The Bond Market
Bonds are generally thought of as loans to government entities. The Federal government sells Treasury Bills, Bonds and Notes. They are all bonds, only differing in the amount of time until maturity. Municipalities also issue bonds. Government bonds are good in that they are exempt from most taxes, but do not pay much in interest. There is also a corporate bond market, which are short term loans you make to businesses. They usually mature in less than a year. Junk bonds (corporate bonds) mean that you are getting a higher than average interest rate from a company. This is due to the increased risk you are taking, since the companies are not in the best financial condition, hence the name junk bonds. While it is almost impossible to lose your money investing in the Federal government, an investment in municipal bonds is slightly riskier.
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Consumer Price Index
The Consumer Price Index (CPI) is a basket of weighted consumer goods and services. From this basket, it can be determined the future course of prices, whether we will have inflation, deflation or prices remaining flat. They are weighted, because if oil goes up in price substantially, you do not want that to affect the Price Index. It is possible that oil went up in price, and most everything else declined in price. The same would apply to medical care which is rising rapidly. A medical care price rise does not necessarily mean the price of food rose as well. Cost of Living raises in salary are often tied to this figure.
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Deflation
Deflation is sometimes called a negative inflation rate. Deflation is the fall in price for goods and services. The price falls because there is less demand for these goods and services. At this time we have a mild deflation, in that demand has decreased, people are saving more and prices are dropping as a result.
Businesses and government fear deflation more than inflation (increase in prices or a decrease in the value of money). This is true, on account of the possibility, that consumers seeing the price of goods falling, will put off purchases even longer into the future, in the hope of even lower prices.
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Employment Reports
On the first Friday of every month, the U.S. Labor Department releases the employment figures. The part that is highlighted shows the number of unemployed. There are a number of categories in this report, starting with the letter U. What is often not publicized is the U6, which takes into consideration part-time workers and those who have given up looking for employment. The difference between the general figure of unemployment released and the U6 is substantial. Our unemployment now is just under 10% according to the U.S. Department of Labor. If you count discouraged workers and those not working full time, the figure is closer to 17%. Of course, these numbers are just estimates, based on data that cannot always be confirmed.
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Gross Domestic Product
The Gross Domestic Product (GDP) is the sum of all the goods and services produced within the nation’s borders, not to be confused with Gross National Product (GNP). This is an important measure and is used to determine if a country is in a recession. The traditional definition of a recession are 3 consecutive quarters of a negative Gross Domestic Product. The Gross Domestic Product can be broken down into GDP per capita. This divides the Gross Domestic Product by its population. Doing this will give nations with smaller populations an edge, if the small and larger country have a similar Gross Domestic Product.
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Inflation
Inflation is the general rise in prices for goods and services over a period of time. It is the opposite of deflation. When there is an excess of money in circulation (due to low interest rates and printing of money), prices tend to rise. In inflation the money is losing its value. The longer you hold on to it, the less value it will have. There are too many dollars chasing fewer goods, enabling the seller to raise prices. People will be willing to pay more before the product is no longer in inventory. This works opposite to deflation, in that now people are rushing to buy products before the prices rise again.
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Interest Rates
Interest rates are the prices you pay to use money that is not yours. They are expressed as a percentage, over the course of a year. They are a tool of monetary policy, as can be seen by the very low interest rates set by the Federal Reserve Bank. Usually differing interest rates move together, an example being the government bond interest rates (1 month, 6 month, etc.). They are tools that do not always work, when used to control inflation, unemployment and investment. Once the Federal Reserve Bank sets interest rates, other interest rates are affected, like mortgage rates and the interest banks give you on a Certificate of Deposit.
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Leading Indicators
Economists use Leading Indicators to predict how strong the economy will be in the future. Leading Indicators change before the economy actually does, giving the economist a hint of what is to come. Leading Indicators can be stock prices, which change before the economy does. Any index of consumer sentiment is also one of the Leading Indicators. An increase in building permits is usually a sign of an improving economy and is one of the Leading Indicators along with the money supply. The Conference Board puts out an Index of 10 Leading Indicators. Leading Indicators are not foolproof and have in the past, been incorrect in making predictions.
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Producer Price Index
The Produce Price Index (PPI) are the prices received by domestic sellers over a period of time. If it goes up by a large amount, this could be an indication of coming inflation. Going down month after month, portrays a nation in recession. The Producer Price Index looks at 3 areas of production. Those of industry, commodities, like oil and sugar, and companies involved in the different stages of the processing of goods, since goods do not necessarily come straight from the factory to your neighborhood store.
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Retail Sales
There are numerous Retail Sales reports released by major chain stores, showing how the retail department stores are faring. These are sales from fixed locations including the internet. If sales are down, analysts try to figure out why this is the case, as it is now. The reason Retail Sales are down now, is that the consumer is in a period of retrenchment. The major Retail Sales Report is released monthly and is a strong economic indicator of what the future holds. The Retail Sales Report is timely, in that the information contained is quite recent. The Retail Sales is released with and without auto sales included.
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Stagflation
Stagflation is the combination of a stagnating economy (one that is not growing, certainly not sufficiently to create enough jobs) and inflation. This is difficult to remedy. When you fight inflation the economy stagnates further. When you try to remedy the stagnating economy, inflation takes off. Stagflation can be caused by an increase in the price of oil (the inflation part). The money spent on the imported oil hurts other sectors of the economy, causing business conditions to worsen. The government can also cause inflation by too much money creation and the stagnation part by too much government red tape.
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Stock Market
A stock market is a financial tool that allows any number of clients to purchase and sell shares in companies that are publicly traded. There are several other forms of investing and trading that can also be done on a stock market, such as trading options, selling shares of a company short and buying index futures. A stock market is usually broken up into a number of smaller indices, usually with a group of companies trading under them. A share, or stock, is a piece of paper that has a small value of the company for which it is a part of. Usually a country, or region has its own domestic stock market, rather than just one large global market.
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Trade Balance
The Trade Balance, sometimes referred to as the Balance of Trade, is the difference between a nation’s exports of goods and services and its imports of goods and services. If a nation imports more than it exports, it has a trade deficit, with more money leaving than entering. The money exits the country because the country is paying other countries for their imports. More exports than imports would give a nation a trade surplus. In this case more money would be entering than leaving a nation. It is obvious that the United States has been running a large trade deficit for a long time, especially now, with nations like China holding so many of our dollars.
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Volatility
Volatility in the stock markets was clearly evident a few months ago with the big drops in the Dow Jones Industrial Average. Volatility is the degree of uncertainty and risk in the security’s future value. High volatility means that there is a wide gap in how much the security can fluctuate between highs and lows. Low volatility has a narrower range in which the security can go up or down. You will see the indices of the markets go up and down rapidly when there is high volatility. Low volatility is more in line with normal economic conditions.
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Yield Curve
The yield curve is a line on a graph, that traces the interest rates at a certain point in time of bonds, that are of similar quality, but differ in maturity dates. This is usually done with the 3 month, 2 year, 5 year and 30 year government bonds. Mortgages and bank loan rates are dependent on the Yield Curve. The curve can predict future economic conditions.
There are 3 different types of yield curves. Normal, flat and inverted. A flat and inverted Yield Curve, usually point to economic changes ahead, with an inverted yield curve often pointing to a coming recession. The greater the slope on a graph, the greater the difference in yields between short and long term bonds. An inverted yield curve would show a recession is coming by showing higher interest rates for shorter term bonds, than for long term bonds.
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