Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Therefore, a similar negative alpha would indicate an under-performance of 1%.
The horizontal base line of a chart, x-axis.
Ad Valorem Tax
A tax levied as a fixed percentage of the value of a particular item.
Total planned or desired spending in the economy as a whole in a given period. It is determined by the aggregate price level and by influences such as investment, government spending, and the money supply.
Total value of goods and services that firms would willingly produce in a given time period. Aggregate supply is a function of the available inputs, technology, and overall price level.
The magnitude of fluctuation measured from trough to peak.
A model which refers to a macroeconomic policy regime and capital market structure common to the Anglophone economies. Among these characteristics are low rates of taxation, more open financial markets, lower labor market protections, and a less generous welfare state eschewing collective bargaining schemes found in the continental and northern European models of capitalism.
The act of buying a commodity, bond, stock or currency in one market and simultaneously selling it in another market at a higher price.
An orderly arrangement of values.
which is when earns say $1,000 and that remains unchanged, however taxes rise diminishing the available funds for discretionary spending, this produced a decline in economic activity that is deflationary based on the reduction in disposable income.
Austrian School of Economics
argues that the business cycle is primarily caused by excessive creation of bank credit
The correlations between the items in a series of data lagging in time or sequence.
BETA (Beta Coefficient)
The term Beta refers to a measure of the volatility, or systematic risk, within any market, security or an overall portfolio in comparison to the market as a whole. Beta is used in the Capital Asset Pricing Model (CAPM) calculating the expected return of an asset based on its Beta and thereby its expected market returns. Beta is calculated using Regression Analysis, where Beta is the instrument’s returns in response to swings in the market price. A Beta of 1 implies that the instrument’s price will move with the market whereas a Beta of less than 1 means that the security will be less volatile than the market. A Beta of greater than 1 indicates that the instrument’s price will be more volatile than the market. Consequently, a Beta is 1.5, suggests in theory that instrument will be 50% more volatile than the market. Therefore, instruments less than 1 in theory are less volatile offering steady returns and a Beta greater than 1 offers a higher potential return with greater risk.
Refers to the market condition wherein the price of a forward or futures contract is trading below the expected spot price at contract maturity or in other words, the spot is trading at a premium to the futures or forward contract. This is an abnormal market condition that reflects a shortage in immediate supply compared to future expectations of supply. While John Maynard Keynes argued this was a normal condition caused by hedging. This is not the case since a backwardation would then be the normal state of a given market rather than the uncommon occurrence that prevails.
Refers to a complex construction of a market reflected through another currency (oil trading in dollars converted to yen) whereby the market condition wherein the price of a forward or futures contract is trading below the expected spot price at contract maturity or in other words, the spot is trading at a premium to the futures or forward contract in that third variable.
A measure of a firm’s monopoly power based on the divergence between price, P, and average total cost, ATC. A modified version of this index is simply: Bain Index = P -ATC / P
Balance of Payments
A statement showing all of a given nation’s transactions with the rest of the world for a given period. It includes the purchases and sales of goods and services, gifts, government transactions, interest payments and capital transactions.
Balance of Trade
The part of a nation’s Balance of Payments which deals with merchandise (or visible) imports and exports.
Balance on Current Account
The total sum of all visible trade (merchandise) plus “invisibles” which are services. In addition, interest payments on obligations and interest earnings on foreign investments are also included.
Bill of exchange drawn on or accepted by a bank instead of an individual or firm.
A test developed by Julius Bartels to determine the number of times out of a hundred that a given cycle could be the result of chance.
An assortment which is grouped together such as a “Basket of Currencies” or a “Basket of Commodities.”
A monetary system under which a nation’s unit of currency is defined in terms of a fixed weight of two metals, namely gold and silver.
In Marxian economics, those who own property or capital and are thus not members of the proletariat (working class).
Bretton Woods Agreement
An agreement among 44 nations in 1944, the Bretton Woods System sought to retain what had been seen as the major benefit of the gold standard, that the value of one country’s currency in terms of another (the exchange rate) should be fixed. Under Bretton Woods, the dollar was fixed to gold and other currencies were fixed to the dollar. It was believed that international trade could develop fully only if international exchange rates were stable and that of exchange rates were not fixed by government, fluctuation may be so severe as to inhibit international business. Central banks assured that exchanged rates remained fixed.
The excess of total government expenditures over and above total receipts.
Consumer Price Index which is the most widely employed index of inflation defined also as the cost of living. It is a price index of the cost of a fixed basket of consumer goods in which items are weighted according to the proportion of total expenditures by urban consumers. It does not include the Cost of Government (taxation) and in most countries it also does not include capital investments such as a home. Housing is generally represented by some form of rent with varying degrees of a real estate component included.
Money on loan subject to repayment at any time.
Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. The theory in CAPM is that investors need to be compensated in two ways: time value of money and the risk involved. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
The term Capital Flow is actually an ancient concept where it arrives from the Latin word “currere” meaning “to run” or “to flow” and this is where the MONEY flowed from the temple where it was produced (coined) giving us the word “CURRENCY” meaning the flow of MONEY.
