October 14, 2014

ASEU MBA Statistics: Lecture 2

Dear MBA Students of Statistics,

Your second lecture is now online. Download here.

Have fun.

October 12, 2014

AU Statistics: Lecture 3

Dear AU Students,

Your third lecture is now online. Download here.

October 9, 2014

AU Statistics: Lecture 2

Dear Students of Statistics,

Following a delay caused by national holidays (and a lot of mojitos), I am uploading the second set of your slides. Download link here.

This Friday, we are reviewing basic probability theory. Buckle up for an awesome ride.

September 30, 2014

ASEU MBA Statistics: Lecture 1

Dear MBA Students at ASEU,

Your first set of slides from today is online. Download it here. We will continue with the discussion of dispersion (variance and standard deviation) next week.


ASEU MBA Statistics: Intro

Dear MBA Students of Azerbaijan State Economic University,

Welcome to your graduate-level course in statistics. Please find attached here your tentative syllabus. Pay special attention to grading.

The first lecture slides will come in the next post.

September 26, 2014

AU Statistics: Lecture 1

Dear Students of Statistics (Azerbaijan University edition),

Here is your first set of slides.

Have fun and enjoy the weekend.

AU Statistics: Introduction

Dear Students of Statistics (Azerbaijan University edition),

Welcome to Statistics for Business. You will have access to your course syllabus, all the slides, and other educational material through this Blog. On the right, you should see a section "Teaching" and the links to your course stuff which look like this: "AU Statistics: ...".

I will post the first set of slides in the next post. For now, you can find your Syllabus here.

Pay attention to how you will be graded.

September 12, 2014

China: Setting for Rate Cuts

In June 2012, People’s Bank of China cut the benchmark interest rate twice for the total of 60 bp (Figure 1). The underlying macroeconomic reasons were, probably, the pass-through from the slowdown in global (U.S., EU and Emerging Asia) demand for the Chinese goods. The key indicators for the Chinese economy are domestic manufacturing and industrial output, trade activity, inflation, the housing market, and exchange rate stability. The latter is rarely overly relevant, which leaves four main indicators which usually lead to a monetary intervention. So, in June 2012, the following events took place:

1.       Manufacturing Purchasing Managers’ Index (PMI) (Figure 2) at dangerous levels of just above 50, a key leading indicator for China. The index later dropped to a below-50 level, which indicates a contraction in the sector but later recovered (with a time lag) following the PBC intervention.

2.       Inflation below 3% (Figure 3), giving room for maneuvers for the Central Bank to boost liquidity through either lowering the key policy rate or decreasing the reserves requirement for banks.

3.       Housing market price deflation (Figure 4). This means domestic home-buyers begin to postpone house purchases with expectations of further price declines in the future. This naturally triggers a downward spiral and can cause a deflationary recession in the extreme. The housing market accounts generally for about 15% of the Chinese GDP.

4.       Capital net flow of -$517 HML (Figure 5) in the preceding quarter, providing not nearly enough support from foreign trade to maintain growth, especially given the politically sensitive GDP Growth expectations.

And now we fast-forward to September, 2014:

1.       Housing market is on the decline and the pace of the decline since the start of the year is much steeper than in 2012. House prices are approaching the critical point of 0% - the inflection point – after which PBC is expected to intervene with certainty

2.       Manufacturing PMI, at 51, is approaching its historically critical point of 50

3.       Capital flows are at a similarly negative level to Q2-Q3 of 2012, offering little support for the 7.5% growth target

4.       Inflation rate even lower than in 2012, now stands at 2%

5.       PBC has already provided $81 of liquidity on Sep 12, 2014, as a potential hint at a looser stance in the future. Officials cite the usual liquidity shortages by Chinese banks in the last quarter, but we believe that this is due to the disappointing growth figures earlier this year

The underlying factors driving the September 2014 downturn are somewhat similar to the 2012’s case: worse than expected recovery from the Eurozone, less demand for the Chinese exports. But there are two relatively new dominant factors which are driving the trends at the moment. First, institutional crackdown on foreign corporations which can cause a negative hit at FDI inflows into the economy and spill over the domestic investment climate. Second, rising labor costs (wages) which devours the cost-based competitive advantage.

Based on the analysis above we believe that it is increasingly likely that the PBC will cut the baseline interest rate by the end of 2014 – early 2015 at the latest. The Eurozone struggles are offering support for this recommendation. The US rate hike decision is unlikely to affect our view significantly – a more dovish than expected narrative will prevent further USD appreciation, and thus a likely depreciative pressure on the Renminbi; a more hawkish than expected position by the FED won’t change the domestically driven trends of the events.

Therefore, we recommend to buy 2-year duration Chinese bonds and select investment-grade credit. We are more upbeat on domestic debt and are reasonably bullish on sovereign debt.

Figure 1



 
Figure 2

 
Figure 3


Figure 4


Figure 5


August 16, 2014

Tottenham Hotspur (Lack of)-Economics

Tottenham Hotspur (a football team in the English Premier League) is a perfect example of a demand-driven recession. Two seasons ago, TH sold their best player Gareth Bale to Real Madrid for close to 100 mln. euro, making him the most expensive player in the world. They had more than enough cash to replace Bale and then some. The supply of resources was (and is) clearly there, as the team was sitting on a 9-digit pile of cash. Instead of buying quality talent like Arturo Vidal, Mesut Ozil, Falcao, they brought in sh*tty young and dirt-old players (except for Lloris and Erickson whose 8 mln. price was a joke) who are yet to establish themselves. TH bought in total 13 players since the Bale sale, and have failed to finish in the Top 4 despite the ample resources. 

