• One Step Closer to a Cashless Society

    If you want to buy a snack or a drink on a flight, you'll have to use a credit card. Airlines stopped accepting cash some time ago, and today, other business are considering going cashless as well. 

    From the NY Times (Dawson, 30 Jul 2016):

    Patrons of Sweetgreen are very particular about their salads. When the company recently removed bacon and sriracha from the menu, customers took to social media to complain. But after a handful of Sweetgreen restaurants stopped accepting cash in January, barely anyone noticed, according to the company’s owners.

    In the shift to cashless payments, businesses seek to shift to electronic payments and invoices. This report from the Federal Reserve suggests that obstacles remain:

    A major barrier identified by U.S. businesses to adopting electronic payments is the willingness of their trading partner’s ability to send or receive automated electronic information (e.g. invoice and remittance information). Although, businesses may choose to implement electronic payments alone and separate from the associated electronic information, often times they maintain and rely on checks if related elements of the end-to-end process, such as the invoice, cannot also be migrated to electronic forms.

    Read the NY Times article and identify the following:

    • the benefits of a cashless society
    • the drawbacks of a cashless society
    • which market participants will benefit the most? which ones can be hurt the most?
  • Income Volatility

    Income alone is not enough to describe the financial well-being of American households. The volatility of that income is another aspect to financial well-being.

    According to this JP Morgan Chase report:

    Although income volatility is prevalent across all income levels, the JPMorgan Chase Institute found that it was most notable among the young, those living in the West and those in lower income tiers.

    For discussion:

    What causes income volatility? What is the impact of income volatility on households? And how can households mitigate the impact of income volatility?

  • Presidents' Economic Grades

    This infographic rates past presidents on their economic success or failure. With the election coming up very soon, economic rankings may be in the spotlight again.

  • How To Find Higher Yields on Bonds

    Low interest rates were an attempt to encourage economic growth, but prolonged low rates have been hurting financial services firms. From a recent CNBC article (di Christopher, 11 May 2016):

    "Bank's interest margins are being hammered. Money-market funds are trying to squeeze out a return. This is the kind of stuff, to be honest, sitting at the table, we did not foresee at the FOMC," he said, referring to the Federal Open Market Committee.

    Germany is in even worse shape because the vast majority of Germans save through life insurance and their pension funds, he added.

    Fisher reiterated his opinion that the Fed should raise rates by a quarter-percent at its June or July meeting, and then at least once again in the second half of the year. The FOMC raised rates a quarter-percent in December from nearly zero percent.

    With government bond yields at historically low levels, investors have to seek yields elsewhere.

    This Financial Times video explains that higher yields are available, but they come with risks:

    (1) default risks, and

    (2) currency risks

    For discussion:

    In what ways do low interest rates hurt investors and financial services firms?

  • Will That Be Cash or Credit Today?

    The infographic below shows that cash is still used, in spite of the many payment options available in our technology-laden world.

    From an NPR article (6 April 2015):

    Compared with their elders, young adults (ages 18 to 24) reported using cash more, for nearly half of all purchases.

    Still, their favorite way to pay is plastic, though not the plastic most might think. Some students say they keep a debit card, instead of cash or credit, to tighten their belts.

    Some find that using cash prevents them from overspending as they recognize the pain of physically parting with the money. Others find that cash leads them to spend unnecessarily, but debit is more inconvenient and therefore leads to less spending.

    source: Federal Reserve Bank of San Francisco

  • Why An Independent Central Bank?

    The central bank of the United States is independent of politics, but that's not the case for central banks in other countries. According to the FAQ on the Federal Reserve's website:

    Careful empirical studies support the view that central banks able to conduct day-to-day monetary policy operations free of political pressure tend to deliver better inflation outcomes, without compromising economic growth. And, while it is important to keep politics out of monetary policy decisions, it is equally important, in a democracy, for those decisions--and, indeed, all of the Federal Reserve's decisions and actions--to continue to be undertaken in a strong framework of accountability and transparency. The public and our elected representatives have a right to know how the Federal Reserve carries out its responsibilities

    For discussion:

    Why is it important that the Federal Reserve remain independent? What are the risks associated with a central bank that is not independent?

  • The Best Paid Banking Executives

    You will find more statistics at Statista

    The infographic above shows that Jamie Dimon, the head of JP Morgan Chase is the top-paid banking executive. Following not far behind is the head of Goldman Sachs.

    The size of the compensation package raises the question of whether executive compensation at these super high levels is legal or ethical.

    From the SEC website:

    The decision by a company regarding the amount and type of compensation to give an executive officer is a business decision and is not within the jurisdiction of the SEC. Rather, the SEC's jurisdiction extends to disclosure—making sure that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. In this regard, the federal securities laws require disclosure of the amount and type of compensation paid to the company's CEO and other highly-compensated executive officers.

    For discussion:

    Is there anything wrong with executive compensation at these high levels? Why or why not?

  • The Retirement Gamble

    What's your retirement plan? Do you plan to work until you can't work any longer? How much do you have saved already and how much more do you expect to save by the time you retire? Are you trusting in Social Security to cover your expenses?

