TUGAS BAHASA INGGRIS BISNIS 2 (Not only-But also , Both-and)

Commodities: The Portfolio Hedge

Most people picture a trading floor at a futures exchange as a scene of utter chaos, with fierce shouting matches, frantic hand signals and high-strung traders jockeying to get their orders executed; their picture is not far off. These markets are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes not only agricultural goods, metals and petroleum, but also products such as financial instruments, foreign currencies and stock indexes that trade on a commodity exchange.

At the center of this supposed disorder are products that offer a haven of sorts - a hedge against inflation. Because commodities prices usually rise when inflation is accelerating, they offer protection from the effects of inflation. Few assets benefit from rising inflation, particularly unexpected inflation, but commodities usually do. As demand for goods and services increases, the price of goods and services usually rises too, as does the price of the commodities used to produce those goods and services. Futures markets are then used as continuous auction markets and as clearing houses for the latest information on supply and demand.

How Commodities Are Traded

Trading futures is the purest way to invest in commodities. To trade commodities, an individual trading account can be opened either directly with a futures commission merchant or indirectly through an introducing broker. Another way to trade commodities is through a managed account, where you give someone a written power of attorney to make and execute decisions about what and when to trade. They will have discretionary authority to buy or sell for your account or will contact you for approval to make trades, or you can hire a commodity trading advisor for a fee. Lastly, ever increasingly popular methods of diversified investing in commodities include commodity pools (limited partnerships) or commodity-related mutual funds.

Benchmarks for Broad Commodity Investing

Two of the most common commodity indexes are the Goldman Sachs Commodities Index (GSCI) and the Dow Jones-USB Commodity Index (DJ-USBCI).

The GSCI is a composite index of commodity sector returns, representing an un-leveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data. When used as an economic indicator, this index will assign a weighting to each commodity in proportion to the amount of that commodity flowing through the economy.

The DJ-USBCI is designed to be a highly liquid index that represents fairly the importance of a diversified group of commodities to the world economy. To avoid overexposure of a particular commodity, the index does not allow any related group of commodities (e.g., energy, precious metals or grains) to make up more than 33% of the index. This forbids a disproportionate weighting of any particular commodity or sector which could negate the concept of a broad-based commodity index and thereby increase volatility.

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The major distinction between the two indexes is that the GSCI uses a strategy of overweighting the appropriate commodity sector (e.g., energy, metal or agriculture) based on economic demand. The DJ-USBCI on the other hand relies on both production and liquidity in determining weightings but has stricter guidelines on the maximum percentages allowed in one particular sector.

Why Commodities Add Value

Commodities tend to bear a low to negative correlation to traditional asset classes like stocks and bonds. A correlation coefficient is a number between -1 and 1 that measures the degree to which two variables are linearly related. If there is perfect linear relationship, you'll have a correlation coefficient of 1. A positive correlation means that when one variable has a high (low) value, so does the other. If there is a perfect negative relationship between the two variables, you'll have a correlation coefficient of -1. A negative correlation means that when one variable has a low (high) value, the other will have a high (low) value. A correlation coefficient of 0 means that there is no linear relationship between the variables.

Typically, U.S. equities whether in the form of stocks or mutual funds are closely related to each other and tend to have positive correlation with one another. Commodities, on the other hand, are a bet on unexpected inflation and they have a low to negative correlation to other asset classes.

Commodities have offered superior returns in the past, but they still are one of the more volatile asset classes available. Make no mistake, they do carry a higher standard deviation (or risk) than most other equity investments. However, by adding commodities to a portfolio of assets that are less volatile, you actually decrease the overall portfolio risk due to the negative correlation and in most cases increase your overall expected return.

How to Invest

Individual commodity futures are an investment for more sophisticated investors. For most investors the most suitable way to invest in commodities is through a mutual fund. They can be purchased through a 'natural-resources fund,' which buys companies associated with the mining or production of commodities, such as Exxon/Mobil or Schlumberger, to name a few. Or, commodities can be purchased through a 'raw-commodity fund,' which actually invests in commodity-linked derivative instruments backed by fixed-income investments.,

In order to get the true diversification value of commodities and the negative correlation to stock returns, you'll need to seek out funds with direct commodity investments since buying a natural-resources fund will typically just add more stock holdings to your portfolio. Two options would be the 'PIMCO Commodity Real Return Strategy Fund' (which uses the DJ-USBCI as an index) or the 'Oppenheimer Real Asset Fund' (uses the GSCI as the index). Several exchange-traded funds based on commodity indexes are being planned for the future.

