Snip below from a Toyota offer on their Camry here in the US.
They have added an additional $500 bonus cash back to bring the total rebate now to $1250 cash back. It was just the $750 the last time I was made aware of the deal this looks like a recently added price incentive.
This makes every Camry currently financed in the US worth less.
A JPY bearish vs. USD development imo; and at least correlated with the recent JPY weakness vs. USD.
A summer price war in the US market between the Japanese and European auto firms would be a factor for continued USD bullish.
"This makes every Camry currently financed in the US worth less."
ReplyDeleteBut the idea is that they sell more - preferably on finance.
There isn't a fixed amount of car sales.
Correct Neil but consider it is "about price not quantity" as far as exchange rates and getting the sales increases you want...
ReplyDeleteThe other thing is that the finance entities are managed/regulated separately from the pure auto operations...
So the "car guys" may do better (quantity) but the finance entities have to take markdowns on the portfolio (price)...
Leasing is related here, the lease financiers assume a residual value at the end, when the auto firms do stuff like this to the new model year they have to adjust for residuals on the previous year units that are already out on lease... etc...
I saw this from Bloomberg yesterday:
"Oil falls as dollar strengthens, ample supply weighs"
http://finance.yahoo.com/news/oil-prices-steady-indications-rally-013734726.html
What if they have it backwards here.... iow should be "dollar strengthens as oil falls..."
Same here with the autos, "yen weakens as Japanese lower auto prices in USD terms...."
Wouldnt be the first time all these other people get it backwards... "govt collects taxes and then is able to spend, blah, blah....."
;) rsp,
Neil what if you have a bike shop and build a custom for $500 and sell it for $1000...
ReplyDeleteYou end up selling only 1 at that price and make $500.
so you lower the price to $750 and now you sell 4 and make $1000 (4 x $250)
Ok you "make more money" but your terms of trade are reduced... are you better off?
If your goal is to maximize profits I guess you are (Toyota profits are way up as they sell more units), but you end up working at reduced terms which is not directly in your interest perhaps (Yen falls vs USD...)
imo the German brands Mercedes-Benz and BMW have enjoyed HUGE advantages in terms here in the US over the last few decades (US military draftees stationed in Germany back in the day ?) ... if the millennial US car buyer goes on a buyers strike against these brands (too expensive for what you get) and favors the Japanese and Korean brands, then those 2 German firms are going to have to take a real hit in terms going forward... would probably put the EUR at a permanent discount to USD from previous "normal" levels...
rsp,
Matt,
ReplyDeleteThe story goes that not that long ago about 95% of all international capital flows was for investment purposes and 5% was speculation. Today those figures have at best been reversed: 95% and probably much more is speculation, with 5%, probably much less, is for investment purposes.
When speculation is what essentially constitutes the currency markets, why should the 5% of genuine investment capital flows or the business decisions of whatever Toyota or any other multinational do matter? All genuine business and investment is dwarfed by the speculators.
Is the story incorrect, incomplete, misleading, or have I missed something?
Mike, as a currency trader yourself, if you'd like to put in your two cents that would be great.
Matt, profits are important but then so is market share. Perhaps Toyota is currently more concerned about defending its market share?
ReplyDelete"Ok you "make more money" but your terms of trade are reduced... are you better off?"
ReplyDeleteThe terms of trade are not reduced at all. All that has happened is more cars have been produced and sold - dynamic expansion - which reduces costs because fixed costs are amortised across more units. There's no supply side limitation here, so you just get more velocity out of the existing stock.
You get these sales volume pushes all the time in business. It's a complex interaction of brand penetration, amortisation and bravado.
I just don't see a causal link here.
My two cents is that Matt has a handle on the real forces that affect exchange rates. There is a price setter in every market and when it comes to Forex it is often the actions of a single large exporter or, dominant export industry. "It's about price not quantity."
ReplyDeleteAs a Forex trader I wish I would have listened to Matt. Got caught going long EURUSD last week. Managed to get out okay, but I was lucky and there was much more to be made on the short side as Matt had been predicting.
Neil if it takes you 8 hours and 500 to assemble a bike and you sell one per month for 1000 and then you reduce the price to 750 (still takes 8 hours and 500 cost of goods, same bike) but you sell 4 per month, yes you make more "money" (you make 1000 vs 500) in the month but you are only getting 250 for your 8 hours of efforts...
