DOCSLIB.ORG

Investment Advice During Inflationary Periods with High Asset Price Inflation

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Investment Advice During Inflationary Periods with High Asset Price Inflation Investment advice during inflationary periods with high asset price inflation How to preserve your value and realize best possible return by investing in the right asset classes during periods of uncontrolled inflation and economical instability Daniel Wardzynski Supervisor: Dr. Emil Numminen Master’s Thesis in Business Administration, MBA programme Date of submission: 2011-06-17 ABSTRACT For the past few years, the world has gone through a global financial crisis, and is still on a quite unstable road to a sustainable economic future. While the governments are trying to cope with a stable inflation rate, investors grow weary and are looking more into precious metals. That is why I investigate the government stimulation as well as the precious metal investment sector in this thesis. The thesis is divided in two important parts. The purpose of the first part was to determine the impact of the United States government intervention, by deliberate injection of new money, through Quantitative Easing - QE, into the monetary system and money supply, during periods of unstable economy in order to control the inflation rate. The second part of the thesis advises on an investment strategy in precious metals during times of high asset price inflation. Research and data collection was performed through a vast review of relevant literature within both traditional and opposing economical theories, principles, and beliefs, along with theories related to general market efficiency and shrewd investment. The research is based on collected quantitative data and mathematical statistical methods. The result and conclusions tell us that one can safely assume that government intervention through injecting money into the monetary system and increasing the money supply does support higher stock values, especially gold mining stocks. Some of the main findings of this thesis are: A short explanation of different and often opposing economical theories that discuss the importance of money and inflation and how to prevent, through either deliberate control or not, an economical meltdown. A short empirical investigation of how the monetary injection programs, by the Federal Reserve, such as Quantitative Easing, impacts the general market, represented by the S&P 500 index. An important investment advice on how to invest during times when governments inflate prices and how the precious metals asset class, represented by the HUI index, are yielding higher profits while at the same time protecting investors wealth in an unstable economy. KEYWORDS: Federal Reserve, Fed, Inflation, Monetarism, Money, Milton Friedman, Ludwig von Mises, Irving Fisher, John Maynard Keynes, Ben Bernanke, S&P 500, SPX, Precious Metals, HUI, Gold Mining, Investment Strategy, Quantitative Easing, QE, Asset Price Inflation. ii ACKNOWLEDGMENTS I would like to thank my advisor, Dr. Emil Numminen, whose constructive criticism has helped raising the quality of this document. I would also like to thank all my teachers of this MBA program, life mentors and individuals who have inspired me to understand the world, its history, its global interconnectivity, different economy systems and its world implications and given me a new valuable perspective. Thank you as well, to my family members for you unconditional support. Finally, I would like to thank all the readers who I have specifically focused this thesis on and tried to make it as readable and interesting to all of you. I sincerely hope that you will find this thesis interesting and that it may open up a new perspective and interest for the world economy, our current situation and help you broaden your perspective with this new knowledge. Daniel Wardzynski The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. /Milton Friedman iii CONTENTS ABSTRACT ........................................................................................................................... ii ACKNOWLEDGMENTS ................................................................................................. iii FIGURES ................................................................................................................................ v 1. Introduction................................................................................................................... 1 1.1. Background ....................................................................................................................... 1 1.2. Problem Discussion ......................................................................................................... 1 1.3. Problem Development .................................................................................................... 3 1.4. Thesis Problem Formulation and Purpose ................................................................ 5 1.5. Limitations and De-limitations..................................................................................... 6 1.6. Thesis’ Structure ............................................................................................................. 7 2. Theory ............................................................................................................................. 8 2.1. Literature Review ............................................................................................................ 8 2.1.1. Monetarism ................................................................................................................................ 8 2.1.2. Monetary Inflation ................................................................................................................... 9 2.1.3. Irving Fisher Equation ......................................................................................................... 10 2.1.4. Quantitative Theory of Money .......................................................................................... 10 2.1.5. John Maynard Keynes and Central Banking ................................................................ 11 2.1.6. Quantitative Easing - QE .................................................................................................... 12 2.1.7. Market Portfolio & Diversification ................................................................................. 13 2.1.8. EMH – Efficient Market Hypothesis .............................................................................. 13 2.2. Theory Discussion .........................................................................................................15 3. Method ......................................................................................................................... 17 3.1. Importance of Scientific Methods ..............................................................................17 3.2. Data Collecting Methods Used ...................................................................................17 3.2.1. Quantitative or Qualitative ................................................................................................. 18 3.3. Quantitative Data ..........................................................................................................18 3.4. Analysis Methods Used ................................................................................................19 3.5. Data Types Used ............................................................................................................20 3.6. Index .................................................................................................................................20 3.7. Trend ................................................................................................................................20 3.8. Pie Charts ........................................................................................................................21 3.9. Bar Chart ........................................................................................................................21 3.10. Correlation ......................................................................................................................21 3.11. Significance Testing ......................................................................................................22 3.12. Sharpe Ratio ...................................................................................................................22 4. Case Description ........................................................................................................ 23 4.1. Standard & Poor’s - S&P 500 Index and its Constituents .................................23 4.2. Amex Gold BUGS - HUI Index and its Constituents ............................................25 4.3. Quantitative Easing vs. the S&P 500 Index ............................................................26 4.4. Market Portfolio vs. the Gold Mining Shares ........................................................27 5. Analysis........................................................................................................................ 29 5.1. Asset Price Inflation ......................................................................................................29 5.2. Investment Strategy ......................................................................................................30 iv 6. Empirical Findings and Results ............................................................................
