Saturday, August 16, 2014

Back to the Future: Russia threatens price controls in the face of Economic Sanctions. We know how this will work out.

Predictable consequences are playing out in the economic sanctions world---with more to come:.

Russians already hurt by Western food import ban

Russians are already paying a price — literally — for the ban on food imports from Europe and the United States that Russia imposed last week to retaliate for American and European economic sanctions.
Suppliers and consumers are facing shortages and price hikes on staples such as fish and fruit, as well as gourmet items such as Italian Parmesan and French Brie cheese.
Suppliers have raised prices for some fish by 20-36%, one of Russia's biggest retailers, X5 Retail Group, complained to Russia's government, the Kommersantbusiness daily reported on Wednesday. Suppliers reported shortages and higher prices for fruit, retailers braced for milk prices to go up, and some meat suppliers were engaging in price speculation, Kommersant reported.
Russia's Central Bank warned last week that the sanctions are likely to increase an already rising inflation rate. Even so, Russia's government has pledged that prices will not go up as a result of the import ban, promising that the Federal Anti-Monopoly Service will check reports of suppliers raising prices.
In the worst case, the government could resort to price controls, Kommersantreported.
Should Russia enforce price controls one unintended BUT predictable consequence would be the rise of Black Market activity.  Russians are used to this--they just need to brush off the rust from the old Communist days.

Below I explain the economic theory/rationale behind the rise of Black Market activity in face of Government policy to control prices.  Let me know what you think. Thanks.

Friday, August 15, 2014

George Soros is "short selling" the US market. A quick Lesson on "Short Selling"

There is an article in Business Insider today on Billionaire George Soros and how he is "short selling" a collection of stocks in the US market.

Most people buy stock in a company with the expectation the price will increase, or appreciate, in value. This is called "going long" on a stock.  Buy Low, Sell High.

However, there is a stock trading technique call "going SHORT" on a stock. Also known as "Short Selling". This means you anticipate the price of the stock will go DOWN.  Buy High, Sell Low. The defintion of "Buy" in short selling is misleading at best.  But it is a way of making money when the price of a stock goes down.

Go here for a more technical explanation of Short Selling.  Below I give a most elementary, non-technical explanation of how this works.  If you are not familar with the trading technique it might help you when you start looking into the complexities of short selling.  Gotta walk before you can run!

Short Selling a stock:
I borrow 100 shares of stock you own in "XYZ Inc". Right now those shares are worth $10.00 each.  Let's say I pay you $50.00 up front as a fee to do so AND I PROMISE to return those shares to you whenever you want them back. 
I take those shares and immediately turn around and sell them. I now have $1,000 in my bank account. 
Let's say the stock price goes down to $5.00. You freak out and want your shares back so you can sell them and take your losses. You come to me and demand your 100 shares back. 
Well, I do not have them anymore!  So, I have to go out and buy 100 shares at $5.00 per share. I am sure there will be plenty of sellers as the stock price decreases.  I need $500.00 to do so. Remember, I have $1,000 in my account for the original sale at $10.00 per share. 
I write a check out of this account for $500.00 to buy 100 shares. I still have $500.00 remaining in my account.  MAGIC!!! (minus the $50 I paid you up front I "clear" $450.00 in the end and adding the $50 fee I paid you, you lose a total of $450.00).
Not bad, eh?

You might be wondering: "What if the price did not go down but went up instead?"

Then I am in a bit of trouble.  My prediction that the price would decrease did not pan out.

If the price went up to $15.00 per share then the total value of the 100 shares is $1,500. You want your 100 shares back so you can take the profit!

I now MUST go out and purchase those 100 shares for $15.00 each.  I only have $1,000 in my account from the original transaction so I have to deposit another $500.00 in order for my check to you to clear.

I lose $500.00  (plus the $50 fee) and you gain $500.00 (plus the $50 dollar fee) on the investment.

Crazy system, right?

Tuesday, August 12, 2014

Shark Week and the Market for Shark Tacos. Let's go to the graphs.

Shark Week on T.V. has appartently increased the demand for Shark Meat in a variety of forms.

NPR has a story on this:
Discovery Channel set viewership records in 2013 as millions of people tuned in to watch sharks feed, sharks attack, extinct giant sharks and researchers catch and tag sharks. Discovery's "Shark Week" returned on Sunday, and this year, to the dismay of conservationists, restaurants and markets nationwide are feeding the frenzy with a slew of shark meat promotions.
This gives me an opportuntity to "go to the graphs" and analyze this development from a basic supply and demand perspective as to what SHOULD happen using the "Market for Shark (Meat) Tacos".

I think I have this right, but let me know where I might have gone wrong. If you can use this in your class(es) feel free to do so. There is no tragedy in this common(s).  :)

It is time for lunch where I am but I am pretty sure a Shark Taco is not on the menu for me. Yuck!

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