What Is A Depression?

What Is A Recession Depression?

First Published: ADawnJournal.com March 23, 2010

When we talk about depression, we are not talking about a psychological condition. Instead, we are talking about an economic condition and it is a very serious one that has done a lot of damage in the past to the world’s economies. Naturally, the most famous is The Great Depression, but there have actually been several depressions, which we will cover.

What Is It?

A depression is a long-term downturn in economic activity of a country, or several countries. In contrast to a recession, a depression is much more severe and has long-term effects that go for longer than a recession. Depressions will typically last for several years, there will be very high levels of unemployment and the availability of credit will be much smaller. As well, there is usually a reduction in trading between countries, bankruptcies increase, and the currency of the countries affected typically becomes more volatile.

What Makes A Depression?

The National Bureau of Economic Research has stated that a depression is a period of time where there is a substantial and sustained fall in the ability of people and governments to purchase goods. As well, the GDP of a country needs to fall at least 10 percent and have a recession that lasts longer than two or more years, to qualify as being in a depression.

Depressions in The Past

There are several examples of depressions in the past, both recent and over a century ago. The degree of severity ranges, but the effects are felt by millions all over the planet.

The Great Depression

The most famous of all depressions is The Great Depression. During this depression, economies around the planet were affected greatly during the 1930s, and it is generally accepted that the catalyst for this depression was the Wall Street Crash of 1929. In the United States, the unemployment rate rose to 25 percent and the GDP of the country fell by 33 percent.

The Long Depression

Not as severe as the Great Depression, the Long Depression lasted for 23 years, or over twice as long as The Great Depression. One interesting point is that before The Great Depression, The Long Depression was called The Great Depression.

Depression of 1837

One interesting depression was one that lasted for five years, and many historians see this as the first Depression in recent history. It was The Panic of 1837, which was caused by the bursting of the real estate bubble in the United States on May 10, 1837, when banks stopped making payments in gold and silver. The Panic was short, but the depression it caused lasted for five years and was marked by banks failing and very high unemployment levels.

Regional Depressions

While the United States is generally seen as the place where depressions start or stop, many countries have had depressions of their own, including in the past 30 years. Some examples of these include:

·   In the 1980s, Argentina, Brazil, Chile and Mexico went through severe depressions in the 1980s when their GDPs fell by over 20 percent.

·   Argentina suffered a second depression that lasted from 1998 to 2002.

·   New Zealand suffered a long depression that lasted from 1974 to 1992.

·   Switzerland is currently in a depression that has lasted since 1973, but the qualification of this time as a depression is not accepted by all economists.

·   From 1980 to 2000, much of Sub-Sahara Africa suffered through a long and difficult depression.

·   The Soviet Union went through a depression that was seen as twice as severe as The Great Depression during most of the 1990s.

·   Finland went through a depression from 1989 to 1994 after the breakup of the Soviet Union. Norway and Sweden also had troubled economic times during this period.

Depressions are not something you want to go through. They are very difficult to deal with on a personal level, and for countries it can have disastrous results on a wide variety of industries. In a depression, there is less money to be spent on infrastructure and that means roads will decay at a faster rate. There is also less money to spend on police officers, which can cause crime to increase. In general, depressions are something every country wants to avoid, and thankfully, most are able to depending on how they react to poor economic times.

Australia Travel Blog: The Blue Mountains & The Three Sisters

Sydney Travel Blog: Part 11 – Blue Mountains’ Stunning Natural Beauty

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Sydney Travel Blog: Part 10 – Mountain Village Leura

When we left Leura for the Blue Mountains, we lost a couple of people. What had happened was that they failed to show up to catch the bus, the tour guide and operator waited a few more minutes, but finally left without them. I wondered how they would go back to Blue Mountains or Sydney; we were far out in the middle of nowhere.