Load more

Recommended publications
  • Another Housing Bubble? a Review of Historical Indicators and Analysis of the Current State of the U.S
    Another housing bubble? a review of historical indicators and analysis of the current state of the U.S. residential real estate market Item Type Honor's Project Authors Harnaga, Brandon J. Rights Attribution-NonCommercial-NoDerivatives 4.0 International Download date 30/09/2021 12:01:37 Item License http://creativecommons.org/licenses/by-nc-nd/4.0/ Link to Item http://hdl.handle.net/20.500.12648/1885 ANOTHER HOUSING BUBBLE? 1 Another Housing Bubble? A Review of Historical Indicators and Analysis of the Current State of the U.S. Residential Real Estate Market Brandon J. Harnaga State University of New York at New Paltz Author Note A Thesis Presented to the Honors Program of the State University of New York at New Paltz in Candidacy for Graduation with Honors on May 6th, 2021. Advised by Professor Michael Sheridan. ANOTHER HOUSING BUBBLE? 2 Abstract The purpose of this paper is to investigate the current state of the United States residential real estate market along with its historical indicators. This study will address questions including: why the housing market is important, what housing bubbles are, and how today’s asset-price inflation is a cause for concern. Moreover, subsequent sections will attempt to address these questions by analyzing the history of gathering market data, discovering the “fundamental values” that influence home prices, and identifying which of those variables were responsible for the past housing bubble. Once these variables were identified, numerous multiple linear regression models were calculated between the periods 1994—2004, 1994—2007, 2008—2018, and 2008—2021 to determine if the run-up period to a potential bubble causes these fundamental values to become less influential in determining home prices.
    [Show full text]
  • Understanding Asset Prices: an Overview 2006 Autumn Meeting of Central Bank Economists by Peter Hördahl and Frank Packer
    BIS Papers No 34 Understanding asset prices: an overview 2006 Autumn Meeting of Central Bank Economists by Peter Hördahl and Frank Packer Monetary and Economic Department March 2007 The views expressed are our own and do not necessarily reflect those of the central banks that were represented at the Autumn Meeting of Central Bank Economists on “Understanding asset prices: determinants and policy implications” or the Bank for International Settlements. Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2007. All rights reserved. Limited extracts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 92-9131-741-1 (print) ISSN 1682-7651 (online) ISBN 92-9197-741-1 (online) Abstract This paper reviews analytical work carried out by central banks that participated at the Autumn Meeting of Central Bank Economists on “Understanding asset prices: determinants and policy implications”, which the BIS hosted on 30–31 October 2006. The paper first discusses some general properties of asset prices, focusing on volatilities and co- movements. It then reviews studies that look at determinants of asset prices and that attempt to estimate a fair value of assets. The next part of the paper focuses on research that aims at measuring the impact of changes in asset wealth on the real economy.
