The "Carry-Trade" explained---Short lesson on how to make money in the Foreign Exchange Market. Don't try this at home!

Here is a quick lesson on the "Carry Trade". In its most simplest terms, this is borrowing money in one currency (i.e. US dollars) at a low interest rate and investing it in another country that currently offers savers/investors a high interest rate (i.e. Brazil--currency called the "Real").  I will use Brazil because it does in fact offer relatively high interests rates to savers/investors.  Of course, we will have to exchange our dollars for the foreign country currency in order to do this so we have to take into consideration the prevailing exchange rate for the two currencies.

There are 2 ways for the holders of dollars to make money--(1) the difference on the spread between the interest rate at which you borrowed the money and interest rate you received from the investment you put the money in (assume the exchange rate stays constant), and (2) IF the foreign currency you currently have the money invested in APPRECIATES in value during the time you hold the investment. 

Look at the first scenario first.  Right now it is "cheap" to borrow money in the US and the interest rates that Brazilian banks offer savers in relatively high.  I am going to use ballpark numbers because, well frankly, the math is easier.  Assume I can borrow money in the US at a 5% interest rate for one year.  If I borrow $1,000 I will have to pay the bank back $1,000 plus $50 after 1 year ($1,000 times 5% = $50)) for a total of $1,050.  I am going to invest this $1,000 in a bank in Brazil because it offers 10% interest rate to savers. 

First, I have to exchange my US Dollars for Brazilian Reals. Assume today the exchange rate is $1.00  = 1.76 Reals. With my $1.000 US dollars I can "purchase" 1,760 Reals. I put those Reals in the bank and start earning my 10% interest.

After one year I will have 1,936 Reals in my Brazilian bank (1,760 + 176 (10% of 1,760). I must withdraw this money so I can pay back the US bank for the money I originally borrowed.  ASSUME the exchange rate did not change at all (it did, but more on that in a minute).  To go from Reals to Dollars, I have to calculate the reciprocal of the exchange rate. The reciprocal of $1.00 = 1.76 Reals is 1.00 Real = $.5681 cents.   If we multiply 1,936 Reals by $.5681 we get $1,100 (rounded). We now take $1,050 of this and repay the bank what we owe them.  We have $50 left over! In real life, we would have to pay a fee for the currency transaction when we bought and sold, so we would have to subtract that from our $50.  BUT, you can see how you can make money by borrowing in one currency and saving/investing in another.

Now, what if the exchange rate changed while you had your money in the Brazilian bank? The exchange rate I used above for the Real was the exchange rate from July 12, 2010, one year ago.  TODAY the exchange rate is $1.00 = 1.58 Reals.  Now $1.00 US buys FEWER Brazilian Reals which means the inverse is true---The Brazilian Real buys MORE US Dollars than before (1.00 Real =$.6329 cents). Let's use this to see how our investment fared.

If today we exchange our 1,936 Reals for dollars we get 1,936 times $.6229 cents = $1,225 (rounded). NOW, when we pay back the loan plus interest of $1050 we will have $75 left over (minus fees).  We have an additional $25 just because to the change in the exchange rate between the Dollar and the Real. Easy money, right???

The trick to this is to (1) find a country where the interests are higher relative to the US, (2) it is stable enough to invest in, and (3) the currency appreciates while it is earning interest.  Of these number 3 is the most risky and difficult to predict. If the Real had DEPRECIATED in this time period, you could have lost not only the interest you earned BUT some of the principle as well.

Even if the exchange rates stay relatively constant, you can see how you can make money in the "carry-trade". The appreciation of the Real was a bonus.  However, this strategy is risky and is not recommended by professional financial advisers unless your investment portfolio can withstand the risk.

A Man gets disability payments from the Swedish Govt for listening to Heavy Metal music...As Chris Rock says "I don't agree, but I understand"...

I wonder if listening to Zamfir will get me the same benefits as this Swedish man...

""A Swedish heavy metal fan has had his musical preferences officially classified as a disability. The results of a psychological analysis mean that the metal lover can now count on having his income supplemented by state benefits.