Capital Flow Analysis
A form of analysis developed by Martin Armstrong in which international capital flows are monitored and studied between nations to provide a basis for forecasting the effects thereof upon domestic markets within a given economy. Likewise, internally, capital will flow between sectors, stock markets, commodities, bonds, and real estate creating booms and busts in one sector at a time.
Defined as the total sum of capital invested in plants and machinery, buildings and infrastructure.
The market in which funds for the purchase of goods and services is borrowed or loaned.
Traditionally defined as an economic system in which most property (land and capital) is privately owned. Capitalism generally refers to economic system where the means of production are largely or entirely privately owned and operated for a profit, structured on the process of capital accumulation. In general, in capitalist systems investment, distribution, income, and prices are determined by markets, whether regulated or unregulated.
An association of producers in a given industry whose purpose is to restrict or bar competition within the industry.
A government established agency responsible for control over the nation’s money supply and credit facilities.
A view, more than an actual theorem, put forth by Ronald Coase that externalities or economic inefficiencies will be corrected by bargaining between the affected parties.
A dynamic model of supply and demand in which adaptive (non-rational) expectations lead to perpetual oscillations in prices.
The process of negotiations between a group of workers (normally a union) and their employer.
Also known as a “planned economy” directed by government.
The combination of a political and economic philosophy in where the ownership of capital goods, including land, is believed to result in the exploitation of workers and is therefore prohibited.
Comparative Advantage (Principle of)
The principle employed in the analysis of foreign trade between countries, according to what a country gains from trade by specializing in the goods in which it possesses the greatest advantage relative to other commodities, or the least disadvantage relative to other commodities.
is a combination of a Transverse Wave and a Longitudinal Wave structure creating an unusual combination as the energy wave through the medium whereby the individual markets compositing the business cycle retain their own cycle frequency, however in a complex wave, they themselves will travel like particles within the water that move in place but in clockwise circles where the radius of the circles decreases as the depth into the water increases. In the economy, each market will retain its own frequency that becomes affected as the energy of the event passes through and the markets most closely associated with the primary focused even are influenced the most decreasing as they are distanced from the main focus just as water particles decrease in their effect traveling downward and thus the wavelength of the energy varies with depth (distanced from the focus). When the medium is a solid, as in the earth, instead of the particles moving in circles as in water, they will move in an elliptical pattern (see Rayleigh Wave).
Made up of distinctly different parts or elements.
adjusted for inflation to the base year specified.
Consumer Price Index
Refers to the market condition wherein the price of a forward or futures contract is trading above the expected spot price at contract maturity. This is a normal forward curve depicting the prices of multiple contracts that are at a premium to the spot of the commodity in question. This normally reflects in part storage and interest costs of carrying the commodity. This is the opposite market condition of a backwardation.
A term used in reference to relationship to two or more variables in which a change in one causes a change in all variables. Normally used in regard to market terminology referring to the interrelationship of several markets together.
Refers to the complex constructive market condition wherein the price of a commodity or financial instrument must be traded through three independent elements. For example, oil trades in dollars but the base currency of the buy is Japanese yen, and thus to reflect the true price of oil in yen involves also the constant conversion of the yen and the dollar to reflect the accurate price of oil in yen. Thus there are three variables instead of the normal two, plus the normal contango
Currencies are said to be convertible when they can be freely exchanged for other currencies.
The measurement to what extent two different time series exhibit similar variations or patterns.
Cost of Government
Defined by PEI as the total sum of all revenue collected by federal, state and local government, including agencies, either through direct or indirect taxation expressed as a percent of nominal GNP.
Inflation originating on the supply side of markets for reasons not related to the demand of such goods. For example, damaged crops in agriculture will lead to a rise in prices without a direct change in the actual consumption demand.
A movement in price opposite to the prevailing trend that exceeds 3 units of time and is a separate cycle in and of itself.
A a mix of locally produced agricultural commodities that had been monetized by the local legislature, found in colonial America.
Crawling or Pegged Exchange Rates
A system in which a nation’s exchange rate is allowed to crawl up or down within a predefined pegged trading range.
Slow but persistent upward movement in the general level of prices.
peak, top, highest point in a time series.
A proposition that suggests that government spending or deficits or government debt reduce the amount of business investment by competing for capital within the system.
A PEI term used in reference to rising prices of goods and services caused by a decline in a nation’s currency value on world exchange markets. Currency inflation is independent of supply and demand changes.
see “Balance on Current Account.”
Taken from the Greek word “kyklos” meaning circle or returning to the point of origin. A rhythm or frequency of repetitive nature as in weather or in regular oscillations from peak to trough in a time series.
The analysis of a time series which isolates regular rhythmic patterns of oscillation.
This is where most people go seriously wrong in ASSUMING that a mere increase in the supply of money must be inflationary. That statement is fundamentally wrong because it PRESUMES people will stop hoarding if you simply increase the supply of money. Inflation will erupt even when the supply of money does NOT increase
A theory relating to the relationship between consumer demand for goods and services and their prices. Demand Theory is the foundation where the demand curve expresses the consumer desire to the amount of goods available. The theory is as more of a good or service becomes more available, then demand drops and therefore so does the equilibrium price. This theory is not necessarily true for there is zero demand for something UNTIL there is some supply
Dear Money Policy
see “Tight Money Policy.”