The Bottom Line

During inflationary times, many investors look to asset classes like real-return bonds and commodities (and possibly foreign bonds and real estate) to protect the purchasing power of their capital. By adding these diverse asset classes to their portfolios, investors seek to provide multiple degrees of downside protection and upside potential. What is important is that you draw the line on the maximum correlation of returns you will accept between your asset classes, and choose your asset classes wisely. Given the unique negative correlation that raw commodities have to stocks and bonds, they can be a well-advised addition to almost every long-term investment portfolio.

sumber:http://www.investopedia.com/articles/trading/05/021605.asp#ixzz1oPE4qgsD 

1.    These markets are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes not only agricultural goods, metals and petroleum, but also products such as financial instruments, foreign currencies and stock indexes that trade on a commodity exchange.

Pasar ini adalah tempat pertemuan pembeli dan penjual dari daftar terus berkembang dari komoditas yang saat ini tidak hanya mencakup barang-barang pertanian, logam dan minyak bumi, tetapi juga produk seperti instrumen keuangan, mata uang asing dan indeks saham bahwa perdagangan pada komoditas pertukaran.
 2.     The DJ-USBCI on the other hand relies on both production and liquidity in determining weightings but has stricter guidelines on the maximum percentages allowed in one particular sector.

DJ-USBCI di sisi lain bergantung pada produksi dan likuiditas dalam menentukan bobot namun memiliki pedoman ketat pada persentase maksimum yang diperbolehkan dalam satu sektor tertentu.

TUGAS BAHASA INGGRIS BISNIS 2 (Neither-nor , Either-or)

Zero is not the optimal rate of inflation

Monetary policy and interest rates remain at center stage of the economic policy debate. During the last recession, the question was how fast and how low the Federal Reserve should lower interest rates. Now that the unemployment rate has fallen to a twenty-three-year low of 4.7 percent, the question has quickly become how high the Fed should raise rates.

Many economists adhere to the notion of a "natural" rate of unemployment (discussed below), and this notion is driving much of the current debate. Federal Reserve Board chairman Alan Greenspan recently stated that the law of supply and demand has not been repealed, arguing that increased inflation is inevitable if the economy continues on its current course. Behind this reference lies a belief in a natural rate of unemployment, itself determined by supply and demand in the labor market.

Side by side with this belief, many economists (including most at the Fed) also claim that optimal monetary policy should aim for zero inflation. However, the claim that this is optimal is inconsistent with the theory of a natural rate of unemployment. In effect, there is an a slip between the cup of theory and the lip of policy. How are we to explain this incongruity, and what really is the optimal rate of inflation?

Competing Perspectives on the Inflation - Unemployment Trade-Off

1. NAIRU: All rates of inflation are equally optimal

The dominant economic paradigm, subscribed to by both the Fed and Wall Street, is the theory of the non-accelerating inflation rate of unemployment (NAIRU), alias the "natural" rate of unemployment. NAIRU theory maintains that if you try to push the unemployment rate below the natural rate, the result will be an increase in inflation but no permanent reduction in unemployment. This is because market forces push the economy back to the natural rate of unemployment, so that the only effect of sustained expansionary monetary policy is increased inflation. NAIRU theory, therefore, maintains that policy-makers cannot trade off a bit more inflation for a little less unemployment.

Economists label the relationship between inflation and unemployment the Phillips curve. According to NAIRU, the Phillips curve is vertical, as shown in Figure 1. Its verticality indicates that if the central bank (i.e., the Fed) increases inflation, there is no reduction in the unemployment rate. Similarly, lowering the inflation rate also has no effect on unemployment. This means that the inflation rate cannot be manipulated to lower unemployment.

The economic logic of natural rate theory is as follows: The level of employment is determined by the interaction of firms' demand for labor and workers' supply of labor. Because of imperfect information among workers regarding the location of jobs and imperfect information among firms as to who job seekers are, there is always a little unemployment resulting from some workers failing to hook up with potential employers. However, neither the demands and supplies of labor nor the pattern of information among firms and job seekers is affected by inflation. Consequently, inflation cannot affect the level of employment and unemployment, and hence the Phillips curve is vertical: Inflation simply has no effect on labor-market outcomes.