ReplyDeleteSo your terms have been reduced. (in terms of $/time)
this is like Mike's Ferraris and Lamborginis.... they dont sell many cars but they make a lot of "money" per car...
The causal link is thru regulatory requirements on the international financiers.... dont be misled by all the talk of "control fraud", it is overdone. The international financiers seek to comply; when the manufacturers change price strategy on the new inventory, it causes the international financiers to make regulatory adjustments... and both ways ie when the prices are increasing and like now under austerity where they are decreasing...
rsp,
John I just dont see specs having that much influence...
ReplyDeleteiow a while ago the EUR was at $1.40 then in went down to like $1.05...
so this is pretty significant effecting the terms of trade probably between nations of 600M people... 25% or so..
Specs just are not that influential... but if VW and Daimler is putting autos on sale and the Brent producers have dropped their price per bbl to US east coast refiners by 50%, this is meaningful...
If you are a multinational entity financing these trade inventories, you cannot just ignore these price developments... you have to add balances to regulatory capital accounts if your asset values are falling, etc...
imo these types of price actions taken by the people in the non-financial firms is the leading/causal actions that THEN result in exchange rate fluctuations in the financial sector...
rsp,
Large firms are driven by profits and market share. In many cases market share is the top priority. Everyone knows that what make GE great was its strategy of market dominance. So market share has become a top criterion.
ReplyDeleteOnce a firm starts losing market share if future is threatened and so is the position of top management. Accounting can often be used to disguise profit position but market share is harder to conceal.
This is what competition is about. Supply and demand graphs misrepresent this by placing most emphasis on price when top management is looking at quantity.
Matt, Tom, Mike
ReplyDeleteI'm new to all this, so bear with me. As far as I can gather, open any international economics or international trade book and they all seem to say" "Exchange rates? Fu*k me if I can tell you a damn thing!" And then they start jabbering about speculative flows being so large that exchange rates are driven by behavioural animalistic sentiment or some such stuff rather than well thought out business decisions by multinationals.
Presumably this is just another indictment of the putrid thinking coming out of the diseased minds of the mainstream economists. In any case, if what you're saying is right - and Mike sees this in his job as a currency trader - then you've gone a long way in solving what is generally accepted to be the hardest problem in international economics. Forget the sainthoods, it'll be Nobel Laureates! Or is this something that has been known for some time, like functional finance, but covered by the neoclassical and monetarist avalanche?
Fair enough, this effect may not be strictly causal in nature, and it may be impossible to predict the exact impact of such a move on an exchange rate because of this knowledge, but are you guys essentially saying that knowing a huge multinational's behaviour, like Toyota's, will give you a strong indication as to whether the exchange rate will move? It just seems impossible that one or two multinationals can move an exchange rate. But then again a couple of months ago I didn't know commercial banks create money.
Currency markets are huge in volume not because there are a lot of traders but rather users. The purpose of speculators in markets is arbitrage based on currency pairs. This ensures market efficiency so that everyone is getting the best deal that is discoverable based on available information. Obviously, the amount of information involved in currency markets is immense and the currency markets are nearly competitive, in theory anyway, bearing in mind that currency sovereigns are monopolists that can intervene in markets. Expectations regarding that are also information.
ReplyDeleteExpectations are set not only by information available to the participants, which is asymmetric, but also different analytical frameworks including conflicting assumptions. This accounts for the two sides of each trade. Most users are positioned here and a lot of what goes on is hedging to manage risk.
Trends in futures markets are obviously based on predominance in weighting of expectations, which is constantly fluctuating. Technical analysis assumes that the fluctuations of price and volume also contain information that can be mined. Many if not most traders, especially short terms traders, are positioned here, attempting to eke something out of other traders being wrong in their estimation of market motion.
are you guys essentially saying that knowing a huge multinational's behaviour, like Toyota's, will give you a strong indication as to whether the exchange rate will move? It just seems impossible that one or two multinationals can move an exchange rate.
ReplyDeleteI would not put it so strongly. There are a myriad of factors involved. One often reads in the financial news that prices moved "because" of some isolated factor. That's because the financial reporters have to say something that sounds reasonable to account for changing events. That's what they get paid for. If they were all that good at it, they would be wealthy traders.