A fixed interest bond issued by firms empowered to do so by their Articles of Association, as a security for a loan. A fixed debenture is secured against named fixed assets, a floating debenture floats over the stock (current assets), and only results in control of the asset if the terms of the debenture are not honored.
The process of converting “nominal” or current monetary valuations into “real” terms meaning adjusted for inflation.
A fall in the general level of prices. This does not mean a fall in GNP or a rise in unemployment. It strictly refers to prices.
The amount by which aggregate demand falls short of full-employment aggregate supply, thereby pulling down the real value of a nation’s output.
A graph illustrating the quantity of a good that buyers would purchase at each price level, assuming all things remain equal.
A term for fiscal and monetary policies used to influence aggregate demand within an economy.
Price inflation caused by an excess demand for goods in general. Sometimes accompanied by heated speculation i.e. 1980.
A prolonged period during which unemployment is unusually high and manufacturing facilities are operating well below capacity. This term was first used by President Herbert Hoover in place of the word “panic” because it sounded less dramatic.
A decrease in the official price of a nation’s currency caused by a deliberate government action resulting in a downward valuation relative to world currencies or to gold.
The difference or percentage of deviation of any item in a time series from the mean value of that series.
Diminishing Marginal Utility (Law of)
The law which states that as more and more of any one commodity is consumed, its marginal utility declines.
Diminishing Returns (Law of)
The law of production stating that the incremental output from successive increases in an input will eventually diminish.
A term referring to the sum equal to GNP, minus all taxes, business savings and depreciation; plus government and other social payments to society including interest payments of government to the private sector.
A declining trend in a given statistic.
A standard technical analysis method of connecting the highest point on a chart to a subsequent reaction high. The resulting trendline is normally interpreted to define the overall trend of the market. A downtrend is said to continue in effect as long as current price activity remains below this downtrend line.
A market situation in which there are only two sellers.
Equipment or machines that are normally expected to last longer than 3 years (cars, trucks, computers, clocks etc.)
East Asian model of Capitalism
involves a strong role for state investment, and in some instances involves state-owned enterprises. The state takes an active role in promoting economic development through subsidies, the facilitation of “national champions”, and an export-based model of growth. The actual practice of this model varies by country. This designation has been applied to the economies of Singapore, Japan, Taiwan, South Korea and the People’s Republic of China.
The policy of a central bank where interest rates are effectively reduced through the means of increasing the available supply of money.
The branch of economics that uses the methods of statistics to measure and estimate quantitative economic relationships.
A social science concerned chiefly with the way society chooses to employ its limited resources, which have alternative uses, to produce goods and services for present and future consumption. The word economics is Greek in origin compounded from “oikos”, a household, and the semantically complex root, “nem-”, here in its sense of to regulate; administer; organize. The full Greek word is thus “Oikonomikos” which was the title of a book first written by the Athenian philosopher Xenophon before the middle of the fourth century B.C.
A term which means that the response of buyers to a price reduction is sufficiently large that total revenue (price times quantity purchased) rises. Conversely, a rise in price will cause a decline in total revenue as the quantity sold declines (inelastic demand.)
A term which refers to the responsiveness of one variable to a change in another. Mathematically, it is the ratio of the percentage change in the quantity (demanded or supplied) to the percentage change in price. Elasticity = [(Q2-Q1)/(Q2+Q1)] / [(P2- P1)/(P2+P1)] where Q1, Q2, P1, and P2 denote the corresponding quantities and prices before and after the change.
The suspension of trade, usually a block on exports of a particular commodity or nation.
Based on observation rather than theory.
Produced from within.
The study of the effect of the working environment on the worker and his productive capacity.
US dollar deposits in banks outside the United States, chiefly in Europe.
A synonym for “planned” or “intended.”
A synonym for “actual” or “realized.”
Produced from without.
A subscript symbol which denotes power signifying the number of times the preceding symbol is to be multiplied by itself.
Extend with estimated values beyond the final data item.
Form of socialism founded in England in 1884. It emerged as an outgrowth of utopian socialism by advocating gradual and evolutionary reform within a democratic framework.
Fallacy of Composition
Fallacy of assuming that what holds true for an individual also holds true for a group.
Federal Funds Rate
Interest rate in the United States at which banks borrow excess reserves from other banks’ accounts at the Federal Reserve normally on an overnight basis in order to comply with Federal Reserve requirements.
Federal Open Market Committee
The most important policy-making body of the Federal Reserve System. Its chief function is to establish policy for the System’s purchase and sale of government and other securities in the open market (see “Open-Market Operations”).
A term which refers to money that does not have an intrinsic value (such as modern day paper money).
The automatic growth of government revenue due to the rise of tax revenue during periods of inflation, as nominal incomes increase.
A government’s program with respect to the purchase of goods and services and spending on transfer payments in addition to amount and type of taxes imposed upon its citizens.
Fixed Exchange Rate System
A monetary system in which a nation’s currency value is fixed or tied to a specific quantity of commodity or a specific quantity of another currency (Example
Floating Exchange Rate System
The current world monetary system in which the value of a nation’s currency floats freely against the value of all other world currencies and is not backed or fixed by any standard unit of value.
