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Question 1

What is CPI?

Answer 1

Consumer Price Index, CPI, is a measure of the change in the price level of a market basket of consumer goods and services purchased by households.

Question 2

What can be used to measure inflation?

Answer 2

CPI.

Question 3

Has quantitative easing in the US lead to inflation?

Answer 3

No.

Question 4

In the US QE expanding the MO monetary base but did not lead to significant inflation. What happened to the M2 money supply during this period?

Answer 4

It did not spike like the M0 supply, because banks hoarded the cash to shore up their own balance sheets. This is one reason why QE did not lead to inflation. Another reason is that the economy was in a deflationary state at the time.

Question 5

In QE how does the money supply increase?

Answer 5

The US Federal Reserve prints money electronically and purchases assets from the treasury and commercial banks, such as mortgage-backed securities and government bonds.

Question 6

Describe the yield curve of sovereign bonds.

Answer 6

The yield curve represents the yield of government debt securities, the yield is the interest which is effectively the price of money loaned to a government. Normally the yield curve has a positive slope because long-dated debt has a higher yield. An inverted yield curve is highly predictive of imminent recession.

Question 7

Name two factors that precipitated the Russian ruble collapse beginning in the second half of 2014:

Answer 7

1) The decline in the price of oil, 2) International economic sanctions following Russia’s annexation of Crimea and military intervention in Ukraine.

Question 8

What are Kondratieff Waves?

Answer 8

Long-term economic cycles in the global economy that oscillate between innovation > prosperity > recession > depression. These coincide in many ways with credit cycles.

Question 9

What legislation did the Obama administration pass in response to the Global Financial Crisis?

Answer 9

The Dodd Frank Act in 2010.

Question 10

One way to reduce domestic debt burden is for a nation to

Answer 10

devalue its currency: current debts in a cheaper currency are effectively less costly. Devaluation also makes exports to other countries cheaper for them and imports more expensive in the devalued country.

Question 11

What is the ISM PMI?

Answer 11

The Institue for Supply Management’s Purchasing Manager’s Index is a survey reflecting the month to month change in inventory supply orders and is a key reading on the economy. The PMI chart exhibits cyclical behavior that according to Raoul Pal coincides with boom and bust economic cycles.

Question 12

An aging population is considered inflationary/deflationary

Answer 12

deflationary because older citizens tend to spend less and divest their savings. A younger population (raising kids, sending them to college, they buy houses/get jobs) tends to add more spending to the economy.

Question 13

Compared to 1968 and adjusted for inflation, today’s minimum wage is ___. Comment on income inequality and wage growth over this period as well.

Answer 13

$2 less. Income inequality has ballooned and wage growth in real terms (∆wages after inflation) has stagnated since the 1970s.

Question 14

What is HDFC?

Answer 14

HDFC is a major Indian bank whose stock price is doing extremely well. Many ASEAN financials are doing exceptionally well, e.g. Indonesia and Vietnamese banks.

Question 15

What is a currency carry trade?

Answer 15

A trading strategy in which money is borrowed in a currency with a low-interest rate and invested in a currency or asset providing a higher yield (greater interest rate). The trade seeks to capture the difference between interest rates and can become very profitable through the use of leverage, however it entails risk by assuming exchange rates will remain constant at present levels.

Question 16

What is the population and GDP of Myanmar?

Answer 16

$75 billion GDP, population of 50 million

Question 17

One reason Chinese manufactured products are so inexpensive and as a result competitive is because of an extreme lack of environmental regulation: T/F

Answer 17

True, intense pollution, deforestation, and total disregard for the environment has reduced the costs for factories and extractive industries, however, this also has created a massive environmental debt.

Question 18

What is tail risk?

Answer 18

A tail risk is a risk of an investment return moving more than 3 standard deviations from the mean of a normal distribution of returns. Typically, portfolio managers are only concerned about downside tail risk.

Question 19

What is amortization?

Answer 19

Amortization refers to the spreading of payments owed on debt over time according to a schedule.

Question 20

Company market capitalization / total free cash flow =

Answer 20

price-to-free-cash-flow ratio

Question 21

Earnings before interest and tax (EBIT) (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure) =

Answer 21

Free cash flow, excess cash which can be used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. Basically, cash flow minus capital expenditures.

