News

Why the Fed Worries About Inflation

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The Federal Reserve, like many government agencies and organizations, has a dual mission. On the one hand, it is the Fed’s job to keep the economy running smoothly and maintain the economic and monetary systems the country depends upon. On the other hand, it is the Fed’s job to prevent rampant inflation from crippling the economy. Doing one job well, sometimes means messing up the other job. Under normal circumstances, the Federal Reserve uses its power to set interest rates to moderate the ups and downs of the economy. In a free market system, there are periods of expansion and contraction (good times and bad times). These variations in the economy occur for two main reasons. First, people (as a group), do not always behave rationally. Second, even when people are behaving rationally, there can be a significant lag between the arrival of data and the impact of that data on decisions. For example, when we talked before about how inflation works, we talked about a man named Brad who, when prices rise, cuts back on spending by cancelling his gym membership. Theoretically, the exact moment for this to happen is when Brad’s expenses increase beyond his income. However, in …

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Good Economic News and Inflation

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It seems any time economic news gets reported, there is a good news / bad news sort of thing going on. If there is an economic report that offers up good news about the economy, that is paired with the bad news that the Federal Reserve is either not going to do anything (recently) or may move to increase interest rates. Either way, that seems to worry some people, no matter how good the economic news might seem other wise. The Fed and Inflation The Federal Reserve’s mission is to regulate the U.S. economy independently of the U.S government. That role has never been as important as it has been lately when Congress and the President seem constantly paralyzed by politics from taking any steps or implementing any policy to help the economy. In particular, the Fed’s role is to help regulate U.S. monetary policy. This is a historical mandate, and it shows that those who created the Federal Reserve had remarkable foresight, because what is good for the country’s economy does not often square up with what is good for the political parties that want so desperately what to gain and hold power. There are two main missions for …

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Job Numbers Good News or Bad News

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On Friday, the US Department of Labor released the July non-farm payroll numbers. They showed that employment rose by 163,000 while the unemployment rate was basically the same at 8.3 percent. Of course, this is an election year, which means that within minutes, the airwaves were flooded with spin about how this was good news or bad news, depending upon your political persuasion. Truth in Money How do you tell if the July nonfarm payrolls data is good or bad? Among politicians, talk is cheap. There is no need to be accurate or correct, only to color the perception of the electorate in such a manner that you garner the majority of their votes. In other words, a politician, and their supporting ecosystem of political pundits and talk show hosts have no interest in what the jobs numbers, or other economic data, actually mean. How can you tell when a politician is lying? His lips are moving. In fact, many of them have only the barest of understanding as to what the data actually says. Instead, they have their experts comb through looking for what can be characterized as good or bad and then run with whichever one supports their …

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What Is Wrong With Greece Debt?

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There has been a lot of news over the last year about the situation in Greece and how Greece’s economy could possibly take down the Euro. The ripples from such an event could set off a global slow down. But, what is the problem with Greece’s economy, and why has this never been an issue before? Greece and the Euro To understand what is going on with the Euro and Greece, it is helpful to understand just where things stand today, and where they stood a couple of decades ago. Before the implementation of the Euro as a single currency for countries across Europe, each country had its own money. Greece had its own currency called the drachma, and other countries had their own currency such as the German mark, the French frank, and so on. Each country gave up its own currency to make one currency to be used through out Western Europe, with the notable exception of England, which refused to give up the English pound. Greek Deficits and Inflation Typically, when a country takes on too much debt there are various market forces that “fix” the problem. For one, the bond markets begin to demand a higher …

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2012 Economic Recovery?

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It’s July 1st, and that means that the second quarter just ended. Recent economic data suggest that the housing market might finally be improving a little bit. Recent jobs data suggests that the labor market is at least holding its own, even though it isn’t strong enough to be lowering unemployment yet. How companies report their second quarter earnings will go a long way toward showing whether or not the economy will finally move forward faster than a snail in 2012. Economy Improving? Here is what to look for. Companies should report earnings that are pretty much in line with how well they did in the first quarter since there were no real up or down catalysts in the second quarter. However, what you really want to be looking for is the guidance that companies are giving for the next quarter and the rest of the year. If companies feel good about the rest of the year, that means that they are more likely to spend, or at least not cut. That additional economic activity is what this economy really needs to kick it over this hump because consumers are tapped out. A solid third quarter with rising expectations heading …

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Facebook IPO Securities Fraud?

