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Macro-Finance for Managers Part I

Highlighting a Few Key Ideas and Issues. Macro-Finance for Managers Part I. Macro World Views: Compressed & Simplified. Demand-Side Shocks & Amplifiers Consumer Spending (as cause , not effect ) Inflexibility in prices (especially wages ) amplify.

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Macro-Finance for Managers Part I

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  1. Highlighting a Few Key Ideas and Issues Macro-Finance for ManagersPart I

  2. Macro World Views:Compressed & Simplified • Demand-Side Shocks & Amplifiers • Consumer Spending (as cause, not effect) • Inflexibility in prices (especially wages) amplify

  3. 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

  4. 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

  5. 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?

  6. Shiller Data:PE Ratios and SP500-GDP Ratio

  7. Crash of 2008:Debt/GDP Explosion of 2000s

  8. Using Market Information to Gauge Market Risk Managers and Market Risk

  9. Composite Indexes from STL Fed and KC Fed:Indexes Based on Spreads

  10. Rate Spreads • Natural Experiments • Think “Twin Studies”

  11. 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

  12. 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

  13. 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

  14. Treasury Spreads & Recessions 10 Year – 3 Month Recessions in Grey Few False Positives or False Negatives

  15. Financial Stress and Short Term Spreads Libor – TBillblue Commercial Paper – Tbill red :

  16. LIBOR – Tbill (TED) Spread During 2007-08 Crisis

  17. Real Estate Asset Price Risk: Housing Price to Rental Ratio (computing “spread” as ratio rather than a difference)

  18. Inflation Risk:10-Yr Rate – Inflation Indexed (TIPS) 10-Yr Rate Nominal 10- Nominal Rate Inflation Indexed Rate

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