 Roger Tullgren (Photo#1, Photo#2, Photo#3, Photo#4, Photo#5), 42, from Hässleholm in southern Sweden, has just got a new job as a dishwasher at a local restaurant.
Because heavy metal dominates so many aspects of his life, the Employment Service has agreed to pay part of Tullgren's salary. His new boss meanwhile has given him a special dispensation to play loud music at work.
"The fact that I am so into music has affected my work situation to the extent that I have had to quit some jobs," he said.

[Watch video footage of Roger Tullgren talking (in Swedish) about his heavy metal addiction at this location.]

Roger Tullgren first developed an interest in heavy metal when his older brother came home with a BLACK SABBATH album in 1971.

Since then little else has mattered for the 42-year-old, who has long black hair, a collection of tattoos and wears skull and crossbones jewelry.

Last year the ageing rocker claims to have attended almost three hundred shows, often skipping work in the process.

Eventually his last employer tired of his absences and Tullgren was left jobless and reliant on welfare handouts.

But a series of sessions with a psychologist soon led to a solution of sorts: Tullgren signed a piece of paper on which his heavy metal lifestyle was classified as a disability, an assessment that entitles him to a wage supplement from the job centre.

The manager at his new workplace allows him to go to concerts as long as he makes up for lost time at a later point. He is also allowed to dress as he likes and listen to heavy metal while washing up.

"But not too loud when there are guests," said Tullgren.

The Local spoke to an occupational psychologist in Stockolm who admitted to being baffled by the decision.

"I think it's extremely strange. Unless there is an underlying diagnosis it is absolutely unbelievable that the job centre would pay pay out.

"If somebody has a gambling addiction, we don't send them down to the racetrack. We try to cure the addiction, not encourage it," he said.

Henrietta Stein, deputy employment director for the Skåne region, is also puzzled by the move; "an interest in music" is not usually sufficient to qualify for wage benefits.

"Certain cases are confidential but in general there is always a medical reason that is well-documented," she said.

Tullgren currently plays bass and guitar in two rock bands (including SILVERLAND; MySpace) and says that he tends to get a lot of positive reactions for daring to be himself.

"Some might say that I should grow up and learn to listen to other types of music but I can't. Heavy metal is my lifestyle," he said. ""

3D Printing---Am I the last to know about this? This is going to change the way we make stuff dramatically...Two short videos here to give you the what-for's and how-to's. AMAZING!

I have heard of this technology called "3D Printing" but had no idea of how it worked until I viewed these two videos.  As a non-techie but someone who can see potential, this is amazing!  It is in its infancy, but I believe we will all see this in the near future. It will change the nature of how manufacturing and how we make stuff. There will be more control at a end user level. HT: Carpe Diem)

The first video shows an example of 3D Printing. The second one is a slightly more technical explanation of the process. You WILL be fascinated!

"I am going to a meeting on Capitol Hill to discuss a terrorist plot. Oh, reallly? Where are you going to park? I can't tell you that---it is a secret!"...

I am convinced that many things labeled "Secret" by the Federal government are done so not to sheild the information from "enemies, foreign and domestic", but to keep information from the general public because, well, it is convenient to do so for a variety of reasons. The term "national security" is used as a guise to keep certain policies/decisions secret that would subject agencies to scrutiny they would just assume not have to deal with. The amount of parking available to elected officials and their Capitol staff seems to be an example of this. Abuse of  power??...(HT: Matthew Yglesias)  

How Much Parking Is There at the Capitol

""The public isn't allowed to know.

Seriously: After taking note of the many expanses of concrete available for Hill staffers across the Capitol complex, I asked the Committee on House Administration how many parking spaces it oversees, and how many permits it hands out (each office gets a certain number to divvy up). Apparently, that information would imperil the security of...I'm not sure what exactly. But something.

My suspicion is that it's a big number. Along with infamous Capitol South metro lot, the U.S. of A. also owns parking lots west and south of the Spirit of Justice park, under the Rayburn building, and below Massachusetts Avenue between 1st and 2nd Streets NE. Some of that would be difficult to build on because of existing rail infrastructure. Most of it, of course, is a massive waste of good land served by some of the most robust transit links in the city.""