Even central banks that are currency monopolists are limited in what they can do.Of course, if a central bank announced a peg or a float there will be an immediate correction, but how often does that happen. Most moves are signaled enough in advance not to disrupt markets, because commerce.
Currency markets aren't all that volatile because it takes a lot of factors converging to move them. If this were not the case, there would be considerably less trade. Within this context, everyone is looking for a leg up. A firm cutting price to increase share is just one of the many. Even Toyota cannot move the yen alone. But it is a significant factor — among a bunch of others.
John this is ancient knowledge...
ReplyDeleteHere from Plato's Laws c. 360BC:
"If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency. And if he is discovered to appropriate it, let it be confiscated, and let him who knows and does not inform be subject to curse and dishonour equally him who brought the money, and also to a fine not less in amount than the foreign money which has been brought back."
So they prevented systemic imbalances by running a fixed exchange rate at parity where they would automatically change out the surplus with local currency... held the exchange rate constant at parity....
This is similar to Electrical Theory where we hold an Ampere constant at one coulomb (roughly 6.241×1018 times the elementary charge) per second.... then we can consistently regulate how OUTPUT varies across differing loads, etc...
So if you dont do this, then the exchange rate can vary/float depending on the inter-relationships of the fiscal agents ... this would be like letting an Ampere somehow vary within electrical theory .... you do that and you're going to blow yourself up.... so we see this happen often in international financial systems...
All the key people involved in regulating these systems are unqualified/incompetent in systems theory for the jobs that they are in... couple that with a good dose of libertarianism thrown in and its never going to work well... we dont have our best people working in these areas imo... back in Plato's day the academe recruited/trained people with aptitudes more suited for these systems oriented technocratic roles...
Its like we are having to learn this all over again... the hard way...
rsp,
Currency markets are huge in volume
ReplyDeleteRight - over 70 times bigger than world trade in goods and services.
A good example is that the big news in the corner offices of the automotive industry is not about a change in the relative value of the yen but rather that a premier company (strong competitor) cut the price of a benchmark product in its class. What they do about it will then factor ex post into the floating rate currency market. Certain decisions can have a cascading effect. People in related market try to access the consequences and position themselves based on these anticipations about what major players will do (expectations).
ReplyDeleteOverall, the world is in a race to the bottom that affects trade (beggar they neighbor), hence, an effect on fx rates, and that race downhill is having a deflationary effect to which central banks are reacting.
The actual problem/opportunity is the assumptions of the framework that most participants are using. They are operating on the basis of fixed rate assumptions. This is a value of understanding MMT. Then one has the basis for a correct framework, so one can take the money from those that don't and consequently take stupid positions based on it.
Right - over 70 times bigger than world trade in goods and services.
ReplyDeleteRight. Capital flow based on shifting financial positions for a multitude of different reasons.
Such flows simply dwarf trade and they are the main determinant of exchange rates in the post Bretton Woods era.
ReplyDeleteThose transactions take place on ECNs there is no way they can effect the actual exchange rates between govts and between govt fiscal agents which are the institutions that set the real exchange rates...
ReplyDeleteYou are claiming that wagers/gambling on sporting events can effect the outcomes of the actual games. Rsp
How could the SNB stick the EUR/CHF at 1.2 for so long if the speculators didnt agree with it?
ReplyDeleteForex vigilantes?
The exchange rates have to be set by the g ovts or they can defer to their fiscal agents .
Rsp
"So your terms have been reduced. (in terms of $/time)"
ReplyDeleteBecause you are assuming fixed output. There is no supply side flexibility in your assumptions. That is a neo-classical view and is incorrect.
In reality what happens is that you are paying people to do 8 hours, and you have a ton of machines lying around idle half the time but only getting five hours of value out of them because you don't have enough orders.
When you get more orders you intensify the existing capital and labour and get more value out of them because you are amortising fixed costs across greater output.
Businesses simply don't run at full capacity at all - ever. Certainly robotic production lines can work an awful lot more intensively - even if you run more shifts.
So you drop prices to get more orders and the price drop is covered by the amortisation intensification of the capital plant - even if you hire more staff and run extra shifts (in essence labour has become part of the material cost since they largely press buttons and watch screens).
Businesses earn on the turn and turn is a combination of price *and* volume. It's all about the level of 'contribution' from each sale. If you ignore volume effects you've simply got it wrong.
