Welcome to moneycleaned.com!
Looking for cash? You can receive a cash advance of up to $1,500 deposited directly into your bank account. Check out the deal!
-
Taking Advantage of Historically Low Interest Rates
If you pay attention to any housing news, odds are you’ve heard how low home loan interest rates have become. In fact, many home mortgage rates are down to almost 4.5%, a historical low for mortgage interest rates. But while we all love to stay informed, what’s really important is how we can possibly benefit from these lowered interest rates.
Interest rates are depressed right now because the Federal Reserve Bank is lending at lower rates to retail banks where we are all customers. When retail banks can borrow at low rates, they can afford to lend at lower interest rates to the general public. Right now, foreclosures and unemployment are both problems that will significantly affect the recovery of housing. The banks are smart to keep interest rates low in order to promote more growth and activity in the housing market, and you can directly benefit from this by refinancing your current mortgage rates.Refinancing into Lower Interest Rates
Refinancing into lower interest rates doesn’t have to be difficult, but you’ll have to educate yourself the right way to really make a refinance work. You should be aware that despite promises made by refinance experts, not all loans will qualify. If you are currently underwater on your loan or need other financial assistance, you’ll have a much better chance of refinancing through specialized lenders or government programs. You should also consider whether you will be saving money in real dollars.
Reducing your monthly mortgage payments may be a good strategy for the short term, but it’s not a good idea if you can’t really afford the house or would be spending the money you save on discretionary expenses. Keep in mind that you will have to pay points for the amount you refinance, which will cost you money up front. Only you can do the math on your home loan rates to see if the lowered monthly payments are worth the expense.
If you can take advantage of low interest rates, you could effectively reduce your minimum monthly payments and use the extra money for more pressing needs or to simply free up more money each month. Interest rates tend to fluctuate according to market conditions and other economic factors. Keeping up to date on the latest mortgage data will also give you a better indication if rates are expected to stay low or will soon increase. -
The Good Debt vs Bad Debt Debate
Is there such thing as establishing good debt? Well to be frank, no. You never want to owe people money, which is not usually a good idea. However that doesn’t mean that all forms of debt are the same level of bad. In fact, there are many kinds of debt that are less severe than others, the trick is trying to limit your debt to the kind that is going to do less damage on your bank account and your credit score. In the wild world of debt reduction you must always consider the long term effects of every purchase you make.
So what kinds of debt should you consider better than others? Well first of all, investments can be considered debt in some situations, but since they are investments you are probably expecting some sort of return from it in the long run. Money you spend on an education can be considered an investment because you are putting stock in your future even though you are burying yourself in debt right now. This is one of the reasons selecting the right degree is an important step, spending thousands of dollars on a degree you will not be using is foolish and a waste of time.
There is no doubt that getting into debt is almost always inevitable, but you need to try and find the least harmful form of debt possible. Reducing your debt is going to be one of the most important thing in your life until it is gone. This is why I continue to stress over and over that there is no form of debt you should covet or seek. All forms of debt are still debt, meaning you should do your best to avoid them.
-
Statistical Skeletons
In order to fully understand VaR modeling it is necessary to get to grips with some fundamental statistical theory. These bare bones are fleshed out in the statistics primer which provides a more formal treatment. The way in which the data is distributed has an important bearing on the effectiveness of statistical methods to measure risks. Most VaR methods assume:
Normal distribution. That the data in the form of price changes of instruments has a normal distribution. A normal distribution is one that has a mean equal to its mode and median and is symmetric about the mean. The price changes may be expressed in absolute or percentage terms. Stable standard deviation of returns. That the variation of returns about the mean is stable and does not vary over time. The variation of returns is measured by the distribution’s standard deviation.
No serial correlation. That there is no serial correlation between returns. This is particularly important when extrapolating results for a single holding period to multiple holding periods. -
Broker Fees Can Make You Broker
If you’ve taken a look at your mutual fund statements recently, your heart is probably sinking along with your retirement plans. In tough times when more people rely on a payday advance to make ends meet, it pays to review these investments and figure out how to cut costs.