The problem lies, of course, on the demand side of the equation. No serious player (like the aforementioned Vidal or Ozil or Falcao, or Cavani) in his sane and sober state of mind would agree to join the Hotspur. The supply is there, but there is little demand for TH from the players' side. Exactly the same situation dragged us into the liquidity trap - banks and other financial institutions sat on billions of dollars looking for projects to invest in. The suppy was and is there. What the economy lacked is sufficient market demand and network trust. Nobody serious wants to play for Tottenham, since nobody seriously trusts their Top 4 ambitions. Nobody wants to invest in risky projects (that could speed up growth), since people still haven't recovered the trust in the financial system. Basically, Tottenham is in a liquidity trap ("attracting normal football players" trap) and Daniel Levy is Alan Greenspan.

#ArsenalFCfan

July 5, 2014

Home and Dowry Foundation - A Financial Plan

Marriage is an extremely important event for Azerbaijanis. For some reason, when a girl is born her parents are already looking for suiting husbands and are contemplating her engagement ceremony. [Sidenote: as far as I heard, in countries like Pakistan the situation is yet more serious - families collect and preserve golden things from the moment of a girl's birth until her marriage, thus preparing her dowry]. Personally, I would be dreaming of seeing my children graduate from a good university or establish themselves as reknown practicioners and experts of some interesting field. The people are so obssessed about marriage that literally the first question that a young male and especially female get asked at any sort of social and/or family gathering is "are you still single?" With the key word being, of course, "still". Being 21 and single for a female is strange. Being 25 and still single is a catastrophe of intergalactic proportions. I have complained about these short-mindended presumptions in earlier posts and this isn't really the point at the moment.

Being an economist, my brain operates strictly in the Samuelsian demand-supply paradigm. If the issue of marriage is so cared for in the region, why not exploit this demographic trend with a proper financial motive? I propose to establish a "Home and Dowry Foundation" which will solve all of the people's problems. The entity will operate as a mutual fund. They already have such vehicles for education-related savings. So, why not structure a similar instrument for marriages?

When a boy is born, caring parents instantaneously plan on purchasing him a home as a gift for his marriage so he can move in with his fiancee/wife. This is a substantial financial investment for families of all financial strata, let alone of the developing world. What the parents do is as soon as the baby boy is born, they register at the Home and Dowry Foundation (HDF) and sign an 20-year contract, assuming that marriage won't happen until then. After 20 years they receive a brand new apartment (withouth furniture, which will naturally be provided by the female side of the marriage arrangement, and can also be financed by the HDF). In return, one of the parents or legal guardians obliges to not leave the country for more than 3 months at a time (except for emergencies) and not change citizenship during the 20-year period.

Upon registration of 1000 babies (for example), the Fund is now in de facto possession of 1000 parents who promised to reside in the country for 20 years - reside, consume, pay taxes, etc. Macroeconomically, this is a very nice arrangement that prevents unwanted labor and population migration. Each baby provides no principal at the start of the contract. In return, the parent/guardian which promised to reside for 20 years, promises to contribute 10% of his monthly salary to the pool. The transactions can occur automatically, like the ones for pension contributions. Assuming a 1000$ monthly wage, the parent contributes 100 per month, 1200 per year, totalling $24000 after 20 years. It is nowhere near the average price for a decent apartment. Considering the 1000 babies in a basket, we have $24,000,000 of total monthly contributions over the 20-month period. The Fund invests contributions, earning a compound interest of, say, 8% with single annual compounding, yielding $59,307,505. These are fairly conservative assumptions, and under positive scenarios the interest gain from capital markets can reach 10% if invested in stock and with favorite macroeconomic conditions. So, with $60 mln, each 18 year-old teenager is entitled to roughly $60,000. The kick is that there is usually a huge difference in apartment prices on a retail (single purchase) and wholesale (building the whole block) level.

With the $59.3 mln, the Fund needs to provide 1000 apartments for the 1000 members if the given basket. On the retail level, each member would have bought an apartment for around $60,000. But the Fund can take advantage of the economies of scale and actually purchase land, build the apartment blocks, and thus save a lot of money for itself (and for the contributing families as well). Now I can speculate that to build an apartment block in Baku, Azerbaijan, one would need land and the actual building. Comparing to comparable prices in London, a piece of land suitable for a large block would cost $2 million. Further $2 million are needed for building design, erection, worker wages, materials, etc. Consider a 20-storied building with 4 flats per floor, yielding 80 flats. Let's build 13 of them, leading to 1040 flats.

So we end up with the required 1000 flats in 13 buildings of 20 stores high, 4 flats per floor, and each building costing $2 million per construction and further $2 million per land purchase. We have spent $52 million. Out of the remaining roughly $7 million, say that $2 million were spent on other expenses during the project - taxes, construction permit, etc. About $5 million remain in pure profits for the Fund. This is about 8.5% of the total amount of $59 million. The same mechanism works for the female side of the marriage arrangement. When the girl is born, parents are planning on purchasing dowry for her future house - furniture, gold, utensils, etc. Maybe not as expensive as purchasing an apartment, but this is also a significant investment. The Fund can collect, invest, and purchase dowry on wholesale level, thus satisfying each participant's needs and maybe even make a profit in the meantime.

The morale of the post is that demographics and people are very important. Their beliefs, traditions, expectations form their consumption and saving behavioral patterns, and thus affect the macro-financial environment and asset prices. Our job is to monitor and locate important demographic trends, design the required economic and financial instruments, and ultimately provide the supply for the demand.