Highlighting a Few Key Ideas and Issues. Demand-Side Shocks & Amplifiers Consumer Spending (as...
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Transcript of Highlighting a Few Key Ideas and Issues. Demand-Side Shocks & Amplifiers Consumer Spending (as...
Macro-Finance for ManagersPart I
Highlighting a Few Key Ideas and Issues
Macro World Views:Compressed & Simplified
Demand-Side Shocks & Amplifiers
Consumer Spending (as cause, not effect)
Inflexibility in prices (especially wages) amplify
Macro World Views:Compressed & Simplified
Demand-Side Shocks & Amplifiers Consumer Spending (cause, not effect) Inflexibility in prices (especially wages) as amplifier
Supply-Side Shocks and Amplifiers Tech/Structural Shifts; Oil Price Spikes
Incentive effects as amplifiers
Macro World Views:Compressed & Simplified
Demand-Side Shocks & Amplifiers Consumer Spending (cause, not effect) Inflexibility in prices (especially wages)
Supply-Side Shocks and Amplifers Tech/Structural Shifts; Oil Price Spikes
MacroFinancial Shocks and Amplifers Shocks to Risk Perceptions
▪ Bubbles, Crashes▪ Asset Prices, Debt Growth, FX
Risk Perception Drives Asset Prices and Likely Many Macro Changes
1970s Thinking: All About The Numerator Finance: Expected earnings (numerator) drives asset prices, P/E
ratios Macro: Expected earnings, expected income same thing, so whatever
driving changes in incomes, driving changes in asset prices
2000s Thinking: All About The Denominator▪ Finance: Perception of risk (denominator) drives asset prices, P/E
ratios▪ Very High P/E = current risk assessment overly optimistic▪ Very Low P/E = current risk assessment overly pessimistic▪ Macro: Consumer spending too?
Shiller Data:PE Ratios and SP500-GDP Ratio
.00
.05
.10
.15
.20
.25
.30
.35
0
10
20
30
40
50
60
70
20 30 40 50 60 70 80 90 00 10
SP500/GDP (left scale)
SP500/Earnings (right scale)
Crash of 2008:Debt/GDP Explosion of 2000s
Managers and Market Risk
Using Market Information to Gauge Market Risk
Composite Indexes from STL Fed and KC Fed:Indexes Based on Spreads
Rate Spreads
Natural Experiments Think “Twin Studies”
Rate Spreads
Natural Experiments Think “Twin Studies” Example: LIBOR, Fed Funds, TBills
▪ Very short term loans between (usually) reliable parties
▪ Normally, rates within small fractions of 1 percent
▪ Unusual differences implies something amiss in important short term lending markets
Rate Spreads
Natural Experiments Think “Twin Studies” Example: LIBOR, Fed Funds, TBills
▪ Very short term loans between (usually) reliable parties
▪ Normally, rates within small fractions of 1 percent
▪ Unusual differences implies something amiss in important short term lending markets
Example: 10 Year Treasury – 3 Month Treasury▪ Both loans to U.S. government▪ Average difference about 1.5%▪ Unusually differences imply something
divergent views near term and longer term
Recession Risk:Treasuries Rate Spreads & Yield Curve
Treasury Spreads & Treasury Yield Curve: Steep: High growth expected Flat/Inverted: Low growth expected Warning: these expectations hinge on
steady inflation expectations
US Treasury Site
Treasury Spreads & Recessions 10 Year – 3 Month
Few False Positives or False Negatives
Recessions in Grey
Financial Stress and Short Term Spreads
-1
0
1
2
3
4
90 92 94 96 98 00 02 04 06 08 10
Kuwati Invasion
Asian Debt
07-08
Libor – TBill blue
Commercial Paper – Tbill red :
LIBOR – Tbill (TED) Spread During 2007-08 Crisis
-1
0
1
2
3
4
5
6
2006 2007 2008 2009
KC-FSILIBOR-Tbill
Fannie-Freddie
BearStearns
Lehman-AIG
Real Estate Asset Price Risk: Housing Price to Rental Ratio (computing “spread” as ratio rather than a difference)
Inflation Risk:10-Yr Rate – Inflation Indexed (TIPS) 10-Yr Rate
Nominal 10-
Inflation Indexed Rate
Nominal Rate