After reaching the Blue Mountains Scenic World facility, I went inside to reach the observatory deck to have a first glimpse of the Three Sisters rock formation. The day was sunny and clear enough to see them. There are lots of paths and trails that can be explored without going too far. I noticed some huge artificial moving dinosaurs and eggs with sound simulation to make them more realistic. Kids loved those a lot.

I decided to finish lunch before going out in the mountains to get even closer to the Three Sisters. Lunch was not included and prices seemed to be not too inflated. I grabbed a chicken wrap and some water.

Once I started walking through the trails, the lush valley and lots of small creeks were some of the natural beauties I beheld. The tracks were going uphill and downhill, so it was easy to get tired after a few minutes.

The mountainous region was full of a variety of trees and shrubs, some of which were very tall. I was worried about getting lost by going too far, but I met some people from my tour and we stayed together. This helped a lot for taking pictures. I saw zipline cable cars moving through the sky; those people definitely had nicer views than those underneath.

We had to come back to our tour bus to take us to the Echo Point Lookout for a closer view of the Three Sisters, which is on the other side of the valley.

What Is An ETF (Exchange Traded Funds)?

Exchange-Traded Funds (ETF)

First Published: ADawnJournal.com March 28, 2010

What Is An ETF?

An ETF is a type of investment product that trades on an exchange like a stock. However, unlike a stock an ETF is not made of a single entity. An ETF is made of a group of investments. These groups can be a group of stock, bonds, natural resources, commodities, precious metals, etc. In most cases, an ETF follows an Index, as an Index is already made of a group of stock (or other investment products).

Advantages of ETFs

Lower Cost – The ongoing cost of holding ETFs (called Management Expenses Ratio or MER) is lower than mutual funds or index funds. For example, An ETF MER can be in the range of 0.25% – 1.00%; a mutual fund or an index fund MER can run in the range of 1.00% – 3.50%.

Flexibility – ETFs offer more flexibility as they trade on the stock exchange and can be bought or sold throughout the day during regular trading hours. Mutual funds do not offer this option, as they can be transacted using the NAV (Net Asset Value) which comes out at the end of the day.

Diversification – As ETFs are made of a basket of varieties of investments, they provide broad diversification and convenience. It would be time consuming, a lot of hassle, and almost impossible to get the same level of diversification with anything else.

You See What You Get – A major advantage of holding ETFs is that at least you get the return of the underlying index the ETF is tracking. You know what you are getting and you see what you get. With mutual funds, it is totally different. In general, regular mutual funds are made of many individual stocks (or other types of investment products) and most of the time you will have a hard time seeing what you are getting.

Tax Advantage – Tax liabilities are created when trading occurs in the fund. Active fund managers are always buying and selling securities in regular mutual funds. When you sell your mutual funds, fund managers have to sell securities to provide you with cash for your sell. However, this is not the case when you sell your ETFs. When you sell your ETFs, trading can occur between other ETF units holders (in-kind trade) – triggering no capital gain. This means ETFs do not need frequent trading to pay an investor who wants to redeem his part. Less trading creates less tax liability and thus, minimal to none capital gains. However, ETFs do need to trade occasionally. This type of trading occurs when index changes (as they are tracking index).

Easier Asset Allocation – ETFs let you easily manage asset allocation as you are able to see your entire ETFs in one place (your trading account) and thus track and manage asset allocation easily.

Low Maintenance – ETFs allow you to hold a broad range of indexes with minimal supervision. Studies show that experienced ETF investors beat most professional fund managers with a fraction of time and effort spent.

Disadvantages of ETFs

Requires Investment Knowledge – Buying ETFs is not as easy as mutual funds. You need to have a trading account and need to be some sort of investment savvy to hold ETFs.

Brokerage Fees – Buying ETFs incur brokerage commission or trading fees – just like stock, you pay fees to buy and to see. This makes buying ETFs for smaller amounts not justifiable.

No Dollar-Cost-Averaging – Since ETFs incur fees each time and buy and sell, it’s not a good vehicle for dollar cost averaging.