A Model which refers to a capitalist economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market economy where the role of the state is limited to protecting property rights.
The number of complete oscillations within a given period of time (see cycle).
In economic theory, the condition where all factors of production (not just labor) within an economy are being used in production so that factor prices are in equilibrium, and specifically as to labor, that all laborers who are willing to work at the going rate are employed. Thus, full employment is reached where there are an equal number of job openings and laborers looking for that type of work.
The value at current market prices of all final goods and services produced within a nation for a given period without adjustment for inflation or currency fluctuations.GNP (Seasonally Adjusted)
GNP (Seasonally Adjusted)
The value at current market prices of all final goods and services produced within a nation for a given period adjusted on a year over year basis to smooth out sharp fluctuations due to summer vacations or the Christmas holiday season.
General Equilibrium Theory
General Equilibrium Theory studies supply and demand fundamentals in an economy with multiple markets. The objective remains proving that all prices are at equilibrium. The theory analyzes the mechanism by which the choices of economic agents are coordinated across all markets. General Equilibrium Theory is distinguished from Partial Equilibrium theory by the fact that it attempts to look at several markets simultaneously rather than a single market in isolation.
Bad or debased money drives out good quality money as people then hoard the better and spend the worst.
Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country in a given period. GDP is the market value of everything produced within a country; GNP is the value of what’s produced by a country’s residents, no matter where they live. GDP= private consumption + government spending + (exports - imports).
Gross Fixed Capital Formation
The value of a nation’s investment before allowing for depreciation over a given period, excluding investment in stocks and working capital.
Gross National Product (GNP)
When normally used, GNP by itself refers to the value at current market prices of all final goods and services produced within a nation for a given period adjusted both for seasonality and inflation.
a method of describing a time series by fitting sine-cosine curves of harmonic (unit fraction) lengths to the given time series.
An action taken by an individual, company, or institution to seek protection against possible adverse effects due to price changes in the future.
Financial funds which are moved from one country to another to take advantage of more favorably interest rates, exchanges rates, inflation rates, taxation rates, labor rates, or security consideration (see International Value Theory).
Normally defined as a rate of inflation exceeding 1000 percent annually.
IMF (International Monetary Funds)
Organized in 1945 to provide loans for postwar reconstruction and to promote development of less developed countries.
Implicit Price Index (IPI)
Also known as the GNP Deflator. A weighted average of the price indexes used to deflate the components of GNP. Real GNP = (Nominal GNP / IPI) therefore IPI = (Nominal GNP / Real GNP).
The range of occurrence or influence of an economic act.
A tax which can be shifted to someone other than the individual or company originally paying the tax such as excise taxes, taxes on business or business properties.
Normally defined as the rate of percentage increase on an annual basis within the general price level. Most often calculated from the rate of change in the CPI index.
This is when inflation spreads from one sector into all others as people assume everything will rise and this is normally associated with a decline in the value of a currency. This trend followed the 1933 proposal to devalue the US dollar in 1933 and most other nations during the 1930s when the abandoned the gold standard. We also saw this contagion spread following the oil price shock of OPEC that was instigated by the abandonment of the gold standard on August 15th, 1971. Hence, inflation spreads from that epic center into other areas directly affected by that sector in the initial stages and then broadens into the entire economy.
see DEMAND Inflation
The amount by which aggregate demand exceeds aggregate supply at full employment, thereby causing inflationary pressures.
An explanation offered by Joseph Schumpeter (1883-1950) which attributes business cycles and economic development to innovations that forward-looking businesspersons adopt in order to reduce costs and increase profits. Once an innovation proves successful, other businesspersons follow with the same or with similar techniques, and these innovations cause fluctuations in investment which result in business cycles. The innovation theory has also been used as a partial explanation of how profits arise in a competitive capitalistic system.
A term which refers to actual money deposited opposite of “outside money” (fiat money).
A term which refers to money that does not have an intrinsic value (such as modern day paper money); see Fiat Money.
International Value (Terms of)
A PEI term meaning adjusted for foreign exchange value fluctuations.
International Value (Theory of)
A theory set forth by Martin A. Armstrong in which international capital movements are caused by changes in a nation’s labor costs, inflation rate, tax rate, geopolitical considerations, and value of currency relative to other world markets which sets up a natural arbitrage through which capital seeks the most secure and profitable avenue.
A concept put forth by Adam Smith in 1776 to describe the paradox of a laissez-faire market economy. The invisible hand doctrine holds that, with each participant pursuing his or her own private objective without interference from the state, furthers the wealth of the economic society through their collective efforts. This effort forms the “invisible hand” and was the surest way to increase efficiency and wealth.
Iron Law of Wages
In Marxian economics, the theory that there is an inevitable tendency in capitalism for wages to be driven down to a subsistence level.
