Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time. In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. As such, those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual funds, could well be called speculators. Indeed, given the efficient market hypothesis, which implies that a thorough analysis of stock data is irrational, all rational shareholders are, by definition, not investors, but speculators.
Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.
To avoid speculation an investment must be either directly backed by the pledge of sufficient collateral or insured by sufficient assets pledged by a third party.[original research?] A thoroughly analyzed loan of money backed by collateral with greater immediate value than the loan amount may be considered an investment. A financial instrument that is insured by the pledge of assets from a third party, such as a deposit in a financial institution insured by a government agency may be considered an investment. Examples of these agencies include, in the United States, the Securities Investor Protection Corporation, Federal Deposit Insurance Corporation, or National Credit Union Administration, or in Canada, the Canada Deposit Insurance Corporation.
Promoters of and news sources that report on speculative financial transactions such as stocks, mutual funds, real estate, oil and gas leases, commodities, and futures often inaccurately or misleadingly describe speculative schemes as investment.
Thursday, April 26, 2012
What is Investment?
Monday, April 16, 2012
Dead Wrong
The Recession
-- Fed action: In his March 26 speech to business economists, Federal Reserve Chairman Ben S. Bernanke concentrated on the weak employment picture and said further reductions in joblessness would require “more rapid expansion of production and demand from consumers and business, a process that can be supported by continued accommodative policies.”
Investors read this as suggesting the economy might be weak enough in future quarters to require another round of quantitative easing via Fed purchases of Treasuries and mortgage-backed securities. They seem to believe that the negative effect a weak economy would have on corporate profits and dividends pales in comparison with the impact of the money received directly by sellers of securities to the Fed.
Stocks took off after Bernanke’s remarks: The Dow Jones Industrial Average closed out its best first quarter since 1998; the Standard & Poor’s 500 Index (SPX) ended the quarter above the 1,400-point mark for the first time in almost four years; and the Nasdaq Composite Index topped the 3,000 level for the first time in more than 11 years.
Beyond the money received directly by sellers of securities to the Fed, investors certainly can’t expect any multiplier effect from the member banks’ reserves created by the central bank’s policies. The two rounds of quantitative easing helped pile up those reserves, which now exceed requirements by about $1.5 trillion. Banks will lend only to the most creditworthy, and are so loaded with cash they don’t need to borrow much.
Given the recent euphoria, stocks might rally if the economy strengthens, and the prospect of more quantitative easing disappears. Can you have it both ways? This reminds me of the ad published by the National Association of Realtors in the Wall Street Journal several years ago when house prices were collapsing. In screaming headlines across the top of the page, it read, “Now Is a Great Time to Buy a House!” and in identically large print at the bottom, it read, “Now Is a Great Time to Sell a House!”
-- Congressional action: In addition to a possible QE3 by the Fed, rising unemployment and increasingly negative economic data could also spur a push for stimulus in Congress before the November elections. The payroll-tax cut, along with the Bush-era income-tax cuts, are set to expire at the end of this year. Meanwhile, unemployment benefits are scheduled to plunge, at a moment of what I believe will be rising joblessness. This fiscal drag would knock 3 percent to 4 percent off GDP. Representatives and senators seeking re-election -- of both parties -- don’t want to face opponents’ charges that they did nothing as the economy tanked.
Some renewal of the earlier tax cuts and extension of unemployment benefits seems almost certain. But with gridlock in Washington, how will it play out? Congress and the administration will no doubt act before the election if the economy is in bad shape. Otherwise, they could come back for a so-called lame-duck session in December. Or, as they did this year, they could act after the new Congress is installed in January and make the renewed tax cuts retroactive to the beginning of 2013. Continuing uncertainty over eventual congressional action will only further depress the confidence and spending of U.S. consumers and business.
Meanwhile, a number of economic indicators are pointing in the direction of a faltering economy. The Economic Cycle Research Institute index remains in recession territory. The ratio of coincident to lagging economic indicators, often a better leading indicator than the leading indicator index itself, is declining. Electricity generation, though influenced by the warm winter, is falling rapidly.
In Part 4, I will look at the recent hunger for stocks despite the increasing reasons for caution and recent volatility.
The Recession
-- Fed action: In his March 26 speech to business economists, Federal Reserve Chairman Ben S. Bernanke concentrated on the weak employment picture and said further reductions in joblessness would require “more rapid expansion of production and demand from consumers and business, a process that can be supported by continued accommodative policies.”
Investors read this as suggesting the economy might be weak enough in future quarters to require another round of quantitative easing via Fed purchases of Treasuries and mortgage-backed securities. They seem to believe that the negative effect a weak economy would have on corporate profits and dividends pales in comparison with the impact of the money received directly by sellers of securities to the Fed.
Stocks took off after Bernanke’s remarks: The Dow Jones Industrial Average closed out its best first quarter since 1998; the Standard & Poor’s 500 Index (SPX) ended the quarter above the 1,400-point mark for the first time in almost four years; and the Nasdaq Composite Index topped the 3,000 level for the first time in more than 11 years.
Beyond the money received directly by sellers of securities to the Fed, investors certainly can’t expect any multiplier effect from the member banks’ reserves created by the central bank’s policies. The two rounds of quantitative easing helped pile up those reserves, which now exceed requirements by about $1.5 trillion. Banks will lend only to the most creditworthy, and are so loaded with cash they don’t need to borrow much.
Given the recent euphoria, stocks might rally if the economy strengthens, and the prospect of more quantitative easing disappears. Can you have it both ways? This reminds me of the ad published by the National Association of Realtors in the Wall Street Journal several years ago when house prices were collapsing. In screaming headlines across the top of the page, it read, “Now Is a Great Time to Buy a House!” and in identically large print at the bottom, it read, “Now Is a Great Time to Sell a House!”
-- Congressional action: In addition to a possible QE3 by the Fed, rising unemployment and increasingly negative economic data could also spur a push for stimulus in Congress before the November elections. The payroll-tax cut, along with the Bush-era income-tax cuts, are set to expire at the end of this year. Meanwhile, unemployment benefits are scheduled to plunge, at a moment of what I believe will be rising joblessness. This fiscal drag would knock 3 percent to 4 percent off GDP. Representatives and senators seeking re-election -- of both parties -- don’t want to face opponents’ charges that they did nothing as the economy tanked.
Some renewal of the earlier tax cuts and extension of unemployment benefits seems almost certain. But with gridlock in Washington, how will it play out? Congress and the administration will no doubt act before the election if the economy is in bad shape. Otherwise, they could come back for a so-called lame-duck session in December. Or, as they did this year, they could act after the new Congress is installed in January and make the renewed tax cuts retroactive to the beginning of 2013. Continuing uncertainty over eventual congressional action will only further depress the confidence and spending of U.S. consumers and business.
Meanwhile, a number of economic indicators are pointing in the direction of a faltering economy. The Economic Cycle Research Institute index remains in recession territory. The ratio of coincident to lagging economic indicators, often a better leading indicator than the leading indicator index itself, is declining. Electricity generation, though influenced by the warm winter, is falling rapidly.
In Part 4, I will look at the recent hunger for stocks despite the increasing reasons for caution and recent volatility.