Transcript Slide 1

BUS 353
Part IV: Money and Markets
A. The Economy and the Business Cycle
1. The Economy – The interaction of people
producing, buying, and selling goods and
services
2. The Business Cycle
a. Boom – the peak of the business cycle, with
high capacity utilization and low
unemployment
b. Recession (Contraction) – a shrinking economy,
indicated by rising unemployment and falling
output
A. The Economy and the Business Cycle
c. Recovery – the economy is stable following a
contraction, unemployment is stable to falling
slightly
d. Expansion – a growing economy, indicated by
increasing employment and output (Gross
Domestic Product, or GDP)
3. Investing and the Business Cycle
a. It is nearly impossible to pick exact market tops
and bottoms
b. The best protection against the business cycle is a
diversified portfolio
c. The best environment for investors is slow, steady
growth
B. Tracking the Business Cycle With
Government Data
1. Jobs Data – Monthly payroll information
released on the first Friday of every month –
includes the number of jobs created,
unemployment rate, wages, hours worked per
week, and weekly unemployment claims
(http://www.bls.gov/ces/)
2. Inflation Measures – High inflation curbs
economic growth and erodes the value of fixed
income investments
(http://www.bls.gov/bls/inflation.htm)
i. Core – excludes food and energy
ii. Measures include CPI, PPI, etc.
B. Tracking the Business Cycle With
Government Data
3. Sales – Measure economic strength through
consumer spending
(http://www.census.gov/epcd/econ/www/in
dijun.htm)
4. Gross Domestic Product (GDP) – A measure
of economic growth (economic output) –
generally, 3% or more annually is regarded
as robust economic growth
(http://www.bea.gov/)
C. The Federal Reserve
1. Created as the United States Central Bank,
similar to those in other countries (Bank of
England in the U.K., European Central Bank
for the Eurozone, Bank of Japan, etc.)
(http://www.federalreserve.gov/)
a. Sets interest rates
b. Issues currency
c. Manages the overall level of money in the
economy
d. Oversees the national banking system
C. The Federal Reserve
2. The Federal Reserve’s primary tool in
economic regulation is setting short term
interest rates
a. Fed Funds Rate – the interest rate banks charge
each other for overnight loans
b. Discount Rate – the amount that the Federal
Reserve charges member banks for overnight
loans (extended so that banks can meet required
cash reserves)
(http://www.federalreserve.gov/releases/h15/data.htm)
C. The Federal Reserve
3. The Fed raises interest rates to slow the
economy, and lowers interest rates to spur
economic growth
4. Specific roles of the Federal Reserve
a. Policymaker – buys and sells government
securities to control the amount of money in
circulation
b. Banker – maintains bank accounts for the U.S.
government and government agencies
C. The Federal Reserve
c. Lender – makes loans to banks
d. Regulator – interprets laws governing banks,
monitors compliance with banking rules
e. Controller – replaces worn and damaged currency
f. Guardian – watches over gold stored by foreign
governments as a reserve for currency exchange
g. Administrator – national check clearinghouse
5. Policies are set by the Federal Reserve
Chairman and by meetings of the Open
Market Committee
(http://www.federalreserve.gov/aboutthefed/default.htm)
D. The Money Supply
1. Money Supply Policies
a. Increasing the money supply increases
liquidity, providing more money for loans and
fueling economic expansion but increasing
inflation risk
b. Decreasing the money supply decreases
liquidity, increasing interest rates, slowing
economic growth, and damping inflation
D. The Money Supply
c. The money supply is increased when the New
York Fed purchases government securities from
banks and brokerage houses, using money that
hasn’t existed before
i.
ii.
iii.
The new money increases that firm’s reserves
The resulting money can then be re-lent
Example – 10% reserve
d. Decreasing the money supply decreases liquidity,
increasing interest rates, slowing economic
growth, and damping inflation
i.
ii.
The money supply is decreased when the New York Fed sells
government securities, reducing the amount of money in
circulation
The contraction spreads through resulting bank transactions
D. The Money Supply
2. Money Supply Gauges
a. M1 = Funds readily available for spending –
cash and checking accounts
b. M2 = M1 plus all private deposits
c. M3 = M2 plus short term financial assets
(http://www.federalreserve.gov/releases/h6/Current/)
E. The Banking System
1. Types of Banks
a. Commercial Banks – accept deposits and
provide loans to businesses and individuals
b. Savings Banks – generally provide mortgage
loans and obtain deposits from individuals
c.
Credit Unions – pool depositors’ money to make
loans to other members
d. Investment Banks – underwrite stock and bond
offerings, advise on mergers and acquisitions;
subject to only minimal regulation
E. The Banking System
2. Types of Deposits
a. Transaction deposits – deposits against which
checks can be written (checking accounts)
b. Demand deposits – accounts from which money
can be withdrawn at any time (savings
accounts)
c.
Time deposits – provide interest payments for a
fixed term (certificates of deposit)
F. The Banking System
3. Government Regulation
a. Federal Reserve – regulates how much cash
(reserves) banks must maintain, and serves
as the primary regulator for federally
chartered banks
b. Office of the Federal Comptroller of the
Currency -- charters, regulates, and
supervises the activities of national banks,
international branches of U.S. banks, and
U.S. branches of non-U.S. banks – oversees
lending and investments by banks
F. The Banking System
c. Federal Deposit Insurance Corporation –
insures bank deposits to $250,000 per
individual per bank
d. State Banking Regulators – regulate lending
and investment practices of state chartered
banks
G. Calculating Rates of Return
1. Basic Formula:
Gain or Loss = (Sale Price + Dividends) – Purchase
Price
Percentage =
Return
(Gain or Loss) + Dividends
-----------------------------------Initial Cost
G. Calculating Rates of Return
Compound
=
Annual Return
Future Value
-----------------Present Value
1/n
-1
Where n = number of years (term)
Gain or loss must include dividend or interest
payments (or interest on borrowed funds) plus
capital gains (or capital losses)