Ask an Economist (Post #1005 and counting)

[JerichoHill]

How come the British pound is stronger than the dollar and how can we fix that?

Many reasons. Mainly that Britian is 18 months ahead of recovering from its financial troubles. And it hasnt lowered interest rates in its last two fed meetings.

Currency arbitrage is a dangerous game. I dont advise it unless you're skilled (ie, have a degree or years experience).

I am invested heavily in European /Asian indexes.

 

[Ansar]

I'm not talking about currency arbitrage.

I'm just wondering how can the dollar go back up in value?

 

[JerichoHill]

I'm not talking about currency arbitrage.

I'm just wondering how can the dollar go back up in value?

*This is a really simple version*

The dollar inflates and can now purchase less. Americans purchase fewer goods abroad (lessens import demand). Foreigners can afford more American goods, so they buy more (increases exports).

Since you have to buy in the currency of the country the goods are produced (in this example), American dollars are not circulating as much in foreign countries, they come home to roost, so to speak.

This is very simple and doesnt assume changes in investment markets between countries. Another simple example

US lowers interest rates which cause the currency to inflate. This stimulates domestic borrowing (its cheaper). However, foreign financing goes elsewhere (to chase higher returns). That causes inflation in the other foreign countries, and allows the US to build its economy through borrowing (say for infrastructure).

The US Dollar has seen its value inflate and deflate many times since the Fed Reserve was created. At the moment this episode in history has nothing on the year 1979

 

[Ansar]

So we need to buy more stuff from the US rather than stuff made from other countries?

 

[WillJ]

Thanks Will. I've deliberately skipped over the whole price/supply/demand thing as several of you have done a good job talking about it

I'm still not sure if my original question was ever fully answered. I still don't see why any industry, no matter how high initial costs are, would have a downward sloping supply curve --- even if there are heavy barriers to entry, those costs are sunk costs, right?

Oh, we were talking about different things then. I think I was talking about demand and you were talking about supply.

No worries!

Everybody dance now!

 

[LightFang]

Perhaps something like economies of scale could answer your question? You know, mass production makes things cheaper, etc.

 

[JerichoHill]

I'm still not sure if my original question was ever fully answered. I still don't see why any industry, no matter how high initial costs are, would have a downward sloping supply curve --- even if there are heavy barriers to entry, those costs are sunk costs, right?

Everybody dance now!

Fixed Costs and Variable Costs. Where the initial costs are depends on your perspective of time in your analysis

IRL, downward sloping demand curves are essentially kinks to a normally sloping demand curve. They are typically abberations and deal more with unusual circumstances and human psychology than anything else.

 

[dutchfire]

I'm still not sure if my original question was ever fully answered. I still don't see why any industry, no matter how high initial costs are, would have a downward sloping supply curve --- even if there are heavy barriers to entry, those costs are sunk costs, right?

Everybody dance now!

Downward sloping means first derivative is positive, second derivative is negative right?

The marginal costs might be increasing, say because they've run out of easy and cheap resources/personnel. For example in the oil industry, drilling more oil becomes more and more expensive since you need to go to more hostile places to get the oil.

Was I even slightly right?

 

[philippe]

I'm sorry i just can't read all these pages so excuse me if this is asked before
today we had an lecture by a person of the banking sector, I asked him about the shape of the dollar and he advised me to wait for 2 or 3 months, then buy stock marked in dollars or even dollars itself, and then after two three years reap the benifits.
He actually said that when an democrat will be elected (which he thinks will happen) the price of the dollar will go back up, in a rather fast way.

So what do you think about it?

 

[JerichoHill]

I never try to time the market. But, in general, I think the trend he outlined will likely play out. Unless China really dumps the dollar and we see a very quick reversal of the CAD.

When your Barista is telling you to invest in X, run the other way.

 

[Godwynn]

Do you think Washington Mutual is a good buy right now after being beaten down 56% YTD and its dividend stands at 9.7%?

Will they continue to hurt and may have to cut that dividend? There were rumors last week that Citi may have to.

 

[JerichoHill]

Do you think Washington Mutual is a good buy right now after being beaten down 56% YTD and its dividend stands at 9.7%?

