Category Archives: Original Articles

Economics and Investments: Analyzing related investments

This post is concerning the importance of related investments, in a series of posts that will cover topics such as forms of investments, strategies and methods. If you have a specific request, email us at econsoc@uwaterloo.ca.

In economics, we learn about elasticity in several different forms such as price elasticity of demand, income elasticity of demand, elasticity and cross-elasticity of demand. In analyzing the elasticity of a certain commodity, we evaluate how influential a factor is in determining the new price or demand of the commodity. These concepts are key to understanding the effects that take place in the marketplace. George Liu wrote an important article regarding the influence of NAFTA to our economy that can be found here.

Cross-elasticity of demand explains that a rise of a substitute in consumption will result in an increase in the demand of the commodity. For example, if the price of windows laptops increase, it is likely that the demand for Macbooks will increase. Likewise, if a price of a complement decreases, the demand will increase for the related commodity. For example, if the price of ketchup decreases, the demand for hamburgers will increase.

On a micro-economic level, investors should look for similar relations. For example, if an investor expects Apple to release a new, revolutionary iPhone with an huge increase in sales, while the AAPL stock may be too expensive for the investor, an investment in a related company may be suitable. An example of this is Zaggs, a company that specializes in making screen protectors for smartphones, or Speck Products, a company that makes several different designs for iPhone cases. Likewise, if AAPL’s new phone will be taking a huge portion of sales then it is likely that the stock in competitors such as Samsung and LG will go down.

From a macro-economic stance, the effects on things such as trade agreements and government policies heavily influence the market. For example, if the government encourages further immigration, it is likely the real estate market will experience further growth.

If the stock of one competing company increases, it is likely the stock of a related company will decrease.

It is important for investors to look for relations between different investments, as well as the overall market to finding the best value and understanding why a certain investment is going up or down.

Feel free to email us at econsoc@uwaterloo.ca or me personally at arracher@uwaterloo.ca for any questions or concerns.

The Importance of NAFTA’s Economic Influence

The North American Free Trade Agreement (NAFTA) was implemented in 1994, almost 23 years ago. The agreement was negotiated between Canada, United States, and Mexico to eliminate the majority of tariffs between the countries and to promote the trade of manufacturing, agriculture, and more. Canada and the United States exchange $750 billion each year in trade, with Canada being the largest trade partner to the U.S. The trilateral trade between the countries in 2015 had exceeded USD$1 trillion [1]. NAFTA is arguably the most important trade agreement for Canada and is credited for increased economic growth, investment opportunities, job growth, and much more.

However, with the successful election campaign of President-elect Donald Trump, the fate of NAFTA is now in the spotlight. It is no denying that the trade agreement between our three countries has an enormous economic impact, however Trump and others like him have been very vocal against the agreement, believing it has a negative effect on their economy. While we wait for the governments to discuss NAFTA’s fate, here is why it benefits Canada and the other countries:

NAFTA creates jobs: Many people argue the opposite, that free trade will shift jobs to places that have cheaper labour and production costs, leading to the loss of many jobs where they live. It is true that corporations will make changes to lower costs of production, however jobs are also created in the export industry. In Canada, 5.2 million net new jobs were added during 1993-2015 and one in five jobs are related to the exports industry (Statistics Canada). High skilled jobs will not be as affected by lower minimum wages and increasing the export destinations with lower tariffs creates higher demand for these products. Companies also profit from lower costs, allowing domestic companies to expand operations, potentially increasing their workforce.

Increased investment opportunities: NAFTA has helped influence Canada as an attractive destination for foreign investment. Investments from the United States into Canada in 2015 was CA$387.7 billion and the investments from Canada to the other NAFTA countries was CA$463.3 billion [2]. Many of the provisions set by NAFTA require fairness and transparency for investors. The agreement also sets out to protect intellectual property rights, allowing companies to enact legal action and reducing the risks when investing in another NAFTA country [3]. Greater investment opportunities will boost employment and productivity, positively affecting economic growth.

Lowering tariffs and consumer prices: The decrease of tariffs as a result of NAFTA incentivized trade between the three countries. Tariffs have the effect of increasing costs of imported goods and as a result causes lower consumption demand. Free trade allows Canadians to purchase more American and Mexican goods, many of which we depend on, such as oil, manfactured goods, food, and more. Cheaper prices improve the welfare of individuals and households, allowing people to afford basic living necessities as well as products that can improve quality of life.

There are other factors like reducing government spending, improved government relations between member countries, improved industry integration (Ex. automotive manufactoring), and more. All of these factors contribute to improving economic growth in each of our member countries. NAFTA affects everything from the day to day products we consume to the jobs we work. There are also many arguments people can make against the agreement, and that is important as well. It is important to consider the pros and cons of NAFTA before making any decision on changing or removing it.


[1] http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/facts.aspx?lang=eng
[2] http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/info.aspx?lang=eng
[3] http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/text-texte/17.aspx?lang=eng

Economics and Investing: Making money regardless of where the market is heading

This is post one concerning the different types of investments, in a series of posts that will cover topics such as forms of investments, strategies and methods. If you have a specific request, email us at econsoc@uwaterloo.ca.