Volkswagon making cars in the US to sell in South Korea...Think about that for a moment...

VW confirms plans to export Chattanooga-made Passat to Korea

""Volkswagen’s Chattanooga plant, now producing more than 100 Passats daily, plans to sell the car in South Korea as well as in North America, the factory’s chief executive confirmed Wednesday.

Frank Fischer, CEO of VW’s Chattanooga operations, said the automaker’s sales team determined South Korea “is a very good match” for the all-new Passat.

Volkswagen initially is targeting a modest 4,000-a-year sales goal for the Asian nation, Fischer said. Plans are to start those sales in 2012, he said. In addition to the U.S., VW has said the Passat also will be sold in Canada and Mexico.""

HT: Carpe Diem

A penny for your thoughts...A private market invention is saving the Taxpayers BILLIONS of dollars, or I should say cents...

The next time you pass (or use) a CoinStar machine, give it a wink and a nod and a pat on the head.  It is a nice example of a POSITIVE unintended consequence of bringing an invention to the marketplace. It takes "dead" financial capital (all those pennies, nickels and dimes) in a jar, under your car seat, or under the cushions of your couch, and turns them into financial capital that is "alive" and more likely to be spent. CoinStar then returns these coins back to the banking system to be re-circulated again.  The Dept of Treasury then needs to produce fewer coins to meet existing demand.  Natural and labor resources are conserved, hence fewer tax dollars are spent producing coins. 

How come the inventors of this machine don't win the Nobel Prize in Economics and Greenpeace's award for environmental activism?  A simple invention designed to solve an everyday, unromanticm, unflashy, non-technical problem. THAT is the free market at its best...

Source for this entry is at Economix:

The U.S. Mint produced about 5 billion pennies, nickels, dimes and quarters in 2010, less than one-third of the average annual production over the last 30 years.


Just like paper currency, right? Well, not quite.

People clearly are using fewer coins.

But there’s something else too. Call it The Coinstar Effect.

In 1992, three Stanford University graduate students convinced four Bay Area supermarkets to let them install a new machine designed to count spare change. The concept was rather brilliant, like a slot machine with a guaranteed payout. There’s nothing quite like the sound and sight of money — your money — being counted. And as the company grew, the technology began to change the basic physics of change.

Americans keep vast quantities of coins around the house. “Keep” is maybe the wrong word. Coins gather in the folds of couches and drawer bottoms and coat pockets. They are collected in jars, popped into piggy banks, socked away. And until Coinstar came along, that money mostly just sat there. In keeping with the law of entropy, it was easy to turn bills into coins and difficult to turn coins back into useable money.

And that is exactly what Coinstar made easy.

By the early 2000s, the company’s machines were annually collecting more coins than the U.S. Mint was producing. And the company was putting those coins back into circulation, meeting a growing share of market demand, reducing the need to mint new coins.

There’s another important difference between bills and coins: Coin production tracks the American economy much more closely, because the demand for coins is almost entirely domestic, while the demand for paper currency comes mostly from overseas. (Moreover, the demand for paper currency can rise during a financial crisis, as it did in 2008, because people sought to withdraw their money from the banks.)

Coin production, in other words, is likely to rebound somewhat as the economy recovers. But the U.S. Mint estimates that production still won’t top 10 billion coins a year, so it is shuttering equipment and reducing capacity at its plants in Philadelphia and Denver.

Short video explaining the link between Economic Freedom and Standard of Living. So simple, yet difficult to achieve...

HT: Division of Labour

What are the most popular colors for new cars? You might be surprised...or not...

Consumers are pretty conservative when it comes to the color choice in cars. Why is that? Is it for re-sale value? While I might prefer a different, more off the wall color, I may not be willing to gamble choosing that color because it might limit the number of buyers of it used in the future.  Read about this and more on color choices for your car in this article in Road and Track Magazine...What do you think? (HT: Chartporn)

Source: Road and Track

Source: Road and Track

Steve Jobs and jobs---See how he creates jobs around the world to produce the i-Pad. How would YOU do it differently?

Resources are not unlimited.

