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Penn State University Economics Association Optimal Bundle Editor: Patrick Reilly Associates: Holden Sabato, Jared Anderson, Abeer Alghamdi, Zachary Shick. November 6th 2018


t has come that time of year for companies to report their quarterly earnings. This is a critical time for companies as they can tell the public how they’re performing compared to Wall Street estimates. So far a good amount of influential companies have given their reports and more are to come, meanwhile the business world is watching closely. The company everyone loves to talk about, Amazon, reported its earnings on October 25. This was certainly an interesting one as it has seemed that recently Amazon has been diving into every market possible and therefore their earnings should reflect that. To an extent, it did, their earnings per share beat expectations by over $2 this quarter however their guidance for the future was not as promising as people had hoped. Not only was their revenue down from expected this quarter, but the giant e-commerce company stated that they were expecting revenue way below what was estimated for the fourth quarter. As a result the stock crashed almost 10% and people are left wondering what Amazon will do to rebound from this. Another company in

the public eye, Tesla, shared their financial performance in the last quarter. While it seems like Tesla has been getting hit from every angle recently, the car company actually surprised everyone and reported third quarter profit. They destroyed their earnings per share estimate and also beat their expected revenue by $490 million. This positive surprise boosted Tesla’s stock over 10% as investors were quick to hop on the company while their valuation was still low. However, not everyone is so bullish on the company. Goldman Sachs’s David Tamberrino, noted that the company had a great quarter but mentioned that this may just be short term success from Tesla as China tariffs and other factors could end up really hurting the company. Earnings season is certainly an exciting time of the year and we still have many more companies that will reveal how they are performing. Many companies will surprise Wall Street analysts and come out on top but many more will fail to reach expectations and their stock will reflect that. As the stock market reacts to these reports, people everywhere will be watching closely waiting to see who else will surpass expectations. –HS

Jobs Report Beats Expectations


ccording to the BLS 250,000 new jobs were created in the month of October. This number is far greater than the 190,000 jobs expected by economists polled by Refinitiv. Service sectors such as education, healthcare, leisure, hospitality, and professional services were the big winners; producing roughly 121,000 jobs cumulatively. Construction and manufacturing also saw an increase of 62,000 jobs. Our Economy is booming; Unemployment remained at 3.7%, and the tight labor market has prompted wages to increase. In October the average wage earned by an employee rose by 0.2% to $27.30. In the long-run our economy has produced over 20 million jobs since 2010, and in the past year nominal wages have increased by 3.1%. This is the fastest growth of wages since 2009. All of this winning begs us to ask, ‘where do we go from here?’ There may be a downside to beating expectations. The evertightening labor market is forcing companies to pay higher wages and increase benefits. This may cut into corporate earnings and increase inflation. If these growing wages cause inflation, then the Fed may have to further raise rates to a point where the economy is slowed. In fact, markets are already being impacted as new expectations are formed. The Dow Jones Industrial Average dropped by 0.43% and the S&P 500 dropped by 0.63% on Friday. The 10-year Treasury returns were also impacted by this news as rates increased by 8 basis points; rising to 3.22%. The decrease in stocks and the increase in long-term bond yields are indicative of lower expected earnings and higher expected interest rates. It appears that the market is expecting future inflation. However, Fed Chairman Jerome Powell does not seem to be worried, and with good reason. We are currently in one of the longest

disinflationary periods in history, and recent Fed research shows that the Phillips Curve (the inverse relationships between inflation and unemployment) appears to be flattening. Which means despite the ever-tightening job market inflation seems unlikely. Giving the Fed confidence that our current bull market can endure. We may be capable of keeping unemployment relatively low without seeing significant inflation. -JA

Ripple effects of Iran sanctions


he Trump team wants to establish a pact with Iran that thwarts nuclear weapons advancement, prohibits long-range missiles, and ends Tehran’s participation in the fights taking place in Syria, Lebanon, Yemen, and Iraq. The Trump administration attempts to accomplish its goals by withdrawing from the 2015 nuclear deal. Oil prices rose in the past months due to expectations of sanctions, but will most likely lower as a result of other countries’ increasing their supply of oil. Oil makes up about 70-80% of Iran’s exports, and 50% of its government revenue. The sanctions led to a dramatic reduction in Iranian oil exports, by over a million barrels a day, hurting the Iranian economy, and raising inflation to 15.9% in the past month. Iran’s economy faces a two-year recession, according to the International Monetary Fund forecast.

