Any finance/economics experts out there?

ScottK

ScottK

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ScottK
I was reading an article this morning about Japan lowering their interest rate to a negative 0.1%. I understand the general reasoning and expectations of doing this, but as I read further I saw this.

Investors responded positively to the announcement. Stocks in Tokyo rose 2.8% and the country's currency, the yen, fell against the dollar.
Financial markets' turbulent start to 2016 has been particularly punishing for Japan. Prior to the central bank's move, stocks had tanked around 10% in January, and the yen had strengthened.

What I don't understand is why they are encouraged by the weakening of the yen vs the dollar. And does that mean it's worth more vs the dollar or less? Ex: $1 = 150y or $1 - 120y...Which is better for the Japanese?

My head starts to swim when I try to understand the global economic issues. Anybody able to explain this in Economics 101 terms?
 
ScottK said:
I was reading an article this morning about Japan lowering their interest rate to a negative 0.1%. I understand the general reasoning and expectations of doing this, but as I read further I saw this.

Investors responded positively to the announcement. Stocks in Tokyo rose 2.8% and the country's currency, the yen, fell against the dollar.
Financial markets' turbulent start to 2016 has been particularly punishing for Japan. Prior to the central bank's move, stocks had tanked around 10% in January, and the yen had strengthened.

What I don't understand is why they are encouraged by the weakening of the yen vs the dollar. And does that mean it's worth more vs the dollar or less? Ex: $1 = 150y or $1 - 120y...Which is better for the Japanese?

My head starts to swim when I try to understand the global economic issues. Anybody able to explain this in Economics 101 terms?
Click to expand...

A weaker yen vs. the dollar makes Japanese exports more affordable here. Just as our strong dollar has made our exports more expensive globally, and is hammering our manufacturing sector.

So the Japanese expect to sell more stuff here, and put more people to work there.
 
Not an expert, but I've taught econ for decades.

When you have Yen, and it's weaker, it means you can buy less dollars (and things priced in dollars).

Since equities (stocks) are priced in either Yen (on the Japan exchanges) or dollars (on foreign exchanges) you get more value buying things that are already based in Yen than dollars. So, good for sellers of Yen based equities (which are sold on the Japanese markets).

The trade-off penalty applies to consumers who need or desire to purchase dollar based things when yen based things are not available. (in Japan, think oil). It causes inflation in the long run, which Japan needs some, but not too much of.

....but there are many other factors in play than just exchange rates.
 
Let'sgoflying! said:
Cool! I can borrow money and they will pay me for it!
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The central bank (or in our case Treasury) rate is not seen by consumers. Will likely result in somewhere around 1% as a prime rate at then increment up from there.

(this all from memory) But I think it's Treasury rate, then Prime Rate, then generally available rates.
 
To answer the question in the post...NO. There are no experts but there are lots of people that will sell you advice.

Chip has the reason for the what the article says but the second and third order affects will eventually flip their stock market and yen directions so it is not that easy to predict results.
 
It really depends on the balance of trade whether a low or high currency is good.

If you are an exporter, then you sell you products in dollars, but you pay your workers and such in yen. So if the dollar rises in value with respect to the yen, then your margin increases.

The opposite happens if you're an importer.
 
Please to explain central bank interest rate vs currency exchange rate and the impacts on OP's question.

As I recall monetary policy changes interest rate, but not the relative value of the currency to other currencies.
 
rolivi said:
Please to explain central bank interest rate vs currency exchange rate and the impacts on OP's question.

As I recall monetary policy changes interest rate, but not the relative value of the currency to other currencies.
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The market sets the exchange rate value of the currency. The central bank determines how much of the currency will be in the circulating money supply. Increased rates takes money out of circulation by incenting saving, lower rates add to the money supply by incenting borrowing and consumption. Because the central bank lowered the interest rate, the market expects there to be more of the currency available, thus the value goes down. Supply and demand.

So, those yen based investors in dollar denominated assets, like treasuries, will find that the value of those assets has gone up in yen terms, and that the interest being paid in dollars is also worth more yen. It takes more yen to buy a dollar, and you get more yen for selling a dollar today than you did yesterday.

Interesting side note. JPN is the largest foriegn holder of US Treasuries in the world, surpassing China just last year.
 
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Put it this way...a companies stock value is pretty much dependent on it's EARNINGS capability. (Alas it's often the short term earnings outlook rather than the long term). As pointed out a weaker yen makes it more likely that foreign markers will buy as their dollar (or whatever) buys more.
 