The theory set forth by John Maynard Keynes in his General Theory work. He suggested that primarily because of sticky wages a capitalist system does not automatically tend toward a full-employment equilibrium. Accordingly, the resulting underemployment equilibrium could be corrected through fiscal or monetary policies intended to raise demand. In other words, increasing government spending or lowering interest rates will stimulate consumer demand thereby creating more jobs and thus lowering unemployment.
are indicators that usually change after the economy as a whole does, for example unemployment GDP, Inflation, that look backward in time and are thus confirming factors of a change in trend rather than providing advanced warning.
A French term describing an environment in which transactions between private parties are free from any state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.
Law of Unintended Consequences
is a principle that when the outcome of a purposeful event or action in a nonlinear system such as the economy results in creating totally unintended consequences. The concept has long existed but was named and popularized during the 20th century by American sociologist Robert K. Merton.
is a non-symmetrical wave where the wavelength varies between peaks. As the energy moves through the medium the displacement within the medium is parallel to the direction of wave propagation.
MACD (Moving Average Convergence/Divergence)
measures the absolute difference between two moving averages. It is a computation of the difference between two exponential moving averages (EMAs) of closing prices. This difference is the charted alongside a moving average of the difference.
The study of aggregates of firms, households, prices, wages and incomes as opposed to single or individual firms or households.
Malthusian Theory of Population Growth
The belief that the natural tendency of population is to increase at a geometric rate (1, 2, 4, 8…) whereas food tends to increase at an arithmetic rate (1, 2, 3, 4…). Per capita food production would thus decline over time, thereby putting a check on population growth. The theory relies on the diminishing returns law: An increasing population working on a fixed amount of land would reduce per capita output and incomes to the bare subsistence level.
A system in which a currency is allow to float freely but its overall float is “managed” by central bank intervention.
see “Neoclassical Economics.”
An economy based upon trade where estates/villas produce excess product to be sold on the market leading to the development of futures contracts, banking, and credit.
A term which refers to the free market interactions of the economy as a whole.
A socialistic economy in which most microeconomic questions are left to the market mechanism. The state would continue to own most capital and land and would also direct investment, but the techniques of production and the exact composition of the output would be left to supply and demand.
The set of social, political, and economic doctrines of Karl Marx from the 19th century. In theory, Marxism predicted the collapse of capitalism as a result of its own internal contradictions, primarily what he saw as its tendency to exploit the working classes. The conviction that workers would inevitably be oppressed under capitalism was based on the iron law of wages (see “Iron Law”). Marxism waged war directly upon human nature and failed to grasp that we may be equal in rights, but unequal in ambition or talent. Attempting to redistribute wealth is as fundamentally flawed as giving every student the same grade even if they do not show up for class.
An arithmetic average obtained by dividing the sum of a time series by the total number of items within that time series.
The figure in the exact middle of a series of numbers ranked from the lowest to the highest unit of value.
Medium of Exchange
The currency used to express value between tangible objects that may include labor. The Medium of Exchange serves the purpose of a Unit of Account
A political doctrine against which Adam Smith fought in 1776. Mercantilists were impressed by the fact that precious metals (namely gold) were in universal demand and that these metals could buy anything. They argued for policies that would yield a favorable balance of trade (excess of exports over imports). They also argued for authoritarian control which would seek to restrict imports thus insuring the retention of gold. Although this theory is disavowed by most nations today, in practice, they still tend to restrict imports whenever possible.
An analysis with deals with the study of individual markets, economies, people or companies.
Modern Portfolio Theory (MPT)
The MPT is a structure whereby those seeking risk and risk-averse investors alike can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to MPT, it’s possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper “Portfolio Selection,” published in 1952 by the Journal of Finance. There are four basic steps involved in portfolio construction:
- Security valuation
- Asset allocation
- Portfolio optimization
- Performance measurement
A general theory which maintains that changes in the money supply are the major cause of macroeconomic fluctuations. In short, monetarists believe that real output tends toward potential GNP while prices (inflation) tend to move proportionally to the money supply.
The policy of the central bank in exercising its control over money, interest rates, and credit conditions. The tools of monetary policy are open-market operations, reserve requirements, and the discount rate (see Easy-Money Policy, Tight- Money Policy).
Money is not an asset in and of itself, nor is it the direct desired end OBJECT, but rather money is in its essence a language that is true form is merely the MEDIUM OF EXCHANGE. The idea of VALUE emerges from cattle in Roman times, which even today provides the foundation for the terminology of MONEY and financial interests. The Latin for cattle was “PECUS” from which emerged the word for MONEY that became “PECUNIA.” At first glance you may not see how we still use this word and concept of cattle today. When someone has a financial interest in something, he is said to have a “PECUNIARY” interest.
see “Currency Inflation.”
Money Supply (M1)
This is the narrowly defined money supply which consists of coins, paper currency, plus all demand or checking deposits.
Money Supply (M2)
Broad definition of money supply which includes M1 plus all “time deposits” (savings deposits) and a variety of money funds against which checks on demand cannot be presented.
see “Velocity of Money.”
A market structure in which a commodity or service is supplied by only one firm.
The mirror image of a monopoly in which there is only a single buyer.
Verbal pressure applied by a central bank to persuade commercial banks to ease or tighten their credit policies.
A series of successive overlapping averages taken from a time series for a specified unit of time.
