The investor's guide to economic fundamentals

263 Pages·2002·1.12 MB·English

by  John Calverley

The Investor’s Guide to Economic
Fundamentals
WileyFinanceSeries
BrandAssets
TonyTollington
SwapsandotherDerivatives
RichardFlavell
AnIntroductiontoCapitalMarkets:Products,StrategiesParticipants
AndrewChisholm
AssetManagement:EquitiesDemystified
ShantaAcharya
CurrencyStrategy:APractitioner’sGuidetoCurrencyTrading,HedgingandForecasting
CallumHenderson
HedgeFunds:MythsandLimits
Francois-SergeLhabitant
TheManager’sConciseGuidetoRisk
JihadSNader
SecuritiesOperations:AGuidetoTradeandPositionManagement
MichaelSimmons
Modeling,MeasuringandHedgingOperationalRisk
MarceloCruz
MonteCarloMethodsinFinance
PeterJa¨ckel
BuildingandUsingDynamicInterestRateModels
KenKortanekandVladimirMedvedev
StructuredEquityDerivatives:TheDefinitiveGuidetoExoticOptionsandStructuredNotes
HarryKat
AdvancedModellinginFinanceUsingExcelandVBA
MaryJacksonandMikeStaunton
OperationalRisk:MeasurementandModelling
JackKing
AdvanceCreditRiskAnalysis:FinancialApproachesandMathematicalModelstoAssess,PriceandManageCreditRisk
DidierCossinandHuguesPirotte
DictionaryofFinancialEngineering
JohnF.Marshall
PricingFinancialDerivatives:TheFiniteDifferenceMethod
DomingoATavellaandCurtRandall
InterestRateModelling
JessicaJamesandNickWebber
HandbookofHybridInstruments:ConvertibleBonds,PreferredShares,Lyons,ELKS,DECSandOtherMandatory
ConvertibleNotes
IzzyNelken(ed)
OptionsonForeignExchange,RevisedEdition
DavidFDeRosa
VolatilityandCorrelationinthePricingofEquity,FXandInterest-RateOptions
RiccardoRebonato
RiskManagementandAnalysisvol.1:MeasuringandModellingFinancialRisk
CarolAlexander(ed)
RiskManagementandAnalysisvol.2:NewMarketsandProducts
CarolAlexander(ed)
ImplementingValueatRisk
PhilipBest
ImplementingDerivativesModels
LesClewlowandChrisStrickland
Interest-RateOptionModels:Understanding,AnalysingandUsingModelsforExoticInterest-RateOptions(second
edition)
RiccardoRebonato
The Investor’s Guide to Economic
Fundamentals
John Calverley
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Calverley,John.
Investorsguidetoeconomicfundamentals/JohnCalverley.
p. cm.—(Wileyfinanceseries)
Includesindex.
ISBN0-470-84690-9(cased:alk.paper)
1.Investments—Handbooks,manuals,etc. I.Title. II.Series.
HG4527.C258 2002
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Contents
ListofFigures xiii
ListofTables xv
Preface xvii
Acknowledgements xix
PARTI ECONOMICSFORINVESTORS 1
1 WhyEconomicGrowthMatters 3
Trendversuscycle 3
Measuresofgrowth 3
Expandingeconomies 5
Defininggrossdomesticproduct 7
FourwaystoanalyseGDP 8
Keycontroversy:Economicgrowthandthe‘neweconomy’ 12
Conclusion:Growthfundamentalsandtheinvestor 13
2 BusinessCycleFundamentals 15
Atypicalbusinesscycledescribed 15
Investmentandthecycle 19
Theinventorycycle 19
TheUS1980scycle:1982–90 20
TheUS1990scycle:1991–2001 22
Thecurrentcycle2002– 25
Twoapproachesforinvestors 25
Theroleofleadingindicators 26
Howdodepressionsfitin? 26
Whydoesthecycleexist? 27
Wheredoestherecoverycomefrom? 27
viii Contents
KondratieffCycles 28
Conclusion:Businesscyclefundamentals 28
3 IsInflationDead? 29
ThePhillipscurve 29
Whatcausesinflation? 29
Inflationtargeting 30
Whydidinflationpickupinthe1960s? 30
Indicatorsofinflation 31
Measuringtheforcesdetermininginflation 32
Implicationsofalowinflationenvironment 35
Inflationandinvestmentreturns 35
Thethreatofdeflation 36
Conclusion:Inflationremainsfundamental 37
4 TheNewEconomy:MythorReality 39
Fasterproductivitygrowth 40
Betterinventorycontroleliminatingrecessions 42
Permanentlylowerinflation 42
Conclusion:Outlookfortheneweconomy 44
5 UnderstandingCentralBanks 47
Whatarecentralbankstryingtodo? 47
Independentcentralbanksandinflationtargeting 48
Officialinterestrates 49
Theyieldcurve 49
Interestratesandtheeconomy 51
Assessingthepolicystance 51
TheTaylorRule 53
Monetaryconditionsindices 54
Themonetaristview 54
Monetarypolicyandtheexchangerate 58
Conclusion:Monetarypolicyfundamentals 58
Appendix:Howismoneycreated? 59
6 FiscalPolicy 61
Measuringthestanceoffiscalpolicy 61
TheUKexperience1980–2002 62
Whyfiscalpolicydoesnotalwayswork 63
Linkageswithmonetarypolicy 64
TheUSexperience1980–2002 65
Fiscalpolicyandrealinterestrates 66
Fiscalpolicyinhigh-inflationcountries 66
Fiscalpolicyanddebt 67
Conclusion:Fiscalpoliciesandmarkets 68
Contents ix
7 AssetPricesandtheEconomy 69
Whyassetpricesmatter 69
Theincreasedvalueofassets 70
Howassetpricesaffecttheeconomy 72
Assetpricesandeconomicpolicy 75
TheexperienceofJapan 76
Assetpricesandmoneygrowth 78
Conclusion:Assetpricesandtheeconomy 78
8 GlobalisationandCapitalFlows 81
Keyconcepts 81
Whydocurrentaccountimbalancesmatter? 81
Whatcausescurrentaccountimbalances? 83
Thecycleofcapitalandtradeflows 84
Financingofcurrentaccountdeficits 86
Sustainabilityofdeficits 86
Tradedataandthemarkets 86
TheJ-curveeffect 88
Freetradeversusprotectionism 88
Capitalflows 90
Conclusion:Tradeandcapitalflowfundamentals 90
9 InternationalLinkages 93
Isthereaworldbusinesscycle? 93
Whyoilpricesremainimportant 93
Interestratelinkages 94
Stockmarketslinkages 96
Policycoordination 96
Currencymanipulation 97
Conclusion:Internationalinteractionsfundamentals 98
10 EmergingEconomies 99
Differencesfromdevelopedcountries 99
Identifyinggoodgovernmentinemergingcountries 100
Assessingemergingcountries:Achecklistapproach 101
LessonsoftheAsiancrisis 106
Whywasthecrisisnotforeseen? 107
Thailand’sleadingrole 108
TheRussiancrisis1998 110
TheBrazilcrisis1999 111
Argentina’scrisis2001–2 113
Reassessingtherisksofemergingmarkets 115
Conclusion:Emergingmarketfundamentals 118