The explanations so far are pretty good but there's a piece missing:

At any time "The Market" is made up primarily of speculators (aka traders), not investors. Most actively managed mutual funds, for example, are run by traders. That's why you see portfolio turnover of 100% or more in many funds. High-speed trading is all speculation.

So the way The Market behaves on a given day is determined by the expectations of the traders. When BOJ reports a surprising change of policy like this one, trader A attempts to guess how trader B will react and bets accordingly. But how traders actually will react depends on what trader B expects trader A to expect him (Trader B ) to do, and so on. It is a near-infinite recursion that, while kicked off by an economic event, really has nothing to do with the event itself.

The press needs something to write, so they attribute behavior to "investors" that really has nothing to do with investors and very little to do with traders. "Investors ran for the exits" is a popular stupidity. Every trade has a buy and a sell side, so the number of buyers always equals the number of sellers. Said another way, optimists = pessimists. Same-o, when an event like the BOJ action is reported and the market reacts, the know-nothing "market analysts" concoct and promulgate explanations that suit what they see in the rear view mirror. And the naive read it and actually believe it.

The long term will tell whether the BOJ action was good for Japan and/or good for the world economy. Today's market action and the completely vapid press reports are irrelevancies.

No one has ever consistently forecast the global economy because it is too complex to understand. Even if you ignored the daily market analysis your head would swim. Attempting to reconcile the market analysis to reality is beyond futile.
 
airdale said:
The explanations so far are pretty good but there's a piece missing:

At any time "The Market" is made up primarily of speculators (aka traders), not investors. Most actively managed mutual funds, for example, are run by traders. That's why you see portfolio turnover of 100% or more in many funds. High-speed trading is all speculation.

So the way The Market behaves on a given day is determined by the expectations of the traders. When BOJ reports a surprising change of policy like this one, trader A attempts to guess how trader B will react and bets accordingly. But how traders actually will react depends on what trader B expects trader A to expect him (Trader B ) to do, and so on. It is a near-infinite recursion that, while kicked off by an economic event, really has nothing to do with the event itself.

The press needs something to write, so they attribute behavior to "investors" that really has nothing to do with investors and very little to do with traders. "Investors ran for the exits" is a popular stupidity. Every trade has a buy and a sell side, so the number of buyers always equals the number of sellers. Said another way, optimists = pessimists. Same-o, when an event like the BOJ action is reported and the market reacts, the know-nothing "market analysts" concoct and promulgate explanations that suit what they see in the rear view mirror. And the naive read it and actually believe it.

The long term will tell whether the BOJ action was good for Japan and/or good for the world economy. Today's market action and the completely vapid press reports are irrelevancies.

No one has ever consistently forecast the global economy because it is too complex to understand. Even if you ignored the daily market analysis your head would swim. Attempting to reconcile the market analysis to reality is beyond futile.
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I agree with a lot of what you said about distortions, but what makes prices go up is there's more buyers than sellers (supply constraints), and prices go down because there are more sellers than buyers. Prices can drop dramatically when there' s no buyers...as anyone who's lived through recent history can attest.
 
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A Economics professor I know (and also a glider pilot) once told me that Macro Economics today is about where Medicine was 200 years ago.

Example: "lets pump a couple billion into the banks that ought to help", has about the same scientific basis as "let try some leaches, that out to help"

Brian
 
Chip Sylverne said:
I agree with a lot of what you said about distortions, but what makes prices go up is there's more buyers than sellers (supply constraints), and prices go down because there are more sellers than buyers. Prices can drop dramatically when there' s no buyers...as anyone who's lived through recent history can attest.
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Sorry to say, but do the math. Buyers always equal sellers. It cannot be any other way. What you're talking about "no buyers" is really buyers bidding low prices, prices at which they become optimistic that they can make money by buying. IIRC this establishes what the economists call a "market clearing price."

(I am ignoring the minor role of specialists, a quaint and fading artifact of the past.)
 
airdale said:
At any time "The Market" is made up primarily of speculators (aka traders), not investors. Most actively managed mutual funds, for example, are run by traders. That's why you see portfolio turnover of 100% or more in many funds. High-speed trading is all speculation.
Click to expand...

Ultimately, speculators provide liquidity to a market, but do not have a long term impact on pricing with a market. The fundamentals of the market are driven by supply and demand, and speculators try to capitalize on short-term trends, but in the long term they have little if any impact.
 
airdale said:
Sorry to say, but do the math. Buyers always equal sellers. It cannot be any other way. What you're talking about "no buyers" is really buyers bidding low prices, prices at which they become optimistic that they can make money by buying. IIRC this establishes what the economists call a "market clearing price."