Economics covers a very broad range of categories and ideas, one of which being: investing. It is first important to know about the different factors that economics has on the market, both on a micro and macro scale, as well as the many different forms of investments. (See different forms of investments here: http://uweconsoc.com/economics-and-investing-basics/)

One common misconception involved in investing is the belief that markets have to be doing well in order to make money. This is not true. While I, and most people hope that our economy as well as the global economy is growing and more jobs are being created, it is important to know that you can make money even if the market fails. This is exemplified in the movie, “The Big Short,” for example.

Trading currencies tend to be an effective and relatively low-risk method of protecting your assets. If for example you feel that a new policy will cause the Canadian dollar to drop significantly, you may want to transfer some of your Canadian currency into a traditionally stable market such as the United States, Norway or simply investing in another asset such as gold. Likewise, if you feel that the Canadian dollar is on the rise, you may transfer your other assets and foreign currencies into more Canadian dollars.

There are many different methods of investing throughout the various stages of the business cycle, however, I will largely be focusing on longing and shorting stocks.

“Longing” stocks is the term that describes how we traditionally view investing. The basic idea of longing a stock, is to purchase a share, or multiple shares in a given company and predicting that the value of share will go up in the long run, where you can sell it for a higher price and profit the difference. This is the most common form of trading stocks. Popular markets and market determinants such as DOW Jones, TSX, NASDAQ, NYSE have demonstrated that longing is an effective method, as these markets have grown over the long run. There are of course exceptions, for example, the technology industry may be growing, yet companies that specialize in selling VCR’s and VCR machines will be losing value in their stock. Likewise, the energy market may be falling yet there will be exceptions. Another benefit of longing a stock instead of shorting it is the fact that the most amount of money one can lose from investing is the money they put it. For example, if you purchased one stock at $40 and in the very unlikely scenario they become bankrupt and the value of the stock plummets, the most you can lose is $40. Longing stocks are a popular and effective method of making money over the long run, especially with a diversified portfolio.

“Shorting” stocks, is essentially betting on a particular stock to go down in value, for supply to exceed demand. How this works is, through your broker you sell someone else’s share in a company, or multiple shares, for the current price (let’s use $40 as an example) then buy back the stock at a new price and pay the former owner back their stock. The goal is to sell the stock for more than you buy it for, for example, sell it at $40, buy it back at $20, make $20 profit. This can be a very effective trading method in a falling market or industry. However, shorting is not as popular as longing stocks for a few reasons. One is that traditionally markets have been growing over time. The more common fear though is the unlimited risk involved with shorting stocks. While in longing, you can only lose what you invest, which would be $40 in the example above, in shorting, you must eventually pay back the stock regardless of the new price. So, if in our example above, the $40 stock rises to $4000, you will lose $3960 on the trade at the minimum. Shorting is still an attractive option if you see an almost definite downgrade in a stock, for example, an accounting scandal just being reported in the media for a specific company.

It is important to keep in mind that an investor should remain disciplined and diversified regardless of their trading method.

I hope that clears up some of the more basic forms of investments, stay tuned for more information and strategies in the following weeks. Feel free to email us at econsoc@uwaterloo.ca or me personally at arracher@uwaterloo.ca for any questions or concerns.

The Federal Reserve decision on interest rates

This Wednesday, the Federal Reserve announced that they will not be increasing the federal funds rate at this time. The Federal Reserve downgraded the economic growth forecast to a projected 1.8% this year.

The decision did not come without debate as three Federal Reserve officials chose to cast dissenting votes. Esther George, Loretta Mester, and Eric Rosengren all voted no on keeping the interest rates steady, instead suggesting to raise rates immediately. The hesitations seen with the Fed on raising interest rates and the dissenting votes from high level officials may add up to a loss of credibility in the future.

On the topic of wages, Ms. Yellen stated there has been “some modest pickup in wage growth”. This reflects last week’s Census Bureau report which showed U.S. Household Incomes increasing 5.2% in 2015. The productivity growth rate has been low, with the outlook remaining it will stay at a low level. However, due to the continuing rise in job-market growth, concerns with productivity may be offset.

Ms. Yellen stressed that the lack of a rate raise does not mean a lack of confidence in the economy. The Feds is hoping that keeping the rates unchanged will allow for further improvements in the labour market. She further mentioned that the committee has agreed the employment rate is almost at a sustainable rate (long run) and they are looking to raise the inflation goal to 2%.

It is possible that the Feds will decide on raising interest rates in December, however there are numerous factors in that decision and it is possible they may not raise interest rates this year at all. If however the Federal Reserve does decide to raise interest rates in December, Canadians may be affected with a stronger U.S dollar value and see the value of  the Canadian dollar decrease. A lower Canadian dollar may be good news for exports, however consumers may be at a disadvantage shopping across the border. It is also unlikely for the Bank of Canada to follow the Fed’s decision as the Bank of Canada’s governor, Stephen Poloz, announced this Tuesday to expect the low interest rates in Canada to remain for a long time.

Source:
http://www.wsj.com/livecoverage/federal-reserve-september-meeting 
http://money.cnn.com/2016/09/21/news/economy/federal-reserve-september-meeting/