An approach to economics which flourished in Europe and the United States during the period of 1870 through World War I. The neoclassicists were primarily concerned with refining the principles of price and allocation theory, “marginalism,” the theory of capital, and related aspects of economics. They made early and extensive use of mathematics, especially differential and integral calculus, in the development of their analysis and models. Much of the structure of modern economic science is built on their work.
Gross investment minus depreciation.
Net National Product (NNP)
GNP less an allowance for depreciation of capital goods.
see “Keynesian Economics.”
An approach to economics which deals with what “ought to be” rather than “what is” (see “Positive Economics”).
The word economics is Greek in origin compounded from “oikos”, a household, and the semantically complex root, “nem-“, here in its sense of to regulate; administer; organize. The full Greek word is thus ” Oikonomikos ” which was the title of a book first written by the Athenian philosopher Xenophon before the middle of the fourth century B.C.
The relationship put forth by Arthur Okun between cyclical movements in GNP and unemployment. The law states that when actual GNP declines 2 percent relative to potential GNP, the unemployment rate increases by about 1 percentage point.
A situation of imperfect competition in which an industry is dominated by a small number of suppliers.
An economy one which allows foreign trade with other countries.
The activities of the central bank designed to regulate the money supply. These operations involve the purchase or sale of government securities, which effectively expands or contracts funds in the banking system, which, in turn, alters bank reserves, causing a multiplier effect on the supply of credit and therefore on economic activity. Open- market operations represent one of the three basic ways the Federal Reserve implement monetary policy. The other two are changes in the member bank Reserve Requirements and raising or lowering the Discount Rate charged to banks borrowing from the Fed to maintain reserves.
is the repetitive variation, typically in TIME, of some measure about a central value (often a point of equilibrium) or between two or more different states.
is a term referring to money created by leveraged deposits in a bank by lending that is a form of fiat money.
An economy where the state owned all commerce, as was the case in the Venetian Empire (7th century AD until 1797) and in some ancient cultures pre-600BC, but the real medium of exchange appeared to be labor creating what would appear to be a redistribution of assets in the absence of money similar to a communistic type state but where people were free to choose the profession.
Partial Equilibrium Theory
Partial Equilibrium Theory differs from General Equilibrium Theory insofar as it attempts to look at a single market in isolation whereas the General Theory of Equilibrium seeks to observe several markets simultaneously.
Percentage Price Oscillator (PPO)
The PPO is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. The PPO, unlike the MACD which measures the absolute difference between two moving averages, calculates this relative value by dividing difference by the slower moving average. PPO is therefore the MACD value divided by the longer moving average. (see MACD).
The maximum sustainable level of GNP for a given state of technology and population size, sometimes called “high- employment output.”
see “Market Mechanism.”
Producer Price Index (PPI)
The price index of wholesale goods and commodities also referred to as the Wholesale Price Index by some nations.
is the difference over and above the cost subtracted from the amount obtain, but it is temporary by nature in the long-run for it rapidly vanishes in the subsequent process of competition and adaptation.
A succession of number that advances by multiples.
Any policy which seeks to protect a particular domestic industry against competition from imports usually imposed by means of tariff or quota.
The sum total of government obligations in the form of bonds, notes, and bills.
Purchasing Power Theory
A theory which suggests that the rate of exchange between currencies will be such as to enable the actual purchasing power of money to remain the same.
Quantity Equation of Exchange
(MV=PQ) A tautology in which M is money supply, V is the income Velocity of Money, and PQ is price times quantity which is the money value of total output (nominal GNP). This holds exactly since V is defined as money GNP/M.
Quantity Theory of Money & Prices
In terms of the Quantity Equation of Exchange, this theory holds that V and Q are constants or smoothly growing trends. Therefore the level of P (prices) is governed solely by the money supply hence doubling M results in doubling P. The more sophisticated quantity theory maintained by the monetarists, recognizes that money velocity is not so rigidly constant. Instead, velocity changes are relatively predictable, they claim. Hence, control over the money supply in theory is central to control over GNP (see Monetarism).
A factor of production, such as a machine, which earns economic rent in the short run only, is said to receive quasi-rent.
A form of protectionism in which the total quantity of imports of a particular commodity or manufactured item is limited for a given period of time.
R-Squared is a statistical measure that represents the percentage of a fund or instruments’s movements that can be explained by movements in a benchmark index. For example, in bonds (fixed-income) the benchmark is the US T-bill rate. In equities, the benchmark is the S&P 500. Consequently, R-Squared values with a range from 0 to 100 reflect the movement of that instrument relative to the benchmark. Therefore, 100 means that all movements of that instrument are completely explained by movements in the benchmark index. A R-Squared below 70 implies the movement of the instrument doesn’t follow the benchmark index.
An irregular or chance event.
is a Complex Wave with both longitudinal and transverse motion that takes place in solids. The particles in a solid, through which a Rayleigh surface wave passes, move in elliptical paths rather than circular as in water, and the elliptical path decreases as the depth increases and the movement of particles at the surface trace out a counter-clockwise ellipse, while particles at a depth of more than 1/5th of a wavelength trace out clockwise elliptical path.