Market Timing – Since ETFs are easy to trade, it may tempt investors to do market timing (buy and sell to chase returns) via frequent trading and thus incurring a lots of transaction fees. ETFs work best for long time investors.

How ETFs Choose Its Holdings or Products

ETFs mainly use two methods to pick its holdings. These are called: Market-capitalization /Cap-weighted indexing and fundamental indexing.

Market-capitalization /Cap-weighted indexing replicates a market as-is. In this methodology, bigger companies have greater influence. Most common indexes such as the S&P/TSX Composite and the S&P 500 use this method. In Canada iShares and in the U.S. Vanguard use this method to operate many equity ETFs.

Fundamental indexing picks stocks by looking at fundamentals (such as earnings, book value, sales, dividends etc), not by size. Fundamental indexing proponents argue that Market-capitalization /Cap-weighted indexing overvalues larger and undervalues smaller equities. So to get true value, stocks’ fundamentals, not sizes should be looked at.

There are other methodologies such as price-weighted indexing, equal- weighted indexing, etc. If you are looking for the best indexing, there is no clear answer. You need to do a little research to find the best one that suits your needs. If you are looking for the cheapest one, Market-capitalization /Cap-weighted ETFs are usually the winner.

How to Buy or Sell ETFs

Since ETFs trade on exchanges, you need a trading account (discount brokerage account) to buy ETFs; just the same way you would buy stocks. In Invest Now, I have mentioned how to open a trading account at an ease.

Are There Any ETFs In Canada?

Canada is the country that invented ETF. |The world’s first ETF traded on the Toronto Stock Exchange in March 1990. Here are some ETF providers in Canada:

iShares Canada – The oldest and largest ETF provider in Canada.

Horizons – Horizons offers AlphaPro and betaPro ETFs. Horizons AlphaPro is the only ETF family that is actively managed ETF in Canada. Horizons BetaPro offers leveraged and inverse leveraged ETFs to profit in both bull and bear markets.

Claymore ETFs – Claymore offers various innovative intelligent investment strategies ETFs. This is the only company that offers ETFs that can do DRIPs (dividend reinvestment plan) in Canada.

BMO Exchange Traded Funds – New player in the ETF markets and the only major Canadian financial group to offer ETFs.

TMXMoney has a section on Exchange Traded Funds and I strongly encourage you to visit it.

How to Build an ETF Portfolio

I recommend you read these two articles I wrote.

How to Build an Investment Portfolio

What Is Asset Allocation?

A Dawn Portfolio (I am still working on this project and will add a link once done)

Once you are finished reading, do some more research and do some more reading from various other sources to have a good grasp of ETF. And then, if you are confident enough, construct a suitable portfolio that fits your needs. If you are not comfortable figuring out on your own, seek help from professional financial advisors.

NB – Currently, I do not have any articles giving ETF ideas, examples of Indices ETFs track and so on. I will be writing more on these in the future.

How Risky Are ETFs?

No investments come without risk (except some fixed income products like money market instruments, T – Bills, etc). However, due to the fact that ETFs provide a broad diversification with a wide variety of investments, you may be able to reduce some risk.

Last Word

As I mentioned in Invest Now, investment is an art. As such, it requires discipline, hard work and consistency. Do not blindly follow any ETF model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

The Great Depression

Great Depression: The Worst in Recent History

First Published: ADawnJournal.com March 26, 2010

The worst depression in recent history, and one of the defining periods of the 20th century was The Great Depression. From 1929 to 1939, many of the world’s economies suffered high unemployment and greatly decreased GDPs, putting great hardship on citizens and restricting trade between countries.

The Great Depression is the longest and deepest depression of the 20th century and it is now used as the benchmark for how bad a recession or depression is.

In the United States, unemployment rose to 25 percent, while other countries saw their unemployment rise past 30 percent. Many cities and industries were hit very hard, and international trade fell by 66 percent around the world, greatly impacting people around the world.

As well, crop prices fell by 60 percent, causing many farmers to lose their homes as record amounts of foreclosures occurred. Other industries that suffered greatly included banking, mining and logging.

