Two months ago the International Tribune posted an article online that was stating that China and Japan may begin to quit buying US Treasury securities due to the hap-hazard economic policies of the United States.

LINK

Around the same time a former policy maker for the Bank of England, Professor Willem Buiter, came out and said that the US dollar is going to collapse in value due to the US Government’s politicians foolishly believing that they could spend their way out of the current banking system problems.

LINK

Our take on this is that it is possible for the dollar to collapse and this would lead to massive turmoil inside of the US.  In order to protect yourself from such an event, holding foreign assets is a wise decision for the next couple of years. 

The current Stimulus package debate is highly contraversial.  However, someone must pay for this.  Historically the US government has raised capital through US Treasury issuances, tax revenues, and through printing money. 

In order to get through the current spending plan the government should be raising taxes.  However, the current plans are calling for tax cuts.  This leaves the government with two other options for raising capital.  Foreign investment in the US Government or printing more money.  Recently foreign creditors of the US, China and Japan, have been questioning the fundamentals of investing in the US.  If Asian foreign creditors do not bail out the US, then the only option left for the government to pay for the stimulus package will be printing money.  This will in turn cause imported commodities, mainly oil, gas and products such as clothing, to rise in price.

“‘Put your trust in God; but mind to keep your powder dry’.” Lord Cromwell

Posted under The Economy

Here is some of the advice Mr. Rodgers is given in another interview with CNN.  This is a good insightful view of how the Asian markets will supercede the Western ones in the future.

His advice is that the US needs some hard medicine.

Posted under Stock Market News, The Economy

This is a breif interview that introduces you to a trader of reknown, Mr. Jim Rodgers. 

His books are a bit inspirational if you are into trading.

Take a look at the video.  It will fascinate you.

Posted under Business News, Stock Market News

Mr. Jim Rodgers has some interesting opinions about the future of the US economy, and world economy.

This short movie is a very interesting.  It was taken from a television interview in India. 

His advice is about commodity purchases.

Posted under Business News, The Economy

In the previous post, “A look at the Stimulus Bill,” we mentioned that while government spending does lead to economic growth. HOWEVER we also mentioned that it is not necessarily the most effective use of money. Thus, the argument between those who believe in Tax Cuts and those who believe in Spending.

Here is an excellent video from Bloomberg that shows both sides of the argument.

Tax Cuts vs. Spending

Posted under The Economy

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We at Endurance Trading hope that you continue to support our blog. We’ve spent countless hours on this book and have confidence that it will be a good resource on numerous topics. To see what kind of articles are in the book, look through the posts that we’ve posted up to this point.

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Posted under E-book

A Look at the Stimulus Bill (Multiplier Effect)

Using a concept in Economics known as the “Multiplier Effect” we can see how an increase in government spending might affect the Economy.

Let’s take an easy example. The Multiplier Effect occurs because the effects of any spending continue through multiple rounds. For example, if I purchase a food for $10 at a restaurant, that $10 dollars becomes the income of someone else. That person will also spend a percentage of that $10, and some will go to taxes and personal savings. This continues as the $10 cycles as the income and spending of multiple people in economy.

Let’s look at this in a diagram. Assume that every person in the economy has the same savings rate (propensity to save) and are taxed the same. Every person spends half of their income.

Using this simple multiplier model, it is clear that the $10 spending goes much further than $10. The cycle continues as spending becomes income and income becomes spending. In this simple model, $10 grew to $18.75 by the first 4 rounds! Remember that the final amount depends on how much money was taken away by taxes.

This multiplier effect model illustrates that if the government spends 800 billion dollars, the money will go much further than just 800 billion dollars. The fact that the stimulus bill will lead to a jump in GDP cannot be doubted.

HOWEVER…

The debate should be over whether or not this is the best use of the money. Also, there are many ways to design a stimulus bill. For example, if you look at the model we created, do you raise the original $10 to a higher number? Or, do you lower taxes, which would result in more money passing to each person? (If each person spends 75% instead of 50%, notice how much more money passes hands). The effectiveness of these two methods must be analyzed. Also, does the US government have the resources to be spending this much money?

-Ryan

Posted under Economics, The Economy

Present Value (Growing Perpetuity)

In the previous post we discussed perpetuities (revenue streams that continue into eternity). However, if you consider the real world, perpetuities do not always pay the same amount every year. Dividends, for example, often grow annually as the size of the firm grows.

PV = Present value

C = cash flow (e.g. dividend)

R = required rate of return (the rate an investor expects to receive or will invest his money elsewhere)

G = growth rate

Simply plug in the numbers and you will be able to determine the value of a growing perpetuity. This is useful in determining the value of a stock with dividend payments.

Posted under Acct./Finance

Present Value (Perpetuity)

Finding the present value of a perpetuity is a little different. A perpetuity means that you receive the same amount of money at a given pace into eternity. For example, a set dividend payment is a perpetuity.

Imagine that you receive a $5 dividend payment every year. To determine the value of this revenue stream in present terms, we need to be able to calculate the present value.

Take a look at the diagram below.

The simple way to calculate the present value of a perpetuity is through the following equation:

Simply take the yearly dividend payment and divide by the discount rate.

Posted under Acct./Finance

Sometimes present value gets a little trickier because some bonds pay out coupons every year. A coupon is a yearly payment that pays a certain percentage of the face value. It begins payment at year 1 and pays every year, including the last year. You also receive a lump sum of money at the end of the bond’s life.

First of all, the equation.

PV = Present Value

N = number of years

C = Face value of the bond (Lump sum of cash received)

R = Discount rate (Do not confuse this with the rate that the coupons are paying)

The sigma sign basically means to take the present value of every payment separately and then sum them all up at the end. To illustrate this, let’s first look at the problem visually.

Imagine that you have a $1,000 bond that will be redeemed in 5 years. It is a 2.5% coupon bond, meaning that you will receive $25 coupons every year. The appropriate discount rate is 6%.

With the example, you will have to take the present value of every cash flow separately.

In other words, the following present value calculations must be done:

$25 – 1 year

$25 – 2 years

$25 – 3 years

$25 – 4 years

$1025 – 5 years

At the end, sum up these five calculations to determine the present value.

Posted under Acct./Finance