One of the easiest ways is to review the fees offered by different brokers and try to find one that doesn’t take too big a cut of your investments. Even thought the stock market is jittery, it doesn’t mean you should stop investing, however, pay attention to the fees and seek to find ways to reduce them.
-
A Multi-Polar rather than a Bi-Polar Investment World
The results we have looked at so far with regard to this model assume a bi-polar world of money/cash or interest-bearing securities. Suppose however that our investment world is much more complex than that, involving equities, fixed income securities, money market funds and money/cash. As a central bank cuts interest rates, the effect of this should be spread across these asset classes, which in turn react in different ways. If a central bank cuts interest rates, this should cause the investor to cut their portfolio weighting in money market funds and increase it in equities. In the short term, it should also cause an increase in the weighting for fixed income securities as the capital gain should offset the lost income. Eventually, however, we should assume that it causes a reduction in the weighting for fixed income securities. Finally, a rate cut should also lead to an increase in the weighting of money/cash. The reduction in money market funds and fixed income securities should logically equal the sum of the increase in weighting in equities and money/cash. Since money/cash has to share its gains with equities, one should assume that the effect on money demand and therefore prices is reduced. Prices should rise less than they would otherwise do without the influence of equities. Consequently, as prices rise by less, the exchange rate should also depreciate by less than one would otherwise expect. In the same way, an interest rate increase should in this multi-polar investment world lead to less of an exchange rate appreciation than would be expected in a bi-polar investment world.
-
Theory vs. Practice
However, as ever with exchange rate models, in an open economy with high capital mobility there remains the issue of delay in the transmission mechanism. Monetary models suggest that an increase in interest rates should lead to an increase in the investor’s weighting of interest-bearing securities and a corresponding reduction in the weighting of money/cash. This in turn should lead to a reduction in the demand for and therefore the price of goods, which according to PPP should result in an offsetting appreciation of the nominal exchange rate in order to restore equilibrium.
In practice, it may not take place exactly like this, at least in the short term. Say you are an investor in US Treasuries and the Federal Reserve tightens monetary policy by increasing interest rates. Depending on what were market expectations for Fed policy prior to that and also depending on where you were positioned on the US yield curve, you may be facing losses on your position due to the simple inverse relationship between bond yields and bond prices. Eventually, the incentive to hold interest-bearing securities will rise as interest rates rise, but only at the point where the investor believes interest rates have stopped rising. Until that time, the investor may in practice do the opposite of what the model suggests, by reducing their position in interest-bearing securities and reverting to money/cash in order to preserve capital. Theoretically, the investor will have more money/cash to spend on goods and this should push up prices, which in turn should lead to depreciation — rather than appreciation — of the exchange rate according to PPP to restore equilibrium.
Equally, the natural reaction of our US Treasury investor to a fall in interest rates is not necessarily to reduce the position, given that falling yields equal rising prices. Eventually, the reduction in income will not be offset by the capital gain, at which point the investor will indeed reduce the position in favour of other assets such as money/cash. Before that, they may well maintain or even increase the position in interest-bearing securities in order to reap the capital gains impact. Thus, a reduction of interest rates may at least initially lead to an actual reduction in money/cash within portfolios, in turn causing money demand and prices to fall and the currency to appreciate according to PPP to restore equilibrium.
I suspect that the very suggestion that a reduction in interest rates may lead to a reduction rather than an increase in money/cash may cause one or two economists reading this to foam at the mouth. The point is a serious one however, and it is this — the assumption that a change in monetary policy leads directly and automatically to a parallel change in the exchange rate is flawed for the following reasons:
There may be a delay in the transmission mechanism
The initial exchange rate reaction may be the exact opposite of what standard models assume This is not in any way to reduce the importance of the original work. Rather, it is to bring it into the context of modern-day trading and investing conditions. Over the medium to long term, the Mundell–Fleming model of policy combinations is an invaluable guide to future exchange rate direction. In the short term, however, as I have tried to show, there may be delays and distortions, which at least put off the anticipated results. -
Mundell–Fleming
Thanks to the work of Robert Mundell and J. Marcus Fleming we know that certain combinations of monetary and fiscal policy create specific exchange rate conditions. The Mundell–Fleming model illustrates how specific combinations of monetary and fiscal policy changes can cause temporary changes in the balance of payments relative to an equilibrium level. The exchange rate therefore becomes the transmission mechanism by which equilibrium is restored to the balance of payments. It must be noted within this that the degree of capital mobility is crucially important.
