Money Guide | compounding rates
Also: Indicators, World Watch, Quick takes, Weekly Agenda, News, Musings, Opportunities
Money Guide is a personal project, supported by paid-subscriptions. I hope that all readers find the news relevant, the musings interesting, the opportunities attractive, and my thoughts enriching
In this issue: Inflation swinging, Cocoa spikes, Carbon offsets, Low Crypto volumes, UPS strike, India, Silver squeezes, Norwegian phosphate, and a few thoughts on compounding rates
*🔒 Forecasts, analysis and additional information locked in the following sections are available only in the premium edition of Money Guide for paid-subscribers
Indicators
The Money Guide Indicators provide you with a macro overview at a glance of financial markets and more detailed information when you zoom-in
Do you want to know more about its components and how are they evaluated?
Part 1: How to read the Indicators from Money Guide
Part 2: Inflation Rates, Central Banks' Rates, Sovereign Bonds, Currency Exchange Rates
Part 3: Commodities, Stocks, Crypto
World Watch
The Money Guide World Watch provides you with a macro overview at a glance of the main situations that can negatively influence economic and financial markets
Do you want to know more?
2023 Threats
2023 Threats’ status updates
My Quick Takes
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Colored circles in Money Guide refer to estimations of possible economic and financial impact:
🟢=positive mid-term forecast
🔴=negative mid-term forecast
⚪=neutral mid-term forecast
Weekly Agenda
All times are US ET (UTC-4)
Monday, July 10
--
Tuesday, July 11
--
Wednesday, July 12
08:30 🔒 US Consumer Price Index (CPI) report ⚠️
(Previous: ***, Expected: ***)
10:00 🔒 CA BoC Monetary policy decision & report
(Previous: ***, Expected: ***)
Thursday, July 13
08:30 🔒 US Producer Price Index (PPI) report ⚠️
(Previous: ***, Expected: ***)
Friday, July 14
--
Q2 Earnings reports during the week
⚠️Probable high volatility when information is released to the public
(Click here to read about the usual market behavior)
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News
📰 🟢 The US labor market cooled off in June, adding just 209,000 jobs | The US job market cooled back down in June, and fueling optimism that the economy is on course to nail that elusive soft landing of lowering inflation without triggering a recession (link)
📰 🔴 Biggest Cocoa trade in more than a decade rattles London market | Two years of deficits have dramatically reduced stockpiles of the key chocolate ingredient, with a measure of supplies at its lowest in four decades (link)
📰 🔴 Euro-area core inflation quickens again in setback for ECB | The measure of underlying consumer-price gains, which excludes items like fuel and food, came in at 5.4%. The deterioration may eclipse an improvement in the headline inflation gauge. That moderated noticeably to 5.5% from 6.1%, reaching the lowest level since before the war in Ukraine broke out, after energy costs fell (link)
📰 🔴 Some ECB officials weigh faster reduction of bond portfolio | Some hawkish European Central Bank officials are pondering options to speed up the reduction of the institution’s €5 trillion ($5.5 trillion) stash of bonds (link)
📰 🔴 China bans ‘negative’ finance writers as Stock market sinks | China banned a prominent finance writer and two of his peers from social media platform Weibo for commenting about the country’s stock market and unemployment rate (link)
📰 🟢 Initiative launched to rank corporate climate claims using carbon offsets | A consultation for a global standard to assess companies' claims about progress towards internal climate targets and their use of carbon offset credits launched on Tuesday, seeking to bring transparency to an unregulated market (link)
📰 🔴 Spot crypto exchange volumes trending lower | The seven day moving average for daily spot crypto exchange volumes has declined to $14.2 billion on July 8. Meanwhile, CME's bitcoin futures market has seen open interest surge, with the metric hitting $2.7 billion (link)
Musings
💭 🔴 Recent events indicate Earth's climate has entered uncharted territory | Scientists say global heat that inched into worrisome new territory this week is a clear example of how pollutants released by humans are warming their environment (link)
💭 🔴 How the food system is changing and what it means for investors | Global shifts in incomes and populations, geopolitics and climate change are combining to drastically alter the outlook for the world’s food supply (link)
💭 🟢 JPMorgan team ditches bullish treasuries view on US data beats | The shift came as robust US growth and labor data Thursday sparked a global bond selloff as traders bet the Federal Reserve will have to raise rates two more times this year. The yield on five-year notes has climbed more than 40 basis points this month to trade at its highest since March (link)
💭 🔴 Retailers brace for hit to discretionary spending, holiday sales as Supreme Court nixes student loan forgiveness | Apparel, home goods and electronics will likely be impacted the most as households pull back further in order to pay down debt (link)
💭 🔴 The US economy can't function smoothly without UPS. That's why a strike will hurt | Without a deal, 340,000 Teamsters are preparing to go on strike at the nation’s largest trucking company starting August 1 (link)
💭 🔴 The new M&A rules that would delay million-dollar deals | The US antitrust agencies are requiring firms to turn over much more information about their transactions than before in an overhaul to merger rules that could delay deals by months (link)
💭 ⚪ Big Oil mulls a slippery future | Ask energy executives how much oil the world will need by 2050 and you will get very different opinions (link)
💭 🔴 Fund giants seeking Bitcoin ETF nod warned Coinbase may be ‘too small’ to prevent fraud | BlackRock and Fidelity named Coinbase as price surveillance partner for their Bitcoin ETF plans. The exchange's size may not be enough for the SEC (link)
Opportunities
💡 These are the 10 AI Companies to watch right now | With billions in backing from Big Tech and venture capital, AI upstarts have been driving the industry’s latest advancements -laying the foundation for a new technological era. Here are 10 of the biggest, buzziest and best-funded AI startups to watch this year (link)