Causes of the Great Depression

There is no one cause to The Great Depression, but these five are considered to have all played a part in it.

1.   The crash of the stock market in 1929 occurred on October 29, and is considered the start of The Great Depression. This event had a major impact on the economy of the United States, and within two months of the initial crash, stockholders had lost over $40 billion, causing many to lose everything they owned.

2.   The failure of banks was widespread in the United States during The Great Depression. From 1929 to 1939, over 9,000 banks failed because the deposits of the banks were not insured and when banks failed, depositors lost everything. The banks that were still around stopped giving out loans out of worry of going under themselves. This put a lot of people in difficult positions as they lost what they had and could not get money anywhere.

3.   Since people now had less money during The Great Depression, many people stopped buying things they did not need. This caused a reduction in the amount of items being made around the country, which then caused companies to go out of business. Hence, the unemployment rate rose to a record of 25 percent, which only made things worse.

4.   Another cause of The Great Depression was the Smoot-Hawley Tariff, which was created in 1930 to protect American companies from failing. This tariff charged very high taxes for imports, which caused trade between the United States and other countries to fall drastically. As a result, rather than helping the economy, it hurt it even more and further made The Great Depression worse.

5.   To make matters worse, when the economy started failing, so to did crops in the Mississippi Valley during 1930. The crop failures reached such high numbers that many farmers lost their homes as the breadbasket of the world turned into a dust bowl. This is the reason that the 1930s are often called The Dirty Thirties.

How the Great Depression Ended

Countries around the world began to move out of The Great Depression at various times throughout the 1930s. Many countries began to recover around 1933, while the United States reached its full recovery around 1940, just before the country’s entry into World War Two.

One reason for the United States coming out of The Great Depression was the New Deal created by President Roosevelt, which accelerated the recovery of the country due to aggressive spending to help create jobs for the citizens of the country.

However, for the United States, the biggest reason for recovery was the outbreak of the Second World War. When World War Two was declared, economies around the world were stimulated due to the rearmament policies of Allied countries to prepare for war. This was done to such a degree that Britain eliminated unemployment by 1939 when war was officially declared.

When the United States entered the war in 1941, the unemployment rate fell to below 10 percent, and war spending doubled the growth rate of the American economy, thereby stopping The Great Depression for good.

The Great Depression was a watershed moment in the 20th century that ranks with World War One and World War Two as the darkest times in the history of the 20th century. The Great Depression also taught the economists and policy makers in the United States how to avoid a depression and how to keep the economy of the country going. Since 1940, there have been no new depressions in the United States, partly in thanks to what was learned during The Great Depression.

Australia Travel Blog: The Blue Mountains – Stopover at Mountain Village Leura

Sydney Travel Blog: Part 10 – Blue Mountains’ Stunning Natural Beauty

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Once the tour bus passed Sydney City, the natural beauty of Australia started to awe everyone. I thought the 2-hour bus ride was going to be a boring one, but the scenic drive kept me busy enjoying the roadside scenes and capturing them on camera as much as possible.

The tour guide, who also happened to be the coach operator, was giving a running commentary of everything we were passing along with a lot of Australian history. So there was a lot to absorb.

Once I reached the quaint mountain village of Leura, there was a short break to get off the bus. A suburb in the City of Blue Mountains, Leura has a population of 500 and a 1000m- (3300 ft) elevation. This is actually one of the few places in Australia where you can enjoy occasional snowfall in winter and four distinctive seasons.

Although Leura is a small town, it’s full of attractions that can be explored. Fine coffee shops, restaurants, boutiques and galleries, golf courses, Fairmont Resort, Everglades Gardens, Gordon Falls Reserve, Toy and Railway Museums, Cliff Drive, bush walks, Leura Cascades, and the Mount Hay region are a few to mention.

Leura is also known as The Jewel in the Mountains Crown and The Garden Village. I walked along the streets of Leