand that outpaces the economy’s ability to produce goods and services. When demand outstrips supply, businesses may respond by raising prices to capitalize on the high demand.
Causes:
Robust consumer spending.
Increased business investment.
Government expenditure.
Positive economic sentiment and confidence.
Example:
During periods of economic growth, consumers and businesses may increase spending, creating a surge in demand for products and services. If production capacity does not keep up with this increased demand, prices may rise, leading to demand-pull inflation.

If it is demand driven, you can cool down the demand and resolve the shock. While you can’t do that with supply driven (cost push) inflation.

Cost-Push Inflation:
Explanation: Cost-push inflation occurs when the costs of production for goods and services increase, leading producers to pass on these higher costs to consumers in the form of higher prices. Factors that contribute to increased production costs can include rising input costs (such as raw materials or labor) or supply shocks that disrupt the normal production process.
Causes:
Increase in raw material prices.
Higher labor costs.
Supply chain disruptions.
External shocks (natural disasters, geopolitical events).
Example:
If there is a sudden increase in the cost of oil, it can raise transportation costs and impact various industries that rely on oil as an input. This increase in production costs may prompt businesses to raise prices, contributing to cost-push inflation.

(with supply inflation) - a trade of between: creating a recession or allowing high inflation for long time period (until the shock is fully observed in the economy)

Question 18

The Quantity Theory of Money? 2.22

Answer 18

The Quantity Theory of Money is a theory in economics that establishes a relationship between the quantity of money in circulation and the price level in an economy. It is expressed in the form of the equation of exchange, which represents the total spending in an economy. The Quantity Theory of Money is often associated with the equation:

MV=PY (growth rate of money = growth rate of the price level)
Where:

M is the money supply,
V is the velocity of money (measurement of the rate at which money is exchanged in an economy

P is the price level of goods and services, and
Y is the quantity of goods and services produced.
The equation suggests that the total nominal spending (MV) in an economy is equal to the total real output of goods and services multiplied by the average price level (PY). The theory is built on the assumption that changes in the money supply

(M) directly influence the price level (P).

Velocity of money is a measurement of the rate at which money is exchanged in an economy. The velocity of money equation divides GDP by money supply. The velocity of money formula shows the rate at which one unit of money supply currency is being transacted for goods and services in an economy. In long run it is constant.

Key principles of the Quantity Theory of Money include:

Long-Run Equilibrium: In the long run, changes in the money supply primarily affect the price level and not the real output. This implies that changes in the money supply lead to proportional changes in prices.
Velocity of Money: The velocity of money (V) is assumed to be relatively stable in the long run. Changes in the velocity of money can have short-term effects but are expected to return to a stable level over time.
Real Output: The theory assumes that the economy operates at its potential output level (Q), which is determined by factors such as technology, resources, and labor.
Monetary Neutrality: In the long run, changes in the money supply do not affect real economic variables, such as real output and employment. Instead, they primarily influence the price level.

Neutrality of money: because monetary policy has no effect on the real economy in the long run

Question 19

Neutrality of money? 2.22 (He spend a lot of time on this slide)

Answer 19

Neutrality of money: because monetary policy has no effect on the real economy in the long run

The neutrality of money is a concept in monetary economics that suggests changes in the money supply have no real effects on the economy in the long run. According to the theory of monetary neutrality, variations in the quantity of money influence nominal variables, such as prices and wages, but do not impact real economic variables like output, employment, or productivity.

Long-Run Perspective: The concept of neutrality applies to the long run, emphasizing that over an extended period, changes in the money supply only affect nominal values and not real economic variables.

Adjustment Period: The theory assumes that over time, prices and wages adjust to changes in the money supply, maintaining the long-run equilibrium. As prices adjust, the real value of money returns to its original level, and real economic variables are not permanently affected.

Implications for Inflation: The neutrality of money implies that sustained increases in the money supply will result in a proportional increase in prices over the long run, without affecting the overall level of output, employment, or real income.

Monetary Policy and Real Effects: The concept has implications for the conduct of monetary policy. According to the theory of neutrality, central banks can influence inflation through changes in the money supply but cannot impact real economic growth or employment in the long run.

