Fortunately, there is an upside to all of the different classes of risk described in the preceding sections. First, if adversity does not occur at the forecasted level, performance beats the forecast.
This statement does not imply that the forecast is bad; it only recognizes the impact of chance and volatility. Interest rates or customer losses from bankruptcies may move favorably or unfavorably due to changes of course in the economy.
Second, one person’s loss is sometimes another person’s gain. When beef exports from the United Kingdom to the Continent plummeted, local European beef and beef exports from Australia and Argentina filled the gap, and overseas packaging businesses benefited. And if you risk the loss of a big customer, so do your competitors. Their defectors become your valued new customers.
Third, catastrophes change overall market conditions. Major outages (which may take a plant off line for three to twelve months) are fairly common in the chemical industry, owing to accidents or mechanical failure. Indeed, disruptions seem to be more common when markets are tight because plant superintendents
push hard for extra production and defer scheduled maintenance if it involves shutting down a line. The loss of 1 percent or 2 percent of an industry’s capacity and the resultant scramble to seek new sources of supply can change the psychology of purchasers and sellers and result in upward movement in prices and profits.
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If we accept the basic concept of a utility curve for money, it would appear to support the thesis that high-risk investing is the foundation of prosperity. Bernoulli’s concept implies that as investors get richer, they will be more risk tolerant, at least for investments of a given size. In other words, as a population becomes wealthier, it can afford to be more interested in highrisk investments. Because risk and return are correlated, highrisk investments should earn more in the long run. Given many more rolls of the dice, the rich are more likely to accept these risks than those who are not rich and will earn higher average returns. So the rich will get richer. This principle should apply at the level of rich individuals, rich corporations, and rich nations.
There is considerable evidence that it happens in fact. The converse is that wiping out concentrations of excess wealth may lower returns for society as a whole.
This hypothesis is politically uncomfortable because it bears directly on the central political issue of trading off policies that make the pie grow larger versus policies that divide the pie more equally.
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The ideal performance measure for CDO equity is a cash flow based yield or internal rate of return. For issues that have terminated, we can compute actual internal rate of returns (IRRs) under the assumption that an investor purchased the equity at par. An IRR calculation assumes an investor can reinvest intermediate cash flows at the computed internal rate of return. For nonterminated issues, we need the secondary market price to accurately calculate a total return. Unfortunately, there is no reliable source for secondary market prices.
Investors should be cautious about using proxies such as the Credit Suisse First Boston (CSFB) Leveraged Loan Index to infer equity returns. We compared the returns on this index with the returns earned by closed-end funds. The low correlations we observed suggest the index is a poor proxy for CDO equity performance because it ignores the effects of structure and managers. Of course, a closed-end fund can trade at a discount or premium to the portfolio’s NAV. To the extent that time-variation in this discount or premium captures the cost (value) of a manager’s expertise, we should not be surprised by this result.
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Microeconomics involves the study of individual decision-making agents, whereas macroeconomics involves a broader study of aggregate activity. The concepts of scarcity, choice, opportunity cost and rent form the basis of property economics. A definition may describe it as a social science that studies how individuals choose to allocate scarce resources to satisfy the competing needs of society for various goods and services.
The exchange of information between buyers and sellers about factors such as price, quality and quantity takes place in a market. Property is made up of a diverse range of market sectors and relative to all other markets, they have distinguishing characteristics: the market is decentralised and restricted to fewer transactions than consumer goods or services, the product is heterogeneous, physically immobile, durable and of finite supply.
Commercial property exists to serve the needs of occupying businesses. It is a derived demand that can be classified by property type. A lot of this stock is not actually owned by business occupiers themselves but is owned by investors instead.
Commercial property investments tend to be of interest to a wide range of institutional investors seeking real income and capital growth. There is a broad range of opportunities to choose from, each comprising a different set of attributes. Property, as an investment medium, exhibits some of the characteristics of equities and bonds. The risks and returns associated with property and other investment assets continually shift in absolute and relative terms as economic conditions change, driven by the level of the interest rate and the opportunity cost of capital invested elsewhere (Ball et al., 1998).
Developers play a key role in assembling sites and procuring the services of a professional team to bring forward property for investment and occupation.
As in the general economic cycle, the property cycle consists of recurrent upswings and downswings that vary in length, scale and composition.
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In broad terms, each state competes with every other state for new plants, residents, and the business provided by people temporarily in a state as vacationers, business travelers, snowbirds, and shoppers. These broad issues of economic competition are considered in the section on interstate economic competition and state tax policy.
Geographic proximity matters in most of these situations. For example, Minnesota’s Mall of America is more attractive to shoppers from Iowa than those from California. New Jersey’s casinos are more attractive to New Yorkers than to residents of Utah. A regional distribution center to serve stores in Tennessee might be established in Tennessee or the Atlanta area, but not in Denver.