(I am ignoring the minor role of specialists, a quaint and fading artifact of the past.)
Click to expand...

To put it in market terms, completed transactions are called "volume". Volume is required for prices to rise. Volume is not required for prices to fall. Market value evaporates without a sale taking place. The idea that because a price is low means somebody sold high just isn't the case.
I'll do the math if you look at history.
 
airdale said:
Sorry to say, but do the math. Buyers always equal sellers. It cannot be any other way. What you're talking about "no buyers" is really buyers bidding low prices, prices at which they become optimistic that they can make money by buying. IIRC this establishes what the economists call a "market clearing price."

(I am ignoring the minor role of specialists, a quaint and fading artifact of the past.)
Click to expand...

Ultimately, anything like the stock-market is a zero-sum game.

For everyone who makes money in a market, someone loses money.

The overall value of the market rises as the value of goods and services rises, and falls if they fall off, but that money does not come from stock trades, it comes from commercial transactions of actual products and services.
 
JeffDG said:
Ultimately, speculators provide liquidity to a market, but do not have a long term impact on pricing with a market. The fundamentals of the market are driven by supply and demand, and speculators try to capitalize on short-term trends, but in the long term they have little if any impact.
Click to expand...

Depends on how levered they are. Too much leverage can affect values for a long while if trades go bad.
 
Chip Sylverne said:
To put it in market terms, completed transactions are called "volume". Volume is required for prices to rise. Volume is not required for prices to fall. Market value evaporates without a sale taking place. The idea that because a price is low means somebody sold high just isn't the case.
I'll do the math if you look at history.
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Volume is not required for prices to rise.

Take a simple example of a company with 100 shares. If there is demand for those shares at say $10, but nobody is willing to sell those shares at that price, there will be no volume to speak of. The price will rise until there are willing sellers, and then some volume of trading will occur.
 
JeffDG said:
Volume is not required for prices to rise.

Take a simple example ple of a company with 100 shares. If there is demand for those shares at say $10, but nobody is willing to sell meteorically w those shares at that price, there will be no volume to speak of. The price will rise until there are willing sellers, and then some volume of trading will occur.
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OK, fair enough, but shares rarely if ever rise meteorically without volume. On the other hand, during a market crash, shares readily fall without an intemediate sale as a price discovery mechanism.

Hence the name "crash".
 
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JeffDG said:
Ultimately, speculators provide liquidity to a market, but do not have a long term impact on pricing with a market. The fundamentals of the market are driven by supply and demand, and speculators try to capitalize on short-term trends, but in the long term they have little if any impact.
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Agreed. I didn't go that far because I was already getting in a little deep. We can also get into the efficient market hypothesis if this basic stuff isn't fun enough.

Chip Sylverne said:
To put it in market terms, completed transactions are called "volume". Volume is required for prices to rise. Volume is not required for prices to fall. Market value evaporates without a sale taking place. The idea that because a price is low means somebody sold high just isn't the case.
I'll do the math if you look at history.
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Huh? Volume has nothing directly to do with price. Every stock terminal shows a bid and an ask price for every stock. If the current ask is higher than the last transaction, and someone agrees to pay the ask price, then the price has just "gone up." If, next, the bid price is lower than that transaction and someone sells at the bid price then the stock "goes down." Volume is just a measure of how many shares are changing hands. It goes up with every transaction. And every transaction has a buyer and a seller. So, again, buyers always equal sellers.

Chip Sylverne said:
Depends on how levered they are. Too much leverage can affect values for a long while if trades go bad.
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It really depends on what your definition of the word "long" is. Like leverage, shorts can have lingering effects. I think for JeffDG and me, "long" may be measured in years. Remember "irrational exuberance?" that lasted quite a while before it got damped out and proved JeffDG to be correct.
 
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JeffDG said:
Ultimately, anything like the stock-market is a zero-sum game. ...
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Another misunderstanding. JeffDG's (oops!) Your comment about the effect of traders is sort of another way of saying that trading is a zero sum game. (Actually it's worse than that because of transaction costs.)

But depending on which tens-of-years "long term" you want to look at, equities have returned 6-8% in nominal terms and IIRC about 3% in real terms. That is not zero-sum, and that is why we invest. If it was really zero sum, then investing would be a slow means of financial suicide due to transaction costs.
 
airdale said:
Huh? Volume has nothing directly to do with price. Every stock terminal shows a bid and an ask price for every stock. If the current ask is higher than the last transaction, and someone agrees to pay the ask price, then the price has just "gone up." If, next, the bid price is lower than that transaction and someone sells at the bid price then the stock "goes down." Volume is just a measure of how many shares are changing hands. It goes up with every transaction. And every transaction has a buyer and a seller. So, again, buyers always equal sellers.
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My point is that prices can drop dramatically without a share ever changing hands, as in a selling panic. The notion of " all that money on the sidelines" because someone sold high is a fiction. Share value can and does evaporate.