Question 22

In financial services, a firm or entity that is involved in selling securities, and often creation and marketing of securities, to investors, funds, institutional clients, etc. is referred to as the

Answer 22

sell side.

Question 23

Who comprises the buy side in financial markets?

Answer 23

money managers, hedge funds, institutional firms, pension funds, mutual funds, and other professional investors. Retail investors are also technically the buy side.

Question 24

A Texas shale company lays off some workers who are now unemployed in a local town. A restaurant in the town closes. Some bankruptcy lawyer makes money due to these reductions, but how does his and the general public’s consumption patterns change?

Answer 24

The local population will interpret these events negatively and their spending will likely decrease, even if their income is unchanged or rising, opting instead to save more for an uncertain future.

Question 25

What is the JOBS act?

Answer 25

Jumpstart Out Business Startpus Act, passed in 2012, is a piece of legislation intended to reduce regulatory friction associated with funding small businesses in the US.

Question 26

What is the Plaza Accord?

Answer 26

An agreement signed in 1985 to depreciate the dollar by the US, UK, West Germany, France, and Japan by intervening in currency markets. This was in large part to improve US export competitiveness.

Question 27

What was an effect of the Plaza Accord on the Yen and Japanese economy?

Answer 27

The Yen appreciated against the dollar by 51% which put pressure against Japan’s export-driven economy by increasing the foreign price of exports. This resulted in expansionist monetary policy in the late 1980s that led to the Japanese asset bubble and then the Lost Decade.

Question 28

What is the Blackstone Group?

Answer 28

Blackstone (BX) is an American multinational private equity and alternative investment firm.

Question 29

Describe trends in higher education in China over the last few decades

Answer 29

China is the largest emerging market for education. To begin with, the cost of building an educational campus is much cheaper in China than in the West and the government subsidizes textbooks. China annually produces graduates many multiples over the number of graduates produced in the West.

Question 30

What is the largest computer manufacturer in the world?

Answer 30

Lenovo, a Chinese brand.

Question 31

The Chinese government is most open to reform and liberalization during periods of

Answer 31

Slowing economic growth. The government fears social instability greatly and therefore job creation is a crucial concern. For instance in 2002 the constitution was amended to put private businesses on equal footing with state companies.

Question 32

Describe a benefit of being a state run enterprise in China with regarding to financial funding?

Answer 32

The main four state run banks, which are directly backed by the PBOC, will provide funds to state run companies regardless of creditworthiness. Many of the officials of these banks are Communist Party members or PBOC officials. The reality is that if corporations or the banks encounter insolvency they will be bailed out by the PBOC.

Question 33

What may have contributed to Intel’s agreement to a chip packaging deal in Chengdu in?

Answer 33

A crowd of tens of thousands chanted “Intel” upon the CEO’s visit to the area. This is a good instance of China’s foreign affairs policy.

Question 34

What did “friend Snow’s” book The Other Side of the River: Red China Today declare?

Answer 34

That there was no massive starvation in China at the time. In fact, over 30 million died from the famine. This was China’s waishi policy at work.

Question 35

What is the result of Yen strength in Japan?

Answer 35

Yen strength is negative for the Japanese economy because it makes their exports less competitive and reduces the prices of imports, thus resulting in deflation in the prices of imported goods.

Question 36

The growing Chinese economy has led to a massive stockpiling of foreign reserves by the Chinese government. Name one thing China has done with these reserves in the early 2000s

Answer 36

Buy US Treasury bonds, which helped finance the Iraq war and US government spending. This helped allow the US to keep interest rates low.

Question 37

What was the Taper Tantrum?

Answer 37

The market response to Bernanke’s comments in 2013 that the Fed’s purchasing of bonds was going to decrease, i.e. QE was being tapered. The market reacted quickly withdrawing from bonds and sending their yields higher.

Question 38

Describe the Japanese government’s debt to GDP ratio since the asset bubble collapse in the late 1980s.

Answer 38

The debt to GDP ratio went from around 50% GDP to climb steadily to over 200% GDP currently.

Question 39

Enmity with China and threats from North Korea, an aging population in Japan, 30 million young single males in China and a large standing army in North Korea, apply pressures that could lead to in Japan

Answer 39

amendment to the defense clauses of the constitution, expansion of the defense budget financed at zero or negative interest rates, and rapid innovation of warfare technology and robotics.

Question 40

In the early 2000s, what did banks do with all the mortgages they were lending out?