In an economy with high capital mobility, suppose that a central bank decides to loosen monetary policy by cutting interest rates. One must assume that it does this because of weak growth conditions and benign inflation. As we saw before when looking at money demand, lowering interest rates reduces the incentive to hold interest-bearing securities, thus on a relative basis increasing the incentive to hold money or cash. This increase in money demand can be put to work buying goods and should reflect a future rise in national income and growth. The standard monetary model thinks of this in terms of rising demand causing price increases, which in turn causes the exchange rate to depreciate via the concept of PPP. Looking at it another way, rising domestic demand will cause rising import demand, which should mean deterioration in the trade balance. This in turn should eventually lead to depreciation in the exchange rate to allow the trade balance to revert back towards an equilibrium level. Another way of expressing the same thing is that lower interest rates cause capital outflows, which in turn cause depreciation in the exchange rate. Conversely, the basic assumption is that tighter monetary policy through higher interest rates should lead either to weaker domestic demand and a positive swing in the trade balance, or capital inflows, both of which should cause exchange rate appreciation.
On the fiscal side, much depends on whether trade or capital flows dominate. On the one hand, looser fiscal policy, either through tax cuts or spending increases, should cause rising domestic demand, which in turn should cause deterioration in the trade balance. On the other hand, looser fiscal policy causes higher domestic interest rates, which in turn attract capital inflows. If trade flows dominate, then the exchange rate should depreciate. However, if capital flows dominate, then the exchange rate should appreciate.
Conversely, tighter fiscal policy should, according to Mundell–Fleming, lead to weaker domestic demand. On the trade flow side, this should result in reduced import demand, causing a positive swing in the trade balance. On the capital flow side, tighter fiscal policy should lead to lower interest rates, which in turn lead to capital outflows. Here, if trade flows dominate, the exchange rate should appreciate, whereas if capital flows dominate, the exchange rate should depreciate. In a world of perfect or at least high capital mobility, it is assumed that capital flows dominate over trade flows.
This model can be used for developed economies and the leading emerging market economies which have deregulated and liberalized barriers to trade and more importantly capital. The classic example of this used in text books is that of the US dollar in 1980–1985, when it appreciated dramatically as the Reagan administration’s military spending programme dramatically boosted the budget deficit, while the Volcker-led Federal Reserve waged war against inflation (caused at least in part by those budget deficits). The Plaza Accord of 1985, which helped to bring down the value of the US dollar, worked only because it was accompanied by significant policy changes. In the 1993–1995 period, the US had a somewhat different problem to 1980–1985. While the new US government was moving towards the idea of balancing the budget, and thus tightening fiscal policy, the Federal Reserve was in 1993 keeping a relatively loose monetary policy. Indeed, one could argue that the Fed maintained an inappropriately loose monetary policy for much of 1994 up until its tightening of November 1994, before policy was seen as appropriately tight. Perhaps not coincidentally, in 1994 the US Treasury market had its worst year on record. In line with this, the US dollar weakened up until November of that year. The above model and examples assume either perfect or high capital mobility. However, not all economies are like this. While the move towards liberalization of trade and capital has broadly increased capital mobility, there remain specific countries in the emerging markets where capital mobility remains low (e.g. China). In this case, therefore, one must assume that trade flows dominate over capital flows.