A move opposite the current trend in price movement that is limited to 2 or 3 units of time. If it extends beyond 3 units in time, then see Counter-Trend Reaction.
A term used to describe a given statistic or market net of the rate of inflation.
A synonym for opportunity cost. Also used to define a cost net of inflation or in constant dollars.
adjusted for price changes (inflation).
Real Interest Rate
The interest rate less the rate of inflation.
A term which refers to a downturn in economic activity, defined by many economists as at least two consecutive quarterly declines in a nation’s GNP.
Repayment of a loan or other liability.
An expansion of aggregate demand after a period of high unemployment or decelerating inflation.
A sale of new government securities to replace outstanding maturing government securities.
Regression Analysis (Nonlinear)
Nonlinear Regression Analysis is where two data series (X and Y) are fit to a model expressed as a mathematical function using nonlinear regression that will generate a normally a curve as if every value of Y was a random variable. The goal of the model is to make the Sum of the Squares as small as possible. Nonlinear regression uses logarithmic functions, trigonometric functions and exponential functions, among other fitting methods. Nonlinear Regression Analysis seeks to create a model that is similar to Linear Regression Analysis modeling in that both seek to graphically track a particular response from a set of variables. However, Nonlinear models are far more complicated than linear models because the function is created through a series of approximations that may stem from trial-and-error process. Mathematicians use several established methods, such as the Gauss-Newton method and the Levenberg-Marquardt method.
The development of average relationships between variables by means of the least squares method or correlation.
Regression Analysis (Linear)
Linear Regression Analysis is a simple linear regression that relates two variables (X and Y) with a straight line (y = mx + b). Linear Regression Analysis modeling seeks to graphically track a particular response from a set of variables.
Overnight Fixed-Rate Reverse Repurchase Agreement is a reverse repurchase agreement, also called a “reverse repo” or “RRP”, is an open market operation in which the Desk sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.
see Social Market Economy
SDR (Special Drawing Rights)
An international monetary unit equal to fixed proportions of major currencies. Rights are allocated to countries that are members of the IMF to borrow in a “special draw” a limited amount from the IMF. Normally, SDR borrowings are made to assist in overcoming temporary balance of payments difficulties.
Variations in business or economic activity that recur with regularity as the results of changes in climate, holidays and vacations.
Seasonally Adjusted (SA)
An adjustment or smoothing of data to take into account regular cyclical oscillations subject to Seasonal.
The profit a nation makes on its currency. It is the final difference between the nominal value of the currency at the actual cost of producing it.
This is a ratio developed by Nobel laureate William F. Sharpe that measures risk-adjusted performance. The ex-ante Sharpe Ratio is calculated by subtracting the risk-free rate
A harmonic curve that is perfectly simple, regular, and symmetrical.
The degree of deviation from the horizontal axis either in an upward or downward direction.
Social Market Economy Model
This model was implemented by Alfred Müller-Armack and Ludwig Erhard after World War II in West Germany. The social market economic model (sometimes called “Rhine capitalism”) is based upon the idea of realizing the benefits of a free market economy, especially economic performance and high supply of goods, while avoiding disadvantages such as market failure, destructive competition, concentration of economic power (anti-trust) and anti-social effects of market processes. The aim of the social market economy is to realize greatest prosperity combined with best possible social security. One difference from the free market economy is that the state is not passive, but takes active regulatory measures. The social policy objectives include employment, housing and education policies, as well as a socio-politically motivated balancing of the distribution of income growth. Characteristics of social market economies are a strong competition policy and a contractionary monetary policy. The philosophical background is Neoliberalism or Ordoliberalism.
Funds of a country that are not acceptable in exchange for the hard currencies of other countries. Example: Soviet Union’s Ruble.
A method of analysis which generates an array of the components of a time series arranged according to cycle length.
Speculative Demand for Money
A part of liquidity preference. The tendency of certain financial speculators to hold, or to sell, their financial assets in the form of cash, rather than bonds, depending on whether they expect the rate of interest to fall.
A speculator who applies for shares with the goal in mind of reselling those same shares at the date of issue for a profit.
A term coined during the 1970s to describe the condition where underlying prices rise due to rising costs but overall economic growth declines.
A Standard Deviation is a measure of the dispersion of a set of data from its mean implying that the greater the spread from the data, the higher the deviation. Standard deviation is calculated as the Square Root of Variance. It is applied to the annual rate of return of an investment to measure the investment’s volatility. Standard Deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
A term used by John Maynard Keynes that implied that wages do not rise simultaneously with prices.
Unemployment resulting from the fact that the regional or occupational pattern of job vacancies does not match the pattern of worker availability.
A payment by a government to a business, household or foreign nation that provides or consumes a commodity at a level under or above the free market price.
Sum of Squares
A statistical technique used in Regression Analysis. The Sum of Squares is a mathematical approach to determining the dispersion of data points. In a Regression Analysis, the goal is to determine how well a data series can be fitted to a function which might help to explain how the data series was generated. The Sum of Squares is used as a mathematical way to find the function which best fits the data with the least amount of variance. The two methods of Regression Analysis, Linear and Nonlinear, use the Sum of Squares whereby the least squares refers to the fact that the regression function minimizes the Sum of the Squares of the variance relative to the actual data points. In this way, it is possible to draw a function which statistically provides the best fit for the data. In order to determine the sum of squares the distance between each data point and the line of best fit is squared and then all of the squares are summed up. The line of best fit will minimize this value.