    Unfortunately, the answers to these questions are daunting. Most people do not have enough saved, and those who have been saving often find their savings wiped out by divorce, illness, or their kids' college tuitions.

    For discussion:

    What advice would you give someone in his/her 20s? 30s? 40s? or 60s to be able to retire?

  • The LSE and the Deutsche Borse

    You will find more statistics at Statista

    This week, nearly all London Stock Exchange (LSE) shareholders voted in favor of a merger with the Deutsche Borse. The vote now goes to shareholders of the German exchange.

    The question remains as to where to base the headquarters of the new LSE. After the British referendum to exit the EU, some question whether London should remain the home or whether the headquarters should be moved to Frankfurt.

    From the NY Times (Bray, 4 July 2016):

    Last week, the head of BaFin, the German financial regulator, questioned whether the combined business could be based in Britain given the outcome of the referendum. Some German investors have also called for the companies to re-evaluate their plans in light of the vote, and to move the holding company’s base elsewhere in the European Union.

    Investors in the German exchange have until July 12 to accept an offer to exchange their Deutsche Börse stock for shares in a new holding company for the combined entity, which the companies have said would have headquarters in both London and Frankfurt and be based in Britain. At least 75 percent of Deutsche Börse’s outstanding shares must be tendered in the offer for the deal to be successful.

    For discussion:

    What fears surround the merger of the LSE and the Deutsche Borse? Where should the new firm be headquartered?


  • MYTH: The Fed Prints Money

    The common myth is that the Federal Reserve simply prints money when money is needed. But this video from the Richmond Fed explains that this common view is incorrect.

    The Fed does issue, distribute, and store currency, and it uses the money supply to influence the economy. The Fed also makes sure that payments get from one party to the next.

    For discussion:

    1. How many Federal Reserve banks are there?

    2. Who actually prints money and produces coin?

    3. How does the Fed influence the money supply and the economy?

  • Taxing Trades

    Taxes serve two purposes: (1) raise government revenue, and (2) discourage specific behaviors. The problem is that goal number 2 erodes the impact of goal number 1.

    This is likely to be the outcome of recent proposals to tax trading. One proposal focuses on raising revenue in the state of Illinois where financial markets are an important component of the economy. The other proposal is by the Democratic party and focuses on curbing high-frequency trading.

    In Illinois, the impact on financial services could be devastating. From Bloomberg (Louis, 26 May 2016):

    The Illinois proposal would impose a tax of $1 per contract for transactions where an agriculture product is the underlying commodity and $2 per contract for everything else, including futures and options. The bill exempts trades in retirement accounts and those involving a mutual fund.

    Regarding the tax’s effect on trading costs, “this is an 800 percent increase on the traders that trade on our exchange today,” Duffy said. “Would they move their business? Absolutely.”

    Duffy said CME has the flexibility to leave the state, skirting the tax. CyrusOne Inc. recently agreed to buy the company’s primary data center just outside Chicago -- the facility where the exchange in essence now lives. CME is now allowed to use any of CyrusOne’s data centers. “If we need to leave Illinois because of any irrational decisions coming out of the state legislature that could affect our business, we have 29 data centers to choose from,” he said.

    The impact of the tax proposed by the Democratic party is less clear. From Bloomberg (Baker and Voskuhl, 1 July 2016):

    “We support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets,” according to a draft released Friday of the proposed Democratic platform, a summary of goals the party wants to promote. “We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.”

    The proposal is a nod to the agenda of Democratic presidential candidate Bernie Sanders, and an effort to appeal to his supporters. The draft platform’s reference to “a broader financial transactions tax” echoes a proposal from the Vermont senator, who challenged Hillary Clinton for the party’s nomination but who now says he’ll vote for her.

    ...Exchanges and electronic traders argue financial transaction taxes would sap liquidity from markets because they would wipe out the already razor-thin profit margins on trading. A proposed trading tax in Europe appears doomed because of such concerns. Terry Duffy, the executive chairman of Chicago-based market operator CME Group Inc., recently called a plan to tax trades in Illinois “ridiculous.”

    For discussion:

    In your own words, summarize the opposing views related to taxing financial transactions. Which argument seems most reasonable to you? Why?

  • Brexit Impact on Currencies

    Following the announcement by the UK to leave the EU, every other currency in the world gained against the British pound (GBP). This infographics shows the gains by other currencies:

    You will find more statistics at Statista

    From the Washington Post (Ehrenfreund, 27 Jun 2016)

    The continued weakness signals global pessimism about the United Kingdom's economic prospects. Some analysts say the country could fall into recession, while others are predicting a stark rise in prices. The pound's sharp decline is also having immediate ripple effects around the globe, from the United States to China to Japan. The dollar is rising, which means U.S. exports will be less competitive; China is fixing its currency at a lower rate to stay competitive; and Japan, desperately trying to jump-start its economy, held an emergency meeting of top economic officials.

    For discussion:

    Why is the GBP weaker following Brexit? What impact is a weak currency likely to have on the UK? On the EU, the US, and China?