Just look at the two top countries, the US and China. If you wanted to have the technological wizardy of the  i-Pad in the marketplace for a "reasonable" price, and you had to divide up the labor to produce it, which combination of jobs would you want available for US workers? You certainly don't trade an engineering job for a production job. That would not make sense. How about a retail job for a production job? Well, can't do that either, because the retail market is in the US.  If we moved ALL(or some) those production jobs to the US, would the i-Pad be a better product? A more expensive product? LESS expensive? OR is everything basically in balance to bring you the magic that is the i-Pad...Perhaps Comparative Advantage works?



Source: The Conversable Economist

HT: The Conversable Economist

Where's Waldo? Likely calling a moving company to book a move to China...Need more evidence that it is in your interest to know more about China? See this graphic, graphic...

We can choose to view China as a problem or as an opportunity. The Genie IS out of the bottle and my advice for young people is to seriously look at what you can to do to prepare yourself for a future with a more prosperous China. Can't ignore hundreds of millions of potential new customers for US goods and/or services.

Below is a graphic from moving company data on international corporate moves. If you are in college, or are about to be, then consider mixing in a little instruction in Mandarin.  Spend a semester there.  Regardless of your major, whether it is medical, technical, business, marketing, etc, it will only enhance your marketability.   



Source: WSJ


Movers Pick Up China Business

""The rising numbers of U.S. workers and students moving to China are a bright spot for moving companies like St. Louis-based UniGroup Worldwide, which has seen domestic business decline.

The closely held company, an affiliate of Mayflower Transit and United Van Lines, handles moves for corporate clients that pay to relocate employees. Between 2008 and 2010, the number of moves from the U.S. to China it handled grew nearly 47% to 396. Meanwhile, United Van Lines saw interstate moves in the continental U.S. decline 26% to 146,837 in the same time period.


China was the third-most common international destination for UniGroup, behind the United Kingdom and Germany, according to the company, which handled more than 15,000 moves last year.

In part to handle the growth in Asia, since 2007, UniGroup has purchased offices in China, Hong Kong and Singapore, among other locations, said president Brian Iles.

Ernst & Young, which has about 9,000 employees in China, has hired more than 1,500 in the last year and plans to hire another 2,000 by next July, said Bin Wolfe, people leader for the company's Asia-Pacific region. Although most of those employees will be native Chinese, Ms. Wolfe said in the last couple years, more employees from the U.S. have sought to get experience in emerging markets such as China.

Chinese students studying in the U.S. are also increasingly moving back to their native country upon graduation, she said.

"There is a lot of competition out there. People with strong experiences and bilingual skills are in high demand," she said.""

Oil and Bio-Fuels clash...The winner? Better question--The loser? Answer--all of us.

Bad energy policies equal bad outcomes...Two reminders in as to why we need to wean ourselves off of oil AND why using food-for-fuel is NOT the way to do so. You are just subsituting one set of bad trade-offs for another. Can we do better than this?...By the way, I am NOT a hardcore "Greenie"  at all.  I just believe in utilizing resources in the most efficient manner. While oil may have served us very well in the past to get us to an unprecedented level of standard of living, I think diminishing returns are setting in with it and we need to move on to develop a new fundemental source of energy production.  Are we there yet? No...Are we working hard enough to get there? I don't really know, but I believe we should be moving a little quicker to do so. Howver, in my humble opinion, bio-fuels are not the way to go.  Where am I going wrong???
Yellowstone river suffers oil spill

""An Exxon Mobil pipeline that runs under the Yellowstone river in Montana ruptured on Saturday, leaking hundreds of barrels of oil and causing a 25-mile (40km) plume that has fouled the riverbank.

The breach in south-central Montana led to the temporary evacuation of hundreds of residents along a 20-mile stretch of the river, a key tourist attraction in the region that runs through the famous national park of the same name. Cleanup crews deployed booms and absorbent material as the plume moved downstream at around 7mph (10km/h):""....Read more HERE

Biofuels land grab in Kenya's Tana Delta fuels talk of war

""The eviction of the villagers to make way for a sugar cane plantation is part of a wider land grab going on in Kenya's Tana Delta that is not only pushing people off plots they have farmed for generations, stealing their water resources and raising tribal tensions that many fear will escalate into war, but also destroying a unique wetland habitat that is home to hundreds of rare and spectacular birds.