    [Show full text]
  • The Recent Crisis: Lessons for Islamic Finance
    Munich Personal RePEc Archive The Recent Crisis: Lessons for Islamic Finance Mirakhor, Abbas and Krichene, Noureddine 2009 Online at https://mpra.ub.uni-muenchen.de/56022/ MPRA Paper No. 56022, posted 20 May 2014 18:33 UTC The views expressed in this publication are those of the author(s) and not necessarily the views of the Islamic Financial Services Board (IFSB). The publication is available for download from the IFSB website (www.ifsb.org) . Islamic Financial Services Board 2009. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited. Contact information: Islamic Financial Services Board 3rd Floor, Block A, Bank Negara Malaysia Building, Jalan Dato’ Onn, 50480 Kuala Lumpur, Malaysia Tel : + 6 03 2698 4248 Fax : + 6 03 2698 4280 Email : [email protected] ISBN : 983-44579-1-4 ABOUT THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB) The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The standards prepared by the IFSB follow a lengthy due process as outlined in its Guidelines and Procedures for the Preparation of Standards / Guidelines, which involves, among others, the issuance of exposure drafts, holding of workshops and, where necessary, public hearings. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research / educational institutions and market players.
    [Show full text]
  • Nber Working Paper Series What Explains House Price
    NBER WORKING PAPER SERIES WHAT EXPLAINS HOUSE PRICE BOOMS?: HISTORY AND EMPIRICAL EVIDENCE. Michael D. Bordo John Landon-Lane Working Paper 19584 http://www.nber.org/papers/w19584 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2013 Paper prepared for the 17th International Conference on Macroeconomic Analysis and International Finance Rethymno, Crete from May 30 to June 1, 2013. The authors would like to acknowledge the excellent research assistance provided by Antonio Cusato during this project. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Michael D. Bordo and John Landon-Lane. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. What Explains House Price Booms?: History and Empirical Evidence. Michael D. Bordo and John Landon-Lane NBER Working Paper No. 19584 October 2013 JEL No. N1 ABSTRACT In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with house price booms. Using a panel of 11 OECD countries from 1920 to 2011 we estimate a panel VAR in order to identify shocks that can be interpreted as loose monetary policy shocks, low inflation shocks, bank credit shocks and house price shocks.
    [Show full text]
  • If Anything Goes Wrong Re-Reading Minsky After the Great Recession
    RESEARCH NETWORK MACROECONOMICS AND MACROECONOMIC POLICIES (RNM) 13 th Conference The world economy in crisis - The Return of Keynesianism? Berlin, 30-31 October 2009 If anything goes wrong Re-reading Minsky after the Great Recession First draft: not for quotation Riccardo BELLOFIORE Department of Economics, University of Bergamo Joseph HALEVI Department of Political Economy, University of Sydney Marco PASSARELLA Department of Economics, University of Bergamo SHORT ABSTRACT : The ‘Financial Instability Hypothesis’ of Hyman Philip Minsky interprets the ‘world we live in’ as an intrinsically unbalanced system. This hypothesis worked well enough until the 1980s, but nowadays it must be changed to take into account the capital market inflation and the birth of a ‘new’ capitalism in the USA in the 1990s – two faces of the ‘money manager capitalism’. The aim of this paper is just to redefine Minsky’s original hypothesis by means of a multi-sector analysis, considering explicitly the different evolution of the financial structures of corporate sector, households and financial business. JEL CLASSIFICATION CODES: E12; E32; E44. KEYWORDS : Financial Instability Hypothesis; Money Manager Capitalism; Capital Market Inflation. Bellofiore-Halevi-Passarella: If anything goes wrong Introduction (extended abstract) The ‘Financial Instability Hypothesis’ of Hyman Philip Minsky interprets the ‘world we live in’ as an intrinsically unbalanced system marked by the alternation of speculative waves and the risk of a debt deflation. The ‘world we live in’ is a capitalist economy with expensive and long-lived capital assets and with a complex financial structure. Minsky’s approach is summarised in section 1 of the paper. In this setting, tranquil growth opens the way to speculative attitudes and structures and these latter, in turn, lead to the global financial vulnerability and then to the open crisis.