As inflation is starting to rise in the U.S., reduced oil prices are beneficial as they increase inflation-adjusted income, and businesses profit margins. Despite the sanctions leading to a short-run improvement to the U.S. economy, they negatively impact the global economy, including valuable countries that supply U.S. energy. The International Monetary Fund, predicted a lower global economic growth forecast for 2018 and 2019. While supply of oil from other countries like Russia and Saudi Arabia increase, demand will decrease due to the harm incurred by the global economy, reducing oil prices. OPEC ally Russia, increased oil production by 400,000 barrels a day to make up for losses from the diminishing oil production of the Islamic Republic. In 2019, daily global oil supply will likely rise by 2.5 million barrels, according to Rapidan Energy Group. President of Rapidan Energy Group, Bob McNally, mentioned “we see next year as very oversupplied, and that’s before we take into account demand risk.” U.S. and Brazil will likely account for the majority of oil supply in 2019 as U.S. increases their oil production and output. -AA

An image of Iran’s capital city Tehran at night

Crypto, Fiat, and the Future of Decentralized Currency


he burst of the cryptocurrency bubble, that took the investment world by storm at the end of last year, killed off much of the hype surrounding the crypto scene. Since then, the most popular coins have all seen dramatic drops in price, but with this has also come a large decrease in volatility. Currently Bitcoin’s 30-day volatility index, a measure of the fluctuating price in US dollars, is at its lowest point in almost 2 years (around 1.5%). During this time its price has stabilized between $6,150 and $6,700.1 Why is this significant? This allows for the discussion of cryptocurrency’s original purpose, an escape from the world of fiat currencies.

As it stands, the world is dominated by fiat currencies, currencies issued by various governments as the primary tool of indirect exchange. Long gone is the use of commodity moneys such as gold and silver, which had two important traits that modern currencies do not, having a truly finite supply and being much harder to manipulate or counterfeit. With the use of paper moneys, governments can continue to print and produce money to no end, as there is an effective monopoly on its production. The grand expansion of governments incentivizes them to constantly be manipulating the value of its money, its supply, etc., and infinitely depreciate said value in the long run.2 In the

fight against fiat currencies, Bitcoin was designed and modeled around becoming gold’s first digital successor (hence the use of the term “mining” for the creation of new coins), as it also has a theoretical total supply, and can be used independently as a private, anonymous means of exchange. For the longest time, free-market advocates could only look to a return to metal commodity moneys as a glimmer of hope, but this idea proved to be far too ambitious and impractical as time went on. In a 1984 interview, Austrian Economist and Nobel Laureate F.A. Hayek had this to say about what I would call ‘monetary freedom,’

“ I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” F.A. Hayek, 1984 Effectively predicting the rise of cryptocurrencies, Hayek had the right idea here. With its innate anonymity, freedom from third party interference, entirely market determined value, and freedom from any sort of set “conversion rate” or sales tax, Bitcoin and all other cryptocurrencies, also called “altcoins,” are paving the road for the future of government-free money. With further advancements in transaction speeds such as the Lightning Network, all we can hope for is further adoption of these networks as the superior means of exchange.—ZS Murray Rothbard, What Has the Government Done to Our Money? (Auburn: Ludwig von Mises Institute, 1963)

Profile for The Optimal Bundle

The Optimal Bundle: Volume 55  

November 6th, 2018

The Optimal Bundle: Volume 55  

November 6th, 2018