According to NAIRU theory, neither inflation nor deflation (negative inflation) has any effect on either unemployment or output. Thus, from a strict NAIRU perspective, all rates of inflation are equally optimal: Inflation simply does not matter. Although Wall Street and Federal Reserve economists may push for zero inflation, their own theoretical framework actually provides no justification for this policy stance. The implication is that they either do not understand the issue (which is unlikely) or that they are really working with some model other than NAIRU.

2. The optimal inflation rate is the actual rate

A modified version of NAIRU theory maintains that the optimal rate of inflation is the actual rate. Thus, if an economy currently has a 5-percent inflation rate, 5 percent is the optimal rate. The logic is that inflation itself does not matter, and in the long run the Phillips curve is vertical. However, lowering the equilibrium rate of inflation is costly and results in lost output.

The reason it is costly to lower inflation is that economic agents have inflation expectations, and these expectations are hard to adjust. Getting agents to lower their inflation expectations requires a period of higher unemployment, and this implies lost output. Thus, if the central bank wants to lower inflation from 5 to 3 percent, this would require a period of higher unemployment, and there would be an output cost. However, since there is no compensating benefit to reducing inflation, the implication is clear - the central bank should stick with the existing 5-percent rate.

A problem with this reasoning is that just as there is a onetime cost to lowering the rate of inflation, so too there is a onetime gain to increasing the rate of inflation. If the central bank stimulates the economy, employment and output will temporarily increase. After agents have adjusted their inflation expectations upward, the economy will then return to the vertical Phillips curve with a higher equilibrium rate of inflation. In the long run, unemployment and output will again be unchanged, but there would have been a one-time gain. Given this logic, the central bank should go on nudging the inflation rate ever upward, so that gradually accelerating inflation is the optimal policy.

3. Zero inflation is the optimal rate

Most economists adhere to NAIRU theory with its vertical Phillips curve. At the same time, many would also agree with the claim that zero inflation is the optimal rate of inflation. But these positions are inconsistent.

The claim that zero inflation is optimal implies a different model of inflation from that of NAIRU. According to NAIRU, inflation has neither costs nor benefits. However, if zero inflation is optimal, it must be the case that inflation is costly and causes lost output and increased unemployment, which is why zero inflation is preferred to non-zero inflation.

Implicit in this claim is a notion of a positively sloped Phillips curve, shown in Figure 2. Now, increased inflation causes a northeasterly movement along the Phillips curve that results in higher unemployment. The reason for this negative effect is that inflation distorts the decisions of agents by forcing them to waste resources combating its effects. As a result, profitability, output, and employment are all reduced. An analogous logic applies to deflation, which also induces agents to waste resources combating its effects. Given this, the Phillips curve is bow-shaped, and maximum productive employment is obtained at zero inflation. Zero inflation is therefore the optimal rate of inflation, since it saves households from wasting resources in combating the distortions of inflation.

4. The Keynesian Phillips curve

An alternative theory of inflation is the Keynesian Phillips curve. According to this theory, there is a negative long-run relationship between unemployment and inflation. This is illustrated in Figure 3, in which unemployment can be reduced at the expense of a little more inflation. The Phillips curve is convex, so that as the unemployment rate falls, the trade-off worsens: Further reductions in unemployment cost more and more in terms of inflation. The significance of this construction of the inflation-unemployment relationship is that the central bank now has a policy choice that involves trading off between inflation and unemployment.

The economic logic of the Keynesian Phillips curve is that "inflation greases the wheels of adjustment" in labor markets. In a dynamic multisector economy in which different sectors are subject to random shocks, there is a need to adjust sectoral prices and wages. In sectors receiving positive shocks, prices and wages are bid up; in sectors receiving negative shocks, there is a need for prices and wages to fall. However, it is difficult to get prices and wages to fall, and it may therefore be easier to accomplish adjustment by having prices rise in sectors with full employment. In this fashion, a little inflation can grease the wheels of adjustment, thereby lowering unemployment and raising output.

sumber : http://findarticles.com/p/articles/mi_m1093/is_n1_v41/ai_20485329/

*  According to NAIRU theory, neither inflation nor deflation (negative inflation) has any effect on either unemployment or output

Meaning : Menurut teori NAIRU, baik inflasi maupun deflasi (inflasi negatif) memiliki efek pada baik pengangguran atau output.