For the first time in 10 months the Tenth Federal Reserve District is reporting factory production that is now net positive. The Tenth Federal Reserve District encompasses Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.
The Kansas City Fed released its manufacturing report on Thursday and claimed that “manufacturing activity showed signs of a rebound in June.” The report also shows that firms in the region have net positive expectations for future factory activity.
The net percentage of firms reporting month-over-month increases in production in June was 9, up from -3 in May and -6 in April. The positive production netted increases in both durable and non-durable-goods production plants.
(Source: Kansas City Fed – click to enlarge chart)
Additionally, over half of companies in the region are now reporting satisfaction with their inventory levels.
Large increases also registered in future factory activity indexes from May to June. The future production index rebounded from 1 in May to 13 in June. Sub-indexes for future shipments, new orders, and order backlog all jumped up.
This positive report from the 10th district follows a string of positive manufacturing reports from across the country. Last week the Philly Fed reported its highest activity reading since September 2008. On Tuesday the central Atlantic regional Fed report showed manufacturing advancing considerably faster in June over May. And a week from Monday there was good news lurking under the June headlines for NY’s empire index.
There is a fascinating article in The Economist about how the world of derivatives has shaped up through the crisis.
I often encounter misconceptions about hedging. The one line that summarises the issue is this: The job of a hedging strategy is to combat extraneous economic exposure. Let me focus on currency exposure as an example, though the basic idea works in all aspects of hedging. A good currency hedge is one which neutralises the effect of currency fluctuations on the NPV of profit.
I have seen four major mistakes in the way people think about hedging:
- Hedging seen as a way of eliminating currency risk in the translation of direct import/export proceeds. This is wrong because it’s an incomplete picture of what happens to the profits of a company when the currency moves. A lot of finance practitioners are confused on this subject, particularly in India where RBI rules have had mistakes on these things for decades. (While RBI staff made mistakes, that was no reason for currency hedging consultants and such like to also make the same mistakes).
- Hedging seen as a profit centre. This is wrong because the job of hedging is to eliminate exposure of the NPV of profit, not to make money. Suppose a company embarks on a currency hedging program. Half the time (ex-post) the hedge will appear to have made money and half the time (ex-post) the hedge will appear to have lost money.
For a company which has very big currency exposure, ex-post, half the time there will be massive cash losses on the currency hedge. If top managers, directors or regulators do not understand this correctly, it’s easy to jump into complaints about `massive losses on derivatives trading’. This emphasises the importance of seeing a hedging strategy and the economic exposure in an encompassing way. A person who closes out one element of an overall hedging strategy because that’s generated a lot of cash outflow in recent days is, well, wrong.
- Hedging away the core sources of profit. A refinery is a bet on the `crack spread’, the gap between the price of crude oil and the price of petroleum products. The shareholder and owners of a refinery are inexorably speculators on the crack spread. If you don’t believe that this spread will do well, don’t build a refinery. For a refinery, this is core business risk, this is the source of profit. It is not an extraneous economic exposure. To try to hedge away this exposure is not correct.
- Insecurities about imperfect hedges. Every now and then, a bright person complains that a proposed hedge has a substantial basis risk. The only perfect hedge is found in a Japanese garden. All realworld hedges are imperfect. The useful question is: Is an imperfect hedge better than no hedging?
The Economist article points out that with the upsurge in volatility, demand for derivatives has gone up, not down. Once most large firms of the world start doing balance-sheet scale hedging, derivatives positions will be much larger than they are today. The world needs bigger, not smaller, derivatives markets. We stumbled on our way to that world, and now have to figure out once again how we are going to get there.
In the world of OTC derivatives, firms face credit risk owing to contracts with banks and banks face credit risk owing to contracts with firms. In the good old days, these risks were mostly ignored, and OTC derivatives looked more attractive than exchange-traded derivatives (where posting collateral is unavoidable). Now, both sides are getting wary about what this involves. Banks have started charging higher prices for bearing this risk (either though a bigger price or through collateral requirement), and banks have started refusing to have exposures against certain firms. Both these phenomena should enlarge the footprint of exchange traded derivatives. All this flows logically but it was interesting seeing descriptions in the article about things actually shaping up this way.
On 25 June 2009 I was invited to the Cafe Libertalia to speak at a book club where I was given the latitude to choose the book for discussion. I picked What Has Government Done To Our Money And The Case For A 100% Gold Dollar by Murray Rothbard. This book is an easy to read foundation for the student of the Austrian school of economics. Therefore, I think everyone should get and read a copy.
What Has Government Done To Our Money is 119 pages while The Case For A 100% Gold Dollar is 61 pages. It is printed on archival quality acid-free paper and has a sleek cover. This book makes a great addition to any library.
WHAT HAS GOVERNMENT DONE TO OUR MONEY
This is a well done objective monetary history. It discusses how money developed, the rise of fractional reserve banking and the constant meddling by government in money and currency. A key reason governments meddle in the money and currency markets is because it is a source of funding.
The reader learns some some basics of history, government and economics such as the development of monetary names, benefits of money, a short discussion on legal tender application and an entire part on The Monetary Breakdown of the West.
THE CASE FOR A 100% GOLD DOLLAR
This is a persuasive essay on why a 100% gold Dollar should be adopted. This essay originally appeared in the out of print and hard to find In Search Of A Monetary Constitution by Leland Yeager and published in 1962 by the Harvard University Press. While the arguments Rothbard makes are sound; I do not really agree because of advances in information technology and monetary evolution over the past 47 years.
Four and a half decades ago there was no Fandango, online checkin for airplane flights, etc. So likewise there have been advances made in monetary application and I am of the opinion that private digital commodity currencies, like GoldMoney, provide the most efficient solution to the monetary chaos the world has found itself in.
WHO THIS BOOK IS FOR
What Has Government Done To Our Money And The Case For A 100% Gold Dollar by Murray Rothbard is a quick and easy read divided into two main portions. I think the objective presentation of monetary history is a good read for anybody. The persuasive essay is a good read to for anyone who wants to stimulate their analytical capacities but keep in mind it is obsolete. Therefore, I think everyone should get and read a copy of this book.
You can get a free digital copy from the Mises Institute or purchase a physical copy from Amazon.
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