Gustav and economic recovery

Sitting comfortably at home this weekend, we couldn’t help but notice hurricane Gustav head directly towards New Orleans.  As I write, Gustav is expected to make landfall as a Cat 4 ‘cane- not a wimpy breeze indeed.  New Orleans hasn’t quite rebuilt adequately, although this storm will certainly test reconstruction efforts.  In the comments to Holy GDP, we started to discuss how unforseen events can impact the economy and markets in unanticipated ways.

Holy GDP, Bat-economist! Wait, not so fast

Here at The Long Run Blog, our intent is to apply critical thinking to economics, money and finance.  That doesn’t mean we will always be 100% right, but it won’t stop us from taking a skeptical look at economic news.  Yesterday, a interesting piece of data came from the Commerce Department- revised GDP.  GDP for each calendar quarter comes out first as and “advanced” number meaning it is very preliminary based on a lot of estimated data.  Later it is revised as early estimates are replaced with better data.  This is called “preliminary” GDP.  Eventually, enough data rolls in that they make a final adjustment.  Yesterday, we got the preliminary number.

Quotes on the Dismal Science

Here are some great quotes pertaining to economics and finance I have collected over the years.  Some are witty, some cynical and some are just painfully accurate observations. 

We’ll be off for a few days (maybe, if we can stay away).  Enjoy the long weekend.

Some ‘Age’ Old Myths about Social Security

Prompted by some great comments on my other post, The Truth About Social Security, I thought it was appropriate to share some more facts about the system.

Myth: The retirement age has not changed since the system was started in the 1930′s.
Fact: While the official retirement age known as “normal retirement age” is still 65, this is only true for participants born in 1937 or before.  For each year after, the normal age increases slightly until everyone born in 1960 or later that normal age is 67.  Full schedule here.

What are interest rates really?

I recently had someone ask me to explain what interest rates are.  At first I was stumped, thinking ‘you know, the rate interest’, but then it occurred to me that wasn’t really the question.  My acquaintance was really asking, “what is the function of interest rates” and are they arbitrary?  Great questions with an interesting answer.

Too Much Information

The much-maligned ‘Efficient Market Hypothesis’ proposes that market prices already incorporate all known information, and that only new information can make prices change, other than in a completely random fashion.  There are some problems with this idea, but in the very short term, market participants sure act like it’s true.  That’s why they sit huddled in front of screens for every data release, and then furiously trade the market as soon as the data comes out.  As a strategist, I always found the flurry to be pretty amusing – just look at how much data there is between this morning (August 26th, 2008) and next Friday’s employment report:

A Most Helpful “Call” Today

Jon and I come from different sides of the Street.  No, I didn’t grow up with Paris Hilton style amenities while Jon lived in a shack, nor vice versa.  Rather we come from different sides of Wall Street.  You see, Wall Street has a “buy side” and a “sell side”.  These aren’t north, south, east or west, but rather a metaphor for two functions that a Wall Streeter may find him or herself primarily engaged in. 

Market Lore

Working on a trading floor can be a lot of fun, not least because traders, marketers, researchers (economists, strategists, whatever) can have, shall we say, somewhat quirky personalities.  Even in today’s politically correct HR-monitored environment, there is a constant flow of profanity-laced ‘stream of consciousness-type’ patter.  Cliches are legion, with many floor denizens relfexively repeating their favorite Simpsons or South Park quotes.  Or Animal House.  Or Risky Business, or Wall Street – I once walked past a filing cabinet on which some of short-term financing guys had placed the remains of a couple of boxes of Italian Pastry.  I said, to nobody in particular, “Leave the gun.  Take the Cannoli.”  They laughed way too loudly, and told me I was about the 50th person to say that.  Here, in no particular order, are some of my favorites:

Expected Returns

Quick: what return should a stock market investor expect?  If you own an IRA or 401K, you probably invest in stocks through mutual funds.  We do this so that our money has a chance to “work for us” and grow into a larger sum in the future.  Investing in bonds or CD’s, we earn a stated rate of interest.  This is relatively low risk and low paying.  Stocks, however, are sexy.  In contrast to bonds, there is an expectation of high returns.  The higher the returns, the more our money compounds and we end up with a much larger nest egg.
 
But what rate of return should we expect from our stock investments?  When you fiddle with one of the many online retirement calculators, you usually have to enter an expected rate of return, so what do you use?  Wait, didn’t that fund manager on CNBC claim 16% average returns?  Didn’t that stock broker quote a statistic in the 13% range?

What is Money?

I had an exchange with a commenter in the thread after my post about the Fed.  Seems he saw a video (the link is in the thread, I don’t really recommend that anyone waste 47 minutes of their valuable time watching the thing) called ‘Money as Debt’ by Paul Grignon, a Canadian gentleman who is all up in arms about the concept of fiat money, especially of the type known as credit money.