Will they continue to hurt and may have to cut that dividend? There were rumors last week that Citi may have to.

I personally wouldnt be messing with WaMu. Then again, I hold only a few stocks, and mainly buy into market indexes.

 

[The Yankee]

Not just to JH, though if he knows, even better: Where would be a good place to go to pick up options on Eurodollar futures? I would like to do a bit of exploring.

'Course, I could do the legwork and scope out some of the usual suspects to see if they dive down that road. But it doesn't hurt to ask from OT's money men.

 

[JerichoHill]

I'd first do research on morningstar

 

[Whomp]

Godwynn--don't focus on dividend yields so much. They're not always what they appear to be. Again, I have to ask you guys...why do you want to catch a falling knife? Leadership has changed and it ain't financial.

What I would say is historically when financial service companies start approaching book value they tend to be great buys but expect to hold for a long time with no return. Check out prices during the S&L bailout.

The Yankee--what are you trying to do? If you're trying to trade futures I think you should have your head examined. Simply exchanging some dollars for euros would be a better strategy or buying FXE which is a Euro ETF.
http://www.smartmoney.com/etf/eqSnaps/index.cfm?symbol=FXE&eqType=3&delay=delayed&searchType=quote

 

[The Yankee]

Just poking around. It's well established that I can't actually do anything no matter if I have a great idea or if I'm suicidal. There's one thing to read this in the textbook and another to go around and grab materials.

And since you mentioned the exchange rates, all the better.

 

[The Yankee]

Do you think Washington Mutual is a good buy right now after being beaten down 56% YTD and its dividend stands at 9.7%?

Will they continue to hurt and may have to cut that dividend? There were rumors last week that Citi may have to.

There is still more stumbling to go, IMHO. Though individual companies may have already gone through a bunch of the bad news (especially Merrill and Citigroup lately), I suspect there will still be some industry-wide sliding still to be had.

 

[Whomp]

Just poking around. It's well established that I can't actually do anything no matter if I have a great idea or if I'm suicidal. There's one thing to read this in the textbook and another to go around and grab materials.

And since you mentioned the exchange rates, all the better.

Gotcha. Just bear in mind that futures trading is all about leverage, margin and is ultimately a zero sum game. Many times the seller is simply hedging their risk. IE McDonald's treasury department is concerned about hedging all their food commodities (especially cattle), oil, taking in foreign currencies (likely unhedged here).

Here's everything you need for currency trading.
http://cme.com/

 

[The Yankee]

Oh, yes, it's all about the leverage. Especially for Eurodollar futures. Just thankful that the margin is much higher for stocks else we'd really be in a roller coaster ride.

 

[WillJ]

Perhaps something like economies of scale could answer your question? You know, mass production makes things cheaper, etc.

I think diminishing marginal costs (or increasing marginal returns) is what you're getting at, but I don't think that'd cause a downward sloping supply curve. What you're essentially saying is that if the marginal cost of producing something is decreasing, a supplier won't expand production unless the price lowers --- and that's just silly. Diminishing marginal costs don't give the supply curve a downward slope, but rather they cause it to "jump" to a point at which marginal costs are increasing, at which point the supply curve resumes an upward slope.

Fixed Costs and Variable Costs. Where the initial costs are depends on your perspective of time in your analysis

IRL, downward sloping demand curves are essentially kinks to a normally sloping demand curve. They are typically abberations and deal more with unusual circumstances and human psychology than anything else.

Did you mean to type "supply" rather than "demand"? Because I'm really confused about what you're saying there. If you did mean to say "supply," could you elaborate on the unusual circumstances and human psychology?

Downward sloping means first derivative is positive, second derivative is negative right?

No, it means the first derivative is negative (assuming you're expressing price as a function of quantity and not vice versa), and doesn't have anything to do with the second derivative.

The marginal costs might be increasing, say because they've run out of easy and cheap resources/personnel. For example in the oil industry, drilling more oil becomes more and more expensive since you need to go to more hostile places to get the oil.

Indeed, marginal costs are usually increasing, but that's precisely why supply curves are upward sloping.