The importance of geographic proximity varies with distance in most situations, but the differences are not black and white. So there is no such thing as a unique problem associated with border communities, nor is “leakage” of possible tax revenues confined to them.
However, competitive situations in communities near the boarders of states with significantly different tax structures are more readily apparent than other competitive situations and therefore often draw particular attention. As a result, there is constant discussion of whether a particular state should adopt special policies for these situations. Prominent examples are to be found in many multi-state metropolitan areas such as in the three states around New York, Chicago, and Philadelphia, and the two states near Kansas City, St. Louis, and many other cities.
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The comparisons of Tennessee with neighboring and particular competitor states suggests that the overall level of Tennessee taxes is much more likely to be a competitive plus than a competitive minus.
Taxes On Individuals: The level of taxes on individuals is low enough that it is difficult to imagine Tennessee losing residents to other states based on tax differentials. Because Tennessee has no income tax while its neighbors have such taxes, it is reasonable to expect that individuals with jobs in Tennessee would have strong tax reasons for living in Tennessee.
So concerns over the impact of tax policies on individual living patterns boils down to concern over cross-border shopping, as discussed in the section on border tax issues and options.
Business Taxes: In general, Tennessee’s relatively low level of spending and taxes gives it a natural advantage relative to many competing states, such as states of the industrial Midwest. It offers potential advantages over most of Tennessee’s neighbors as well.
Part of that advantage is lost because of the mix of Tennessee taxes. The personal income tax, which Tennessee lacks and competitors have, inherently puts all of its burden on households and none on businesses. By not using it, Tennessee is forced to rely more heavily on sales and property taxes. As implemented in Tennessee and other states with such taxes, they raise a substantial percentage of their total revenues from business.
This difference, however, doesn’t necessarily make Tennessee taxes on business a barrier to success in economic development.
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Academics and consultants continue to produce scholarly analyses of the fundamental question of whether state and local taxes make any difference to success in economic development. The answers continue to be less than clear guides to policy. For example, a recent review for the District of Columbia Tax Revision Commission by three prominent economists who have done studies of the topic concludes:
The studies of the effects of taxes on economic development and business location appear to have come to a consensus that taxes “matter.” But that consensus is not wholly satisfying for two related reasons. First, while the majority of the results from the many high-quality empirical studies of this issue find taxes to be a statistically significant factor, several others come to the opposite conclusion. Second, because of the somewhat scatter-shot nature of the findings, it is difficult for researchers to give advice to policy-makers, who are anxious to know whether their tax policies and tax incentives are likely to be effective economic development tools.
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The adoption of business tax concessions follows a familiar pattern of competitive behavior. Typically states faring the worst in economic competition — that is, states with low per capita incomes or slow economic growth — are the first to break new ground in reducing business taxes. For example, property tax abatements for new plants were pioneered by the depressed Southeast in the 1940s. Subsidies were offered to lure particular plants to Pennsylvania and other Northeastern states two decades later. And the concept of crediting employers with income taxes paid by employees was introduced by Alabama and Kentucky in the 1990s.
Adoption of any new tax concession by one state quickly produces clamors in other states to match the competition. All efforts to limit this competition by agreements among the states have failed. Agreements
among neighboring states — such as one covering the three states in the New York City areas and one covering Arkansas, Louisiana, and Mississippi — have not lasted beyond the governors who made them.
Attempts by the National Governors’ Association to produce consensus have been blocked by governors of “have not” states, who have viewed them as attempts by states successful in economic development to lock in their gains. Suggestions that interstate economic development competition be limited by federal laws have met two major obstacles. First, there are serious technical problems in defining exactly what policies would be limited and how. Second, state officials have opposed such moves as a federal foot in the door to limit state policy flexibility, particularly in controlling tax policy.
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Until mid-July, the exchange rate between the euro and the U.S. dollar only one direction, upwards. To reach the Euro, with nearly 1.60 U.S. dollars its provisional climax. Since that peak, however, knows the exchange rate only one direction, down. That is the mark of 1.40 U.S. dollars per euro broke and currently quoted at 1.3950 dollars per euro.
Reasons for the loss of strength of the euro against the U.S. dollar, the decline in economic activity in the euro zone to search. The experts hoped the European economy decoupling from the U.S. does not seem to grasp the economic situation in Europe can not the U.S. economy grow. The burgeoning fears of recession in Europe and push the euro thus support the U.S. dollar.
In this context, some investors now also on the train of a case that jumped the Euros and invest back into U.S. dollars.
For all individuals in Germany, the falling exchange rate between euro and U.S. dollar also some partially negative impact.
Shopping and holiday in the United States is expensive because there are fewer U.S. dollars for the euro in an exchange there.
As oil traded in U.S. dollars and the euro weakens, we get from the falling oil price at the pump, unfortunately, nothing to do with, because the same changes in the exchange rate falling oil prices again.
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