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Key Macro-Finance Insights for Managers: Understanding Market Dynamics and Risk Perception

This overview simplifies complex macro-finance concepts for managers, highlighting critical issues such as demand-side shocks, consumer spending as a driving force, and the amplifying effects of price inflexibility, particularly in wages. It explores the implications of supply-side shocks, technological shifts, and oil price volatility on economic conditions. Additionally, it examines the influence of risk perceptions on asset prices and offers tools for market risk management, including analyses of rate spreads and yield curves for forecasting recession risks and assessing financial stress.

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Key Macro-Finance Insights for Managers: Understanding Market Dynamics and Risk Perception

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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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