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We talked recently about the Facebook IPO flop. Now, things are starting to maybe look a little bit worse. According to several news websites, including the Wall Street Journal, there may have been some forbidden communications between Facebook, its major bankers, and subsequently, between those banks and their clients. It seems that during the Facebook IPO roadshow, Facebook disclosed, in more detail than in their amended S-1 filed with the SEC, that their earnings were rapidly declining due to the fact that a large part of their user base was shifting to accessing the Facebook service via mobile devices instead of online. The difficulty is that there is no room on most smartphones to put up the ads that populate the right side of the screen on a full desktop computer or laptop computer. As such, Facebook generates almost no revenue from mobile users. If more users access Facebook without generating revenue that is a double whammy. More users equals more expense, but not more revenue. None of this necessarily adds up to trouble for Facebook, other than those disclosures made in private. All material information must be disclosed publicly both about a publicly traded stocks and those about to …

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Facebook Flop or Not?

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Facebook went public on Friday. After months of build up, there were some issues with trading, and finally, no big pop in stock price. This has led some media pundits to conclude that Facebook’s IPO was a flop. But was it really? Facebook IPO Trading Facebook’s IPO was not necessarily typical. However, there was little typical about it before it even began. There was the sheer size of the offering, making the Facebook IPO one of the largest of all time. Then, there was the intense media interest, which, believe it or not, is not typical of initial public offerings. The idea that Facebook’s IPO was a flop revolves around the concept that its stock price did not rise on its first day of trading. Indeed, there was ample evidence that Facebook’s underwriters were forced to step in and prop up the share price to keep it above the $38 offering price. Whether this is a flop or not depends on whose shoes you are in, and how much you care about what normally happens. Facebook IPO Pricing In the days leading up to the IPO, there was some concern that the price for Facebook stock was too high. After …

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Google Lower Cost Per Click Doesn’t Matter

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Google just reported its quarterly earnings. They did very well, beating pretty much every analyst’s numbers. Those who want to nitpick will complain that the price per click has gone down. However, that isn’t really surprising considering that the number of clicks went up. There are some issues coming with Google’s stock, but this isn’t one of them. Google Cost Per Click Down Google’s advertising model is based on advertisers paying either “per click” or “per impression.” Actually, advertisers pay per every thousand impressions, but that isn’t the point. Advertisers who pay using the per click model pay a certain amount each time someone clicks on their ad, but nothing if the ad goes unclicked. A smart online advertiser using the per click model will determine how much each click is worth. There can be many ways of determining this, and numerous intangibles are considered by some advertisers. However, the most simple concept would be something like this. Maximum payable cost per click = Amount of revenue generated per click / Number of clicks necessary to generate revenue. In other words, if you generate $1 per transaction (this is called a conversion) and it takes you 10 clicks to generate …

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Will the Economy Recover in 2012?

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There has been a lot of good news about the economy in 2012. With each passing month, it seems that unemployment drops further, the stock market goes higher, and the housing market… well, that’s why there is still a pretty big question mark out there. Economy 2012 Outlook Typically, after an economic downturn, the stock market leads the way (it’s a leading indicator) by rising in the months before various economic reports (lagging indicators) start rising. If all goes well, the stock market’s rise, is legitimated by improving corporate earnings and then backed up by an increase in hiring that improves the employment outlook across the economy. Once these things happen, the U.S. economy kicks into gear and things march upward until the next correction, recession, or god forbid, depression. The stock market has gone nearly straight up since the beginning of 2012. Earlier this year the Dow went over 13,000 for the first time since 2008. Not far behind, the S&P 500 index passed its 2008 high-water mark earlier this month. And, as Reuters and other report, the number of Americans filing for new unemployment benefits dropped to a four-year low. This follows the last few months of good …

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