Superposition Principle (superposition property)
In all linear systems, the net response at a given place and point in time that is caused by two or more wave (stimuli) that converge and thus can (1) combine increasing the amplitude of the new combined wave or (2) cancel each other out when they are of opposite forces.
Supply & Demand (Law of)
This well-known law suggests that under perfect conditions (all things remaining equal), market prices will move to the level at which the quantity purchasers wish to buy equals the quantity that sellers wish to sell.
A graphics representation of the quantities that sellers are prepared to offer for the sale of a given commodity over each of a range of prices during a particular period of time.
A view which suggests that policy measures should be applied to aggregate supply or potential output rather than managing the economy exclusively through demand.
An economic system in which both the state and capitalism is abolished in favor of reorganizing society into industry-wide associations or syndicates of workers. Each syndicate would then govern its own members in their activities as producers but leave them free from interference in all other matters.
Total Credit Market Debt (Public and Private)
Federal tax on imports or exports usually imposed either to raise revenue (revenue tariff) or to protect domestic forms from import competition (protective tariff). A tariff may also be designed to correct an imbalance of payments. Money collected is called duty or customs duty.
The decline in the price of new technology as mass production rises in proportion to demand that simultaneously causes Economic Deflation as jobs in the old technology are displaced by the new via Schumpeter waves of Creative Destruction.
A system of offering shares and other securities that enables the buyer to make a bid for the named security.
A central bank policy which restrains the economy by reducing the supply of money which in turns adds pressure within the system to cause a rise in interest rates thus curtailing credit facilities. This policy has been employed to reduce the Real GNP growth and/or inflation. It has also been used in an attempt to support a currency value on international markets and to strengthen the balance of payments by trying to attract international capital.
Money held in an account for a specific period of time which is not available on demand or may be subjected to penalties for early withdraw.
A list of data arranged according to time.
A modeling process concerned with forecasting changes in trend on a time related basis.
Expressing a statistic in the form of a weighted basket of currencies arranged according to the amount of foreign trade with various nations relative to the host country.
A term normally employed to the expenditures of a government to an individual. This may be in the form of unemployment compensation, welfare, subsidy, social security, pension fund or some other social payment program. Under some circumstances, this may also refer to foreign aid.
is a moving cyclical wave that is symmetrical in shape and consists of oscillations occurring perpendicular (or right angled) to the direction of energy transfer. The wavelength (measured peak to peak) is consistent.
Negotiable debt obligations of the U.S. government, secured by its full faith and credit and issued at various schedules and maturities. The income from Treasury securities Treasury bills, notes and bonds) is exempt from state and local, but not federal, taxes.
bottom; valley; the lowest point within a time series.
Unit of Account
The unit of account need not be even a denomination of money that circulates. The British Pound was one pound of silver. There were no such coins for many years just as in ancient times there was the concept of a “talent” that was not a coin but a large measure by weight. A Greek Attic talent, was 26 kilograms (57 lb), a Roman talent was 32.3 kilograms (71 lb), an Egyptian talent was 27 kilograms (60 lb), and a Babylonian talent was 30.3 kilograms (67 lb). Ancient Israel, and other Levantine countries, adopted the Babylonian talent, but later revised the mass. The heavy common talent, used in New Testament times, was 58.9 kilograms (130 lb). A talent was a Unit of Account just as we might say $1 million or $1 billion is a modern unit of account yet there is no currency denominated in that amount..
A consumption tax levied on the value added to a product at each stage of its manufacturing cycle as well as the time of purchase by the ultimate consumer. The value-added tax is a fixture in European countries and a major source of revenue for the European Common Market.
The rate of spending, or turnover of money
One based upon a self-sufficient group of estates that produce little if any excess to be sold in a market, a feudal enclave.
A virtuous cycle in the economy means that higher wages stimulate consumption, leading to higher prices and larger corporate profits.
A trade which creates the illusion of where a trader acts both as a buyer and seller to create the impression of volume. This can create the thinking among buyers or sellers of an instrument are waiting in the wings, where others attempt to front-run such positions thereby nudging the market price in one way or the other.
see Complex Wave.
A term coined by Martin Armstrong to describe the rapid collapse in a market or economy after discovering how fast the Roman Empire actually collapsed in just 8.6 years.
A single oscillation measured from one peak to the next or from one trough to the next.
A mathematical process of assigning varying degrees of importance to specific components within a group of items.
A model which refers to a capitalist economy that includes a public policies favoring extensive provisions for social welfare services. The economic mechanism involves a free market and the predominance of privately owned enterprises in the economy, but public provision of universal welfare services aimed at enhancing individual autonomy and maximizing equality. Examples of contemporary welfare capitalism include the Nordic model of capitalism predominant in Northern Europe.
A term normally applied to a highly socialized political system in which the state assumes the burden of financially assisting a large portion of the population at the expense of national production.
The rate of return on an investment. When referring to bonds, it represents the rate of interest.