Question 20

Potential GDP? (He regards it with potential output)

Answer 20

Potential GDP: highest real GDP level that can be sustained over the long period

Also known as potential output or full-employment GDP, refers to the maximum sustainable level of real output (goods and services) that an economy can produce while utilizing all available resources efficiently. It represents the highest level of economic activity that can be sustained over the long term without causing excessive inflation or deflation.

Question 21

Explain the following: Inflation channel 4: long-term inflation is a monetary phenomenon. 2.33

Answer 21

Monetary Policy Implications: From a policy perspective, central banks play a crucial role in influencing the money supply through monetary policy tools. If central banks consistently pursue expansionary monetary policies (increasing the money supply at a rate higher than the growth of the real economy), it can contribute to long-term inflation.

Question 22

Explain Quantitative Easing (QE) 2.34

Answer 22

Quantitative Easing is a monetary policy tool used by central banks to stimulate the economy when traditional monetary policy measures, such as lowering interest rates, may be limited.

Quantitative Easing involves the central bank purchasing financial assets, typically government bonds and sometimes other securities, from the open market. The aim is to increase the money supply, lower long-term interest rates, and encourage lending and spending.

Question 23

Output gap? .28

Answer 23

The output gap is an economic measure representing the difference between a country’s actual economic output and its potential output. It occurs when there is a deviation between the economy’s real Gross Domestic Product (GDP) and its potential GDP, indicating either an underperforming economy (negative gap) or an overheating economy (positive gap).

Question 24

The monetary base? .35

Answer 24

The monetary base, also known as the money base or base money, is the total amount of a country’s currency in circulation or held in commercial banks’ reserves. It includes physical money—both coins and notes—and the banks’ reserves with the central bank. It’s a crucial indicator of monetary policy and liquidity.

Question 25

Money multiplier?

Answer 25

The money multiplier is a concept in monetary economics that describes how an increase in the monetary base (central bank money) can lead to a proportionally larger increase in the total money supply within an economy. It reflects the capacity of the banking system to expand deposits through lending activities.

Question 26

Velocity of money?

Answer 26

Velocity of money is an economic concept that represents the frequency at which one unit of currency is used to purchase goods and services within a given time period. It measures the rate at which money circulates in the economy and is calculated by dividing the nominal Gross Domestic Product (GDP) by the money supply. High velocity indicates a high rate of money exchange between individuals and businesses, suggesting economic activity, while low velocity can indicate sluggish spending and economic stagnation.

Varies over time

Question 27

Does neutrality of money hold in the long run?
What is said about money velocity and real GDP?

Answer 27

Money velocity (V) and real GDP (Y) constant in the long-run, i.e. money is neutral in the long-run

Question 28

Consumer price index? CPI

Answer 28

The Consumer Price Index (CPI) is an economic indicator that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI is commonly used to identify periods of inflation or deflation and as a tool to adjust other economic indicators for price changes, providing a gauge for purchasing power. It’s also used to adjust income payments, such as wages and social security, to maintain the purchasing power of the public. The basket includes various goods and services, such as transportation, food, and medical care, and is updated periodically to reflect changing consumer habits.

Question 29

Business cycle leading indicators of a) GDP by expenditure b) GDP by sector?

Answer 29

a) residential investment, durable goods
b) construction, manufacture of durable goods

Question 30

What is a symmetric manner / changes?

Answer 30

Increases and decreases equally ensuring that magnitude of change is consistent regardless of whether the value is rising or falling.

Question 31

Fiscal vs monetary policy?

Answer 31

Fiscal policy and monetary policy are two primary tools used by governments to influence their economies. Fiscal policy involves government spending and taxation decisions, made by the legislature and executive. It focuses on managing the economy by altering tax rates and public spending to control inflation, boost employment, and influence economic growth. Examples include changing tax policies or government budgets. Monetary policy, managed by a country’s central bank, involves regulating the money supply and interest rates to control inflation and stabilize the currency. Key tools include setting reserve requirements, open market operations, and adjusting discount rates. Both policies aim to maintain economic stability and growth, but operate through different mechanisms and institutions.