Answer 40

They packaged them up in collateralized debt obligations (CDOs) which were bundled into a series of tranches each with specific risks and yields. This securitization was intended to reduce risk, for example through geographic diversification, but in practice in increased risk by leaving the bond owners clueless as to the identity of the borrowers.

Question 41

Describe what happened to CDOs in what Soros calls the ‘securitization mania’ after 2005.

Answer 41

Synthetic securities were created so there were CDOs of CDOs of CDOs. Ultimately the synthetic securities multiplied well beyond the actual supply of mortgages.

Question 42

What was the purpose of credit default swaps?

Answer 42

CDSs are synthetic financial securities which act as contracts between two market participants were one is looking to protect against default risk. It sells a CDS to a buyer who agrees to make good credit losses in exchange for an annual fee.

Question 43

During the crisis, explain the relative nominal values of CDS, US household wealth, total US stock market capitalization, and US treasury market value.

Answer 43

The total nominal value of all outstanding CDS contracts was around 42.6 billion, roughly equal to total US household debt. US stock market capitalization was around 18.5 billion, and the treasury market was around 4.5 billion. This is partly because CDS could be traded on 1.5% margin.

Question 44

Who is Edward Gramlich?

Answer 44

Former US Federal Reserve governor who warned Greenspan about subprime borrowing in 2000 and published a book forecasting the subprime market as America’s next boom and bust in 2007 prior to the crisis.

Question 45

What is the global dollar carry trade?

Answer 45

As a result of low interest rates in the US, and because the dollar is a global reserve currency (meaning practically all other nations can borrow dollars), some $9 trillion has been borrowed in dollars and then invested in other, higher yielding assets or bonds abroad.

Question 46

What happens to the global dollar carry trade when the dollar appreciates?

Answer 46

Dollar denominated debt because more expensive to pay off, this creates pressure on those ($9 trillion) who borrowed dollars.

Question 47

How did the first dollar bull market (after the break from the gold standard) end?

Answer 47

With the plaza accords in 1985 after the dollar had risen 93%.

Question 48

A strengthening dollar is bearish for emerging markets: T/F

Answer 48

True, a lot of the development in emerging markets has been financed in dollars.

Question 49

Oil is denominated in dollars, so if the dollar rallies the price of oil ___

Answer 49

continues to go down; this can be seen in commodities in general.

Question 50

What was Executive Order 6102

Answer 50

An order by President Roosevelt in 1933 to ban the hoarding of gold by US citizens and require all gold to be submitted to the Federal Reserve. Gold hoarding was explained as worsening the economic depression the country was facing, which is why it was criminalized. However, the real reason was to remove the constraint of gold backing on the money supply so the federal reserve would be able to expand the money supply by printing money. Additionally, the price of gold was fixed at $35 after this.

Question 51

Describe the conglomerate boom and bust in the 1960s and 1970s?

Answer 51

Beginning with large defense stocks with lofty share prices worried about declines as the Vietnam War came to an end, these companies began to use their elevated share prices to acquire smaller companies. Conglomerates were formed in this way through acquisition and low-interest rates aided the situation. Earnings per share increased, thus changing company fundamentals, and enticing other investors, including hedge funds, this cycle continued with acquisitions necessarily getting larger and larger, in a self-reinforcing manner. However, rising interest rates rendered this process unsustainable and eventually the acquisitions could not continue, exposing weak underlying business fundamentals and leading to a collapse.

Question 52

What is an important fundamental difference between currency and commodity markets?

Answer 52

Commodities cannot be printed by fiat. Commodity futures may be traded by speculators, but ultimately market fundamentals dictate prices.

Question 53

Describe Diego Parilla’s broadband thesis.

Answer 53

He contends that the internet revolution and tech boom in the late 90s allowed for massive overcapacity in internet infrastructure and that the ensuing bust resulted in heavy losses and many of these assets were simply written off. But the infrastructure still existed after the write-offs and effectively had ‘flattened’ the technological space, facilitating internet access on a global level. This flattening thesis applied to the current excesses in oil and gas infrastructure, particularly shale, leads to Diego’s ‘energy broadband’ thesis. In other words, not peak but worthless oil.

Question 54

What energy resource exists in abundance over coal and gas?

Answer 54

Frozen methane under the seabeds: still currently too expensive to extract.