💡 Amazon, Google to expand India investments after Modi visits US | Amazon announced it will invest an additional $15 billion in India by 2030. That includes plans by its AWS division to put $12.7 billion into cloud infrastructure in the South Asian nation to meet rising customer demand. Google will open a global financial-technology center in Gujarat International Finance Tech-City, more commonly known as GIFT City (link)
💡 Where to invest $1 Million: Mobius sees ‘real future’ in India | The emerging markets investor says there are opportunities in India’s infrastructure and Korea’s beauty industry (link)
💡 The World’s appetite for solar panels is squeezing Silver supply | Silver, in paste form, provides a conductive layer on the front and the back of silicon solar cells. But the industry is now beginning to make more efficient versions of cells that use a lot more of the metal, which is set to boost already-increasing consumption (link)
💡 EU hails discovery of massive Phosphate rock deposit in Norway | A massive underground deposit of high-grade phosphate rock in Norway, pitched as the world’s largest, is big enough to satisfy world demand for fertilisers, solar panels and electric car batteries over the next 50 years, according to the company exploiting the resource (link)
💡 The super rich are snapping up Tokyo’s new ultra-luxury homes | The lack of uber-luxury apartments in Tokyo, a city otherwise full of indulgent shopping choices, has long baffled foreign investors. But that’s starting to change as new developments with sweeping views, swimming pools and 24-hour valets are snapped up by local and overseas buyers taking advantage of a weaker yen and low interest rates (link)
💡 Companies look to pay tech vendors based on business outcomes, not usage | Tighter tech budgets and pushback against cloud bills are leading CIOs to question the traditional pay-what-you-use model (link)
A few thoughts on…
compounding rates
Have you ever played “double or nothing”? You start betting a small amount, and after each winning bet, you can decide to “double down” and bet again with the possibility of doubling your winnings or losing everything. The key to the game is that, on every round, the player is betting everything he has won up to that point. Wins and loses are compounded, instead of just making individual bets. In this case, the rate on each direction is 100%, but the same principle applies to other games and investments where the rates are much smaller.
Most people agree that compounding is a key element of long-term financial success (or failure). Also, most people either underestimate or overestimate the effects of compounding.
Let’s explore some basic examples:
This hypothetical investment has an expected return of 10% every year. On the left side, the returns are not re-invested. On the right side, the returns are re-invested each year.
If you earn $10 after one year on a $100 investment, and you re-invest them with the original $100, the second year you would be earning $11 instead of just $10. You could have cashed-out the $10 each year, but re-investing them allows you to use your earnings to earn even more.
After 10 years of compounding, the return is 159% instead of 100%.
The same happens with debts. If the debtor pays the interests every year, the debt will not increase. If the debtor does not pay, the debt will increase because every year the interest rate will be applied to a bigger amount.
Compounding profits is powerful. So is compounding loses:
An investor with 25 years of 10% profits would roughly have ten times more money.
However, a single year of 90% losses would leave him with almost zero cumulative profits. It doesn’t matter whether that bad year is the first, the last or a random one in-between, “The order of the factors does not change the product”.
Maybe a 90% loss sounds unlikely. Three years of 50% losses or six years of 25% losses, or any other similar combination would have mostly the same effect:
As we can see, all else being equal, a 90% loss can wipe out a 900% profit, just as a 400% profit can be wiped out by an 80% loss, or a 50% loss can wipe out a 100% profit.
Let’s now explore some other scenarios:
The past 100-year average (considering good years and bad years) of the US stock market annual returns is, luckily, around 10%. Although, thanks to inflation, after so many years that amount of money won’t be worth the same as it is worth today, so we need to discount the average inflation rate which is expected to be close to 2%. This resulting 8% annual expected return rate means it would take almost 30 years to multiply an initial investment ten times.
But what happens if an investor doesn’t have that much capital to invest since year 1? What if this second investor can start with $10 instead of $100, and will be adding $10 every year?
On the left side, we have the first investor with a $100 initial investment, re-investing the returns every year. On the right side, we have the second investor with a $10-per-year investment and re-investing the returns every year.
As we can see, after the first 20 years both investments have similar returns. It may be harder for the second investor to catch up and surpass the first investor, but it is possible.
It is also possible for a third investor that starts with $5-per-year to even surpass both, by increasing the annual deposits by the same rate ($5.40 the second year, $5.83 the third year, and so on):
On the left side, we have the first investor with a $100 initial investment. On the right side, we have the third investor with an investment that starts with $5-per-year and increasing the annual deposits by the same rate (8%).
Maybe a $100 initial investment and a $1000 return doesn’t sound like much. Remember that the same applies for $1K or $1M.
With an 8% expected rate of return, these are three possibilities to reach $1M:
Invest $100K for 30 years
Invest $10K-per-year for 30 years
Invest $5K the first year and 8% more every year for 30 years
Which one would suit you better?
take care, have fun, be chill
-SM
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