When you have more people willing to buy than willing to sell, prices get bid up. When there are more willing to sell than there are willing to buy, prices fall. When there are very, very few buyers, and many desperate sellers, prices crash.

But yes, price isn't discovered until there's a transaction.
 
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Chip Sylverne said:
... When you have more people willing to buy than willing to sell, prices get bid up. When there are more willing to sell than there are willing to buy, prices fall. When there are very, very few buyers, and many desperate sellers, prices crash. ...
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This is correct for an illiquid market like, possibly, selling your old 2-wheel drive pickup during a blizzard. The national stock markets, however, are not illiquid. There is always an ample supply of bid prices and an ample supply of ask prices. It is never that case that willing buyers and willing sellers are absent. As JeffDG pointed out yesterday, one positive effect of speculators is to increase market liquidity.

Both the buyers and the sellers set their prices at a point where they are willing to enter into a transaction. Optimistic buyers set their prices high and pessimistic sellers set their prices low. Pessimistic buyers set their prices low and optimistic sellers set their prices high. A new player coming in can choose pay the bid price or accept the ask price or he/she can attempt to negotiate a slight better price by offering a transaction somewhere between those two numbers. The difference between the numbers is called the "spread."

Try this:
--------------------------------------------------------------
Liquid market refers to any market in which there are many buyers and sellers present and in which transactions can take place with relative ease and low costs. ...

An example would be a major exchange of the U.S. stock market, such as the New York Stock Exchange (NYSE), where for any given stock many millions of shares may change hands between buyers and sellers every day. Moreover, such high volume of exchange occurs with relative ease in transaction settlements and with low transaction fees. ...

http://www.investinganswers.com/financial-dictionary/investing/liquid-market-594
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Thread drift anyone? I promise that this is my last attempt at teaching Markets 101.
 
JeffDG said:
Ultimately, anything like the stock-market is a zero-sum game.



For everyone who makes money in a market, someone loses money.



The overall value of the market rises as the value of goods and services rises, and falls if they fall off, but that money does not come from stock trades, it comes from commercial transactions of actual products and services.
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This is completely wrong.

The Stock Market is not a zero-sum game.

If my company, XYZ Widgets, sells 1 million shares of stock @$10, and then takes the $10 million and starts earning $1million per year in profit, then the Buyer of my shares profits, and the Seller (XYZ) does not have a corresponding loss. Hence, no zero-sum.
 
Chip Sylverne said:
OK, fair enough, but shares rarely if ever rise meteorically without volume. On the other hand, during a market crash, shares readily fall without an intemediate sale as a price discovery mechanism.



Hence the name "crash".
Click to expand...



This is incorrect.

Shares can meteorically rise on very slim volume and, they can crash on very slim volume.

And, I have seen both happen many times.

It is actually quite easy to make something rise if there is little volume.
 
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JoseCuervo said:
This is completely wrong.

The Stock Market is not a zero-sum game.

If my company, XYZ Widgets, sells 1 million shares of stock @$10, and then takes the $10 million and starts earning $1million per year in profit, then the Buyer of my shares profits, and the Seller (XYZ) does not have a corresponding loss. Hence, no zero-sum.
Click to expand...

I'm talking about the market trading itself. The value of the market changes with the value of goods and services actually produced, but not from trading activity that occurs.

Constrained to purely "trading" activity, no money is made or lost overall. If someone buys a share for $10, and then the price tanks and he has to sell for $1, yes, that person lost $9, however, the person he bought it from originally still has that $9
 
airdale said:
This is correct for an illiquid market like, possibly, selling your old 2-wheel drive pickup during a blizzard. The national stock markets, however, are not illiquid. There is always an ample supply of bid prices and an ample supply of ask prices. It is never that case that willing buyers and willing sellers are absent. As JeffDG pointed out yesterday, one positive effect of speculators is to increase market liquidity.

Both the buyers and the sellers set their prices at a point where they are willing to enter into a transaction. Optimistic buyers set their prices high and pessimistic sellers set their prices low. Pessimistic buyers set their prices low and optimistic sellers set their prices high. A new player coming in can choose pay the bid price or accept the ask price or he/she can attempt to negotiate a slight better price by offering a transaction somewhere between those two numbers. The difference between the numbers is called the "spread."