The irony is that most of the land is being taken for allegedly environmental reasons – to allow private companies to grow water-thirsty sugar cane and jatropha for the biofuels so much in demand in the west, where green legislation, designed to ease carbon dioxide emissions, is requiring they are mixed with petrol and diesel.""...Read more HERE

Colleges are accepting more out-of-state students for admissions for the extra money. Does this mean the admittance of FEWER in-state students? There HAS to be some impact "at the margin", right? See interesting statistics here...

Interesting college admissions numbers from California. The acceptance of out-of-state (Foreign students included in this statistic too) has increased dramatically just in one year. As high as a 100% increase and some schools. With budget cuts, they are aggressively accepting more out of states students than they may have otherwise.  The obvious reason is out of state students pay a much higher tuition rate BUT do not cost anymore than an in-state student.  A negative---Does this potentially "crowed out" the admissions of in-state students seeking admittance to a California college/university?  A positive---does this allow the university system to keep tuition rates lower for California residents than they otherwise would be, even at the expense of admitting fewer in-state students?

Source: Matthew Yglesias

HT: Mattew Yglesias

Creating "Solar Entrepreneurs" in rural areas in developing countries...Solve a local problem that has global implications AND give someone an entreprenuerial opportunity...Does it get any better than that?

I love the concept of Social Enterprise--Equipping people in developing countries with the training,tools and capital to SELL (not give away) a product and/or service that solves a local problem. Solve a problem, fill a need (or want) and create a job--free enterprise at its finest.  Here is one I just stumbled upon. Selling easy to use solar power technology in rural Africa through a network of "Solar Entrepreneurs".  The focus in on training and equipping women to sell to women in remote villages. If you are young, ambitious and want to help people to help themselves, than working for or establishing your own social enterprise of some sort may be for you. I urge you to check this one out.

Solar Sister wants to light up rural Africa: Rugged, intuitive to use, affordable solar lamps that women can sell door-to-door change lives.

""Solar Sister eradicates energy poverty by empowering women with economic opportunity. We combine the breakthrough potential of solar technology with a deliberately woman-centered direct sales network to bring light, hope and opportunity to even the most remote communities in rural Africa (see flow chart below)

Investing in women is not only the right thing to do, it is the smart thing to do. Solar Sister creates sustainable businesses, powered by smart investment in women entrepreneurs. When you invest in a woman, you invest in the future. Join us by making an investment in a Solar Sister Entrepreneur today.""....Read more HERE at SolarSister.org...

As you head off to college, here is some practical advice from a college professor who is also a student advisor...Pretty good stuff to make you think...

For those of you on your way to college and trying to figure out what classes to take, or wanting to maximize your time/experience at college this Yale professor has some practical advice that I think is important to consider. Some in education are not going to agree with a lot of it, but the advice is not for them, but for you.
He also has other links for other perspectives HERE and HERE

From Chris Blattman...

1.Acquire skills that are hard to get outside school. Your first temptation will be to fill your schedule with courses on fascinating subjects. Do this, but don’t forget to also use university to tech up. For anyone interested in public policy or development, I suggest at two semesters of statistics and economics. Then pick a field of study in development (economics, politics, etc) and pick the hardest courses in each. Other technical skills may come in handy, depending on your interests: international law, political theory, tropical medicine, qualitative methods, finance & accounting, and so forth.


2.Learn how to write well. Take writing seriously. Consider a course in creative, non-fiction, journalism, or business writing. Read books on writing. You won’t regret it.

3.Focus on the teacher, not the topic. You will learn more from great teachers than great syllabi.

4.When in doubt, choose the path that keeps the most doors open. If you aren’t sure of your interests, stick to mainstream majors, ones with plenty of job and grad school options at the end, and get your core stats and math training (multivariate calculus, linear algebra, and multivariate regression).

5.Do the minimum language and management classes. Languages are hugely valuable, but better learned in immersion, during your summers and holidays. Maybe take an intro course, but only that. Business and management skills are critical, but classrooms are poor places to get skills other than finance and accounting.