    [Show full text]
  • 15 the Financial Crisis and the Great Recession
    15 The Financial Crisis and the Great Recession The financial crisis that commenced in 2007 and its aftermath have been widely referred to as the “Great Recession”—and with good reason. From its beginning until its nadir in 2009, it was responsible for the destruction of nearly $20 trillion worth of financial assets owned by U.S. households. During this time, the U.S. unemployment rate rose from 4.7 percent to 10 percent (not counting the discouraged and marginally attached workers discussed in Chapter 7). By 2010, college graduates fortunate enough to find a job were, on average, earning 17.5 percent less than their counterparts before the crisis—and experts were predicting that such a decline in earnings would persist for more than a decade. The crisis also spread beyond U.S. borders. As consumption and income declined in the United States, many countries experienced a significant reduction in exports as well as a decline in the investments that they held in the United States. As a result, global GDP declined by 2 percent in 2009. It has been estimated that between 50 million and 100 million people around the world either fell into, or were prevented from escaping, extreme poverty due to the crisis. Why did this happen? Why were its effects so long-lasting? What lessons can be learned for the future? These are complicated questions to which this chapter provides some answers. 1. PRELU D E TO A CRISIS In retrospect, perhaps it is not difficult to see that something “big” was going to happen.
    [Show full text]
  • Impact of Expansionary Monetary Policy on Asset Purchasing Power
    INTERNATIONAL JOURNAL OF ACADEMIC RESEARCH IN ACCOUNTING, FINANCE AND MANAGEMENT SCIENCES E-ISSN: 2225-8329 Vol. 1 1 , No. 3, 2021, © 2021 HRMARS An Analysis on Asset Price Inflation: Impact of Expansionary Monetary Policy on Asset Purchasing Power Ahmet Rutkay Ardogan, Remzi Can Yilmaz To Link this Article: http://dx.doi.org/10.6007/IJARAFMS/v11-i3/10356 DOI:10.6007/IJARAFMS /v11-i3/10356 Received: 05 June 2021, Revised: 08 July 2021, Accepted: 27 July 2021 Published Online: 20 August 2021 In-Text Citation: (Ardogan & Yilmaz, 2021) To Cite this Article: Ardogan, A. R., & Yilmaz, R. C. (2021). An Analysis on Asset Price Inflation: Impact of Expansionary Monetary Policy on Asset Purchasing Power. International Journal of Academic Research in Accounting Finance and Management Sciences, 11(3), 33–47. Copyright: © 2021 The Author(s) Published by Human Resource Management Academic Research Society (www.hrmars.com) This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode Vol. 11, No. 3, 2021, Pg. 33 - 47 http://hrmars.com/index.php/pages/detail/IJARAFMS JOURNAL HOMEPAGE Full Terms & Conditions of access and use can be found at http://hrmars.com/index.php/pages/detail/publication-ethics 33 INTERNATIONAL JOURNAL OF ACADEMIC RESEARCH IN ACCOUNTING, FINANCE AND MANAGEMENT SCIENCES E-ISSN: 2225-8329 Vol.
    [Show full text]
  • Magdoff-Sweezy and Minsky and the Real Subsumption of Labour To
    1 Magdoff-Sweezy and Minsky and the Real Subsumption of Labour to Finance By: Riccardo Bellofiore Università degli Studi di Bergamo Research Associate in the History and Methodology of Economics Group at the Faculty of Economics and Econometrics University of Amsterdam [email protected] And: Joseph Halevi University of Sydney et Université de Picardie, Amiens [email protected] 1. Monopoly capital and stagnation: the condition for the new forms of financial growth: Magdoff-Sweezy and Minsky In the late 1970s a slim book was published containing the essays by Harry Magdoff and Paul Sweezy (1977) in Monthly Review. In it the authors argued that US capitalism was characterized by stagnation and indebtedness, the latter overwhelmingly on the private side. The central issue they raised was that banks where skating on thin ice. For Magdoff and Sweezy there was a connection running from monopoly capitalism to indebtedness. In a nutshell, the regime of oligopolistic capitalism generates a built in tendency towards unused capacity. The ensuing deficiency in effective demand relatively to the productive potential compels the private sector to rely on a growing debt. The central piece of that collection was a quite technical paper on the economics of banking which, with the benefit of the knowledge of what happened since those years, appears as remarkably far-sighted (“Banks: skating on thin ice”, in Magdoff and Sweezy, 1977). The essay showed how the expansion of lending was not the result of optimistic buoyancy regarding the economy, because growth rates had faltered. Rather, increased lending became the instrument to make money by gambling on the future capacity of the loans to be repaid despite liquidity constraints and the fact that the time needed for implementing business investment in capital equipment, and for the returns to flow in, was longer than the repayment of loans.
    [Show full text]