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Penn State University Economics Association Optimal Bundle Editor: Patrick Reilly Associates: Holden Sabato, Jared Anderson, Zachary Shick. and Abeer Alghamdi October 23rd 2018

Lower Your Expectations The United States’ exciting year for GDP growth, measured at 4.2% and 3.5% for the second and third quarters, is not expected to continue on for much longer. With the stock market downturn throughout the month of October and a failed rebound in early November, there is uncertainty floating in the air. Companies such as Alphabet (Google), Facebook, Netflix, Apple, and Amazon have all seen their share prices fall by 20-30% since July of this year. Goldman Sachs’ stated they expect GDP growth for the third quarter of 2019 at a meager 1.8%, then falling to 1.6% for Q4. Many are citing the fizzing stimulus that came from 2017 tax cuts by President Trump, as the effects of such stimulus cannot last forever. In a recent survey of 116 businesses by the National Bureau of Business Economists, only 12% of participants reported an increase in investment following these tax cuts. On top of all of this, expected increases in interest rates are going to further hinder investment as time goes on, as the Fed is expected to raise rates again this December and another three times next year, with little sign of deviating from

this trend. Sluggish investment trends are unlikely to support more of the GDP growth that we have been seeing, and it is unlikely that consumption can come and save the day unless the tight labor market can continue to spur wages upwards. Discussion of declining growth will always spark another discussion of future recession. While Goldman Sachs does not expect to see one by 2020, others cannot say the same. Reuters, the long standing international news agency, in its recent survey of economists reported a median probability of 35% for a recession occurring by 2020, which has increased from a median of 30% from their survey in October. While the optimistic type might simply blow all of this speculation off, the stacking amount of resistance to future growth implies that this bull market might have finally reached its peak. -ZS

Bet It All on Red! In May of 2018 the Supreme Court struck down a federal law that effectively banned commercial betting on sports in most states. This opens the door to legalizing the estimated $150 Billion annual illegal wagers made on United States sports each year. Now everyone has the option to quit their job and become a professional sports gambler, should you do it? The chart below shows the results, over the last 25 years, of different betting strategies involving the NFL and there are a few key statistics shown in the data. One takeaway from this chart is the totals, 3,164 wins and 3,164 losses, exactly 50.0%. This is what makes sports betting gambling, it’s just a coin flip whether a team beats the spread or not. Also, the return is calculated by “assuming laying 11 to win 10”. In order to win $100 betting that a team is going to beat the spread you have to bet $110, not $100. The $10 differential is called the house cut and how the casino makes money. This

means that in order to break even over the long run you have to be correct more than 52% of the time, factoring in the house cut. In order to earn a living professional gamblers have to get over the 52% threshold. They do this with a number of strategies that theoretically increase their odds. One way is to bet on games that other people aren’t like a division 2 football game. The idea being that there can be mispricing’s if there’s a smaller number of people betting on the game. Another strategy is attempting to come up with your own odds and comparing them to the odds the casino gives you. This is obviously more challenging, as there are hundreds of variables you could look at. But, if you find a real trend you could potentially create a system that’s profitable over the long run. Overall, if you’re planning on consistently gambling on sports you have a better have a good strategy or you will lose money in the long run.-PR

Quick explanation of column headings: • Pushes: Number of pushes against point spread • Win Rate: Ratio of wins to bets resolved • Std. Dev.: One standard deviation in the mean of the win rate, assuming every bet had a theoretical chance of winning of 50%. • N.S.D: Number of standard deviations that the actual results differ from an expected win rate of 50%. • Return: Ratio of money won (lost = negative) to money bet, assuming laying 11 to win 10.

Increased Home Prices Decrease Sales Sales of previously owned U.S. homes displayed their greatest annual decline since October of 2014, largely due to higher mortgage rates that are diminishing home affordability and shaking consumer confidence. Existing-home sales dropped 5.1% compared to the year before, while 78% of people currently view renting as more affordable than owning. New rental supply reached a three-decade high leading to slowed growth in rent prices adjusted for inflation in the last few quarters. Simultaneously, home prices continue to grow faster than incomes and inflation, and mortgage rates have risen. Although renting remains unaffordable for many families, buying has become even more unaffordable due to the significant increase in the cost of buying a home.

Today, only 37% of British 25- to 37year-olds own property, in comparison to 67% in 1991. Global financial markets, as opposed to supply shortages, are the main cause of the increased prices of homes. One explanation for increased housing prices, is found by viewing a house as a financial asset, which provides implicit income due to the saving on rent achieved by owning the property rather than renting it from a landlord. Like all streams of income, this can be valued using an interest rate. As global real interest rates dropped, monthly savings on rent, capitalized as house prices, have soared in value.

Although globally real interest rates are falling, housing trends and rental yields vary widely, including within countries. In expensive areas of north London, they are under 3%, whereas in parts of Liverpool they can exceed 10%. Rents have risen significantly in globally successful cities, like San Francisco, where rents are 31% higher in real terms than they were in 2005. A reasonable tactic would be to build more where rents are rising.-AA

Don’t lower your expectations! Over the last several months the stock market has been greatly underperforming expectations and investors are becoming worried. With the Dow Jones, S&P 500, and the Nasdaq all taking heavy hits in November, people are wondering if the longest bull market in history is finally coming to an end. Could a recession be upon us? Are our greatest fears coming earlier than we anticipated? My answer is no, while the market has certainly put a scare in all of us, I believe the future is still bright for some time. First off, everyone was saying the same exact things last month in October, when the markets were deep in the red. However, the beginning of November came and we were able to rebound off the losses and make positive gains. We can also look at market history around this time of the year, market indexes typically climb around Christmas so we should be expecting a bounce back from the recent lows. Hopefully, this will boost consumer confidence back up and at least temporarily end the talks of us entering a recession. We can’t talk about underperforming markets without mentioning the federal funds target. The Fed recently decided to keep their target at a range of 2 to 2.25%, but also give guidance that we should expect rate hikes next month. You might be concerned that the Fed not increasing target rates is a sign that they believe economic growth will slow. However, I do not think that is the case. Recent economic data suggested that while job growth was strong, wage gains were not and it was one of the reasons the Fed felt the

need to temporarily halt their rate hikes. Not only that but Fed chair Jerome Powell was quoted saying that our current bullish market stage could last much longer, maybe even indefinitely. I’m not saying the economy isn’t slowing down, we have experienced great growth for a while now and eventually that has to come to an end. However, I think we have become so accustomed to this rapid growth and over performing markets that these recent falls seem catastrophic to us. I think we need to take a step back and realize that while the economy is slowing its growth, our next recession will most likely not be upon us as soon as the first half or second half of next year like some are predicting. HS


General Motors announced Monday that it planned to idle five factories in North America and cut roughly 14,000 jobs in a bid to trim costs. President Trump has not taken kindly to this and has threatened to cut all subsidies to General Motors including electric cars. Philadelphia 76ers made a splash in the trade market when they sent Robert Covington and Dario Saric to Minnesota in exchange for Jimmy Butler. Jimmy is a four time NBA All-Star and has made an immediate impact by hitting two game winning shots in his first few weeks with his new team. With the Boston Celtics looking surprisingly poor maybe this is the trade the 76ers needed to put them at the top of their conference.

Profile for The Optimal Bundle

The Optimal Bundle: Volume 56  

November 27th 2018

The Optimal Bundle: Volume 56  

November 27th 2018