6.Try careers on for size. Don’t wait until you finish law or medical school to discover you hate working in your specialty. Try out different careers in the summer–researcher, journalist, medical assistant, NGO worker, congressional aide, and so on.

7.Go to strange places. Use a summer or a school year to live abroad, ideally a place completely different from home, where you’ll come to know local people (and not just the expat community). A 10-week sojourn across Western Europe is a blast, but see if you can bunker down for longer in a less familiar locale. Here’s when it makes sense to learn languages.

8.Take some small classes with professors who can write recommendations. If you’re uninterested in grad school, skip to #9. But if a MA or PhD is an option, you will need at least three high quality recommendations. (See my recommendation letter advice here.)

9.If you don’t have to write a thesis, think twice. An independent research project can be the perfect capstone to your college years. Sadly, I often see theses that weren’t worth the students’ investment of time and energy. Some people’s time would be better spent acquiring technical skills (see point 1). I used to advise students against a senior thesis if they had the choice. After getting lots of disagreement on my blog, I’ve revised that view; a senior thesis can be a great investment if you are dedicated to a question of interest, want to learn how to research, want to strengthen a relationship with a professor, want practice for graduate school, or want to try out research and writing as a career option. (If you do plan to write a senior essay, here are my advising requirements.)

10.Blow your mind. At year’s end you should look back at your thoughts and opinions twelve months before and find them quaint. If not, you probably didn’t read or explore or work hard enough. (Come to think of it, this is not a bad rule for life.)

The logic underlying all the above advice: use your undergraduate degree to learn things that are hard to learn anywhere else. Statistics are not more important than languages. But the opportunity cost of skipping a statistics course is high because it’s hard to find alternatives to university classes. Remember you only get 32 courses at university. The opportunity cost of a language program is low because there are a dozen other times and places you can get that skill.

Your paycheck is killing you.. No, really your paycheck IS killing you!...See how here...

When social scientists do research, they try to avoid the "correlation vs. causation" trap. In this particular study (Source: Freakonomics), the basic conclusion is that it is not the actual paycheck that kills you, but the additional activities you engage in after getting paid that increase the risk of something bad happening to you.  My own example: You have little gas a few days before your paycheck--- you drive less. Get paid, and you will drive more in the day(s) after receiving your check, so the probabilities of something bad happening increase.

Why You’re More Likely to Die After Getting Paid

""In a study to be published in an upcoming issue of the Journal of Public Economics, Evans and Moore examined the death records of four demographic groups in the U.S.: seniors on Social Security; military personnel; families receiving tax rebate checks in 2001; and recipients of Alaska’s Permanent Fund dividends. Their results show that mortality increased the week after checks arrived for each of these groups.


Though the effects are strikingly consistent across populations, there are some interesting variations:

•In counties with a large military presence, daily mortality among 17-29 year olds increases by around 10 percent the week after mid-month paychecks arrive.

•The week the 2001 tax rebate checks arrived, mortality among 25-64 year olds increased by 2.5 percent.

•During the week that direct deposits of Permanent Fund dividends are made, mortality among urban Alaskans increases by 13 percent.""

What do they believe is the reason for this outcome?

Q: What about cause of death?


A: For the 17 to 29 population, you see lots of substance abuse and blunt force trauma from auto accidents.

Q: So is it fair to say that when people get paid, they go out and engage in risky behavior? They go party and buy drugs and drive drunk? Is that what’s happening here?

A: There is some of that, but it’s not that extreme for the most part. For a lot of people, you’re just going to the mall to buy something, which increases the risk of all kinds of things: car accidents, heart attacks. It’s not that you’re doing crazy, irresponsible things. It’s not the receipt of income that’s necessarily driving this, it’s the activity generated by the receipt, that’s the killer activity. And that cuts across the entire population.

Q: Did that surprise you, that it was consistent across different types of people?

A: Very much, I think that’s the most important phenomenon with this study, just how broad-based the effect is. The within-month mortality cycle holds for everyone, young and old, rich and poor. It is enhanced for certain demographics. But it’s also very persistent across populations. So, it’s not just poor people or young people, it’s everyone.