Try this:
--------------------------------------------------------------
Liquid market refers to any market in which there are many buyers and sellers present and in which transactions can take place with relative ease and low costs. ...

An example would be a major exchange of the U.S. stock market, such as the New York Stock Exchange (NYSE), where for any given stock many millions of shares may change hands between buyers and sellers every day. Moreover, such high volume of exchange occurs with relative ease in transaction settlements and with low transaction fees. ...

http://www.investinganswers.com/financial-dictionary/investing/liquid-market-594
--------------------------------------------------------------
Thread drift anyone? I promise that this is my last attempt at teaching Markets 101.
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One day in 2008 a Citibank mortgage backed CDO was worth 100 at par. The next it was worthless and unsaleable. Yet, the the bond market is liquid, or was, the day previous. Lots of people wanting to sell, no buyers.

Remember the money market breaking the buck? The commercial paper market dried up about stopped cold. What's more liquid than that? Lots of sellers, no buyers, prices crash.
 
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JeffDG said:
I'm talking about the market trading itself. The value of the market changes with the value of goods and services actually produced, but not from trading activity that occurs.

Constrained to purely "trading" activity, no money is made or lost overall. If someone buys a share for $10, and then the price tanks and he has to sell for $1, yes, that person lost $9, however, the person he bought it from originally still has that $9
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No, you don't seem to understand the "stock market", as, incorrect again.

The purpose of the "Stock Market" is to provide markets for capital for the firms. There are underlying securities to equity shares. (Ignoring options, futures, etc for now.)


How is it a "zero sum" if you sell me a share at $10, and the stock goes to $20?

I now have $20 of value, and you either have $10 of cash, or spent $10 on a bag of weed, or you bought another security with your $10.

EVERY one of your activities: sitting on cash, buying weed, or buying other investments has ABSOLUTELY nothing to do with the share of stock I now own.

If my stock goes on up to $30, not a SINGLE thing changes on your: $10 cash, bag of weed, or your next investment you made.

There does not have to be a "loser" or a "zero-sum" for my stock to increase from $10 to $20 to $30.
 
JeffDG said:
Constrained to purely "trading" activity, no money is made or lost overall. If someone buys a share for $10, and then the price tanks and he has to sell for $1, yes, that person lost $9, however, the person he bought it from originally still has that $9
Click to expand...

The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions.

Sounds to me like you guys a couple of bookies.
 
Chip Sylverne said:
One day in 2008 a Citibank mortgage backed CDO was worth 100 at par. The next it was worthless and unsaleable. Yet, the the bond market is liquid, or was, the day previous. Lots of people wanting to sell, no buyers.

Remember the money market breaking the buck? The commercial paper market dried up about stopped cold. What's more liquid than that? Lots of sellers, no buyers, prices crash.
Click to expand...


If there were "no buyers", then there was "no volume". You can't have volume with out buyers.

When there truly aren't any buyers, then you actually can't get quotes, so you don't have a "worthless" price, you just don't have any price. Everybody may "know" is is worthless, but, there still can be no price/quote.

Many times, there are actually volume AND buyers on securities that are falling toward $Zero. As, an efficient market has short sellers involved who are gladly buying the worthless security to close out short positions and remove margin requirements.
 
JoseCuervo said:
If there were "no buyers", then there was "no volume". You can't have volume with out buyers.

When there truly aren't any buyers, then you actually can't get quotes, so you don't have a "worthless" price, you just don't have any price. Everybody may "know" is is worthless, but, there still can be no price/quote.

Many times, there are actually volume AND buyers on securities that are falling toward $Zero. As, an efficient market has short sellers involved who are gladly buying the worthless security to close out short positions and remove margin requirements.
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That's my point. You don't need large volume for prices to tank. Imbalances between the number of buyers and sellers exists that are reflected in price. I'm sure your familiar with the term "price gap", as in "the price gapped down at the open". Why does this occur? There are more sell orders than buy orders, and the price falls farther than the earlier days close, often by a good margin. The same with a "gap up" open, an imbalance of buy orders. The motivations behind the sell or buy orders can be anything from truth to rumor. As the opportunity created by the imbalance is recognized, during the day the price will "fill" as a clearing or equilibrium price is reached.

If the Good Lord is willing' and the creek don't rise.
 
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flyingron said:
The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions.

Sounds to me like you guys a couple of bookies.
Click to expand...

And where are the clients' yachts...
 
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