The Mundell–Fleming model has done much to explain how combinations of monetary and fiscal policy should affect exchange rates. Indeed, their model is the standard for this kind of work. -
PPP and the Real Exchange Rate
The real exchange rate is a function of the price or inflation differential and the nominal exchange rate. The relationship between the concept of PPP and the “real exchange rate” — or the nominal exchange rate adjusted for price differentials — is of necessity a close and important one. In line with this relationship is the core idea that if PPP is seen to hold over the long term, then the real exchange rate should remain constant. This is the case because if PPP holds relative price differentials between two countries will over the long term be offset by an appropriate nominal exchange rate adjustment. Granted, the real exchange rate may fluctuate significantly over the short term, with the result that such fluctuations can have potentially important economic impact, however, it should revert to mean over time assuming PPP holds. When the real exchange rate is constant, the international price competitiveness of a country’s tradable goods is maintained. Another way of expressing this is to say that when a country experiences high inflation, its tradable goods become proportionally uncompetitive. In order to restore price competitiveness, there has to be a depreciation of the nominal exchange rate. In order to gain competitiveness, a country needs a real depreciation, not simply depreciation in the nominal value of the exchange rate.
The behaviour of the real exchange rate and its components can be broken down into that existing under fixed and floating exchange rate regimes. Under a fixed exchange rate regime, the nominal exchange rate’s ability to move is of necessity limited, hence changes in the real exchange rate must be a direct function of the change in the inflation differential, and this is indeed what we find empirically. By contrast, under a floating exchange rate regime, both the nominal exchange rate and the inflation differential can change or “adjust” in economists’ jargon. Thus, the relationship between the real and the nominal exchange rates is considerably closer. Indeed, because inflation differentials adjust relatively slowly in floating exchange rate regimes, most of the adjustment to the real exchange rate comes from an adjustment in the nominal exchange rate. Hence, the same cautions of applying PPP to nominal exchange rate valuation should also apply to real exchange rate techniques.
To summarize this concept of PPP or the law of one price, it is a poor predictor of short-term exchange rate moves. However, it is considerably more accurate on a multi-month or multi-year basis. Note that in the case of the Euro–dollar forecasts, the 13% overvaluation noted in January 1999 and the 11% undervaluation noted in April 2001 was a multi-month guide to the future nominal exchange rate. Thus, a corporate Treasury department or a long-term strategic investor can find a PPP model highly useful in terms of providing a directional framework for medium- to long-term currency forecasting. A “macro” hedge fund or leveraged investor might also find this highly useful for spotting disparities between fundamental valuation and market perception. On the other hand, this is clearly less so for short-term traders whose perspective is measured in days or weeks.
Some final points to note with regard to PPP:
PPP provides a useful medium- to long-term perspective of currency valuation
If PPP holds, the real exchange rate remains stable over the long term
There can however be substantial short-term divergences from PPP
PPP may thus be particularly useful in currency forecasting for corporations, long-term investors and also leveraged investors, but much less so for short-term traders -
PPP and Corporate Pricing Strategy
The law of one price assumes the exchange rate will move over time so that the price of the same good is the same everywhere. However, corporations do not necessarily follow this as they may vary national prices of the same good to reflect a variety of factors in those countries such as local supply/demand dynamics, delivery costs, cultural tastes, customer price tolerance, target margin, competitor prices, market share considerations and so forth. To an economist, such price variations represent temporary distortions, which should over time be eliminated by market efficiency. To a corporate executive, faced with the frequently competing real-world priorities of profit maximization and raising market share, there may be nothing temporary about such “distortions”. As a result, PPP may in some cases not hold over the “short term” for homogeneous goods since such pricing strategies may not allow it to hold.
-
IT systems project failure
Numerous cases of cancelled or failed IT projects in the finance industry happen on an alarming scale. Many within the banking world are unreported because of reputation risk, i.e. risk of losing clients or looking foolish in front of rivals.
There are four major reasons for IT systems failure:
The risk management system was initially unsuitable for the bank or fund and could not be successfully tailored for use.
The skills base of the business project implementation was not properly understood or resourced.
Organisational politics or budgetary problems hindered progress.
Operational errors or poor systems design ruined chances of success.