No doubt you guys have a handle on the FX, but the reason you've come up with isn't the correct one. It doesn't add up systemically or from an accounting point of view in a large multi-national manufacturing setup. How you say it works isn't how it works in individual manufacturers and I can't see an aggregate feedback loop that ties it together either.
ReplyDeleteIt has to be something else.
So you're currently trading a correlation, not a direct causation, and those correlations can change on a hatpin if the corporate Treasury bods find a new Zeitgeist they like the sound of or whatever.
I don't want anybody losing their shirt over an incorrect belief.
Neil once a car is manufactured it goes into inventories and the cost to produce it is already established. . They produce a preplanned amount every year... if the model does well they increase production the next year...
ReplyDeleteThen they have to sell it.
At what price?
If they can get the original planned MSRP price they do... if they can't then they have to discount ... if they discount it adjusts the terms down against them...
Look at the light Brent producers. A year ago they got $100/bb now they get $50 and their volume to US is down as Bakken light crude is increasingly railed shipped to the Brent producers (former) US east coast refiner customers...
So both sales volume AND price are down. Their terms are manifestly reduced. So EUR was 1.40 now it is 1.08 reflecting the aggregate impact of the reduced terms of trade between EZ and US due to oil price reduction and reduction in price of other products being exported out of EZ into the US..
The financiers of the trade have to make regulatory adjustments in the face of falling import prices in USD terms... this will effect the observed exchange rate...
it doesn't matter what speculators trading against one another on a non functionally related cash basis ECN are doing... if that mattered how could the SNB come out tomorrow and put the CHF back at 1.20 to the penny...
What about feedstock agriculture how can they control productivity in a drought or bumper crop years... Beef: Cow can have 1 calf per year due to gestation period of a cow... etc...
Rsp
It has to be something else.
ReplyDeleteRight. As I said, we aren't dealing with causes and therefore input-output invariances that can be expressed in functions but rather a myriad of factors that no one has a handle on. Some of those factors are catalysts that influence expectations on a massive enough level to count. This is how a major corporation like Toyota reducing a price can have know-on effects that have influence, but attributing causality to it is impossible. But it is likely to have more of an effect at crucial points, like now with companies and countries trying to increase exports not just to get a leg up but to stay in the game.
Wikipedia has an informative article on FX. I'll post some excerpts below.
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[5] Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives...
ReplyDeleteUnlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0 to 1 pip to 1–2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 39% of all transactions.[61] From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size”.[66] Central banks also participate in the foreign exchange market to align currencies to their economic needs.
ReplyDeleteCommercial companies[edit]
An important part of the foreign exchange market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short-term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational corporations (MNCs) can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks[edit]
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
Foreign exchange fixing[edit]
Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.
The mere expectation or rumor of a central bank foreign exchange intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[67] Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Asia.
Hedge funds as speculators[edit]
About 70% to 90%[citation needed] of the foreign exchange transactions conducted are speculative. This means the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Since 1996, hedge funds have gained a reputation for aggressive currency speculation. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.....
Wikipedia-/Foreign_exchange_market
"once a car is manufactured it goes into inventories and the cost to produce it is already established. They produce a preplanned amount every year."
ReplyDeleteOur two last bought cars were both built after the manufacturer got the orders from the dealer. Nothing specially fancy about those cars.
I asked about it and the dealer said it's much more common these days that the car is build after an order is place by the customer at the dealer, to make cars not end up as inventories.
Even though they changed the rules for what is to be considered a new car e.g. a car built 2013 is considered new when sold 2015, people still care about when the car is built, making a car from 2013-2014 less attractive, therefore better to have as little inventory as possible and ramp up production based on orders, which the dealer said they nowadays do pretty easy.
That's one reason why preplanned cars are deliberately produce in less quantity than they believe they can sell.
Another reason is of all the different options a customer can choose between. Building cars in advance to satisfy different kinds of choices is expensive and a gamble, therefore just a smaller amount of different configurations is made and the rest built when a order comes in.
From a customers point of view just the choice of colour may be a trivial thing, but for the manufacturer it's not. So they tend to wait for as many orders to come as possible, without loosing potential customers due to waiting time, in order for them to not have to change the production set up more than necessary to keep production costs as low as possible.
I don't know if this how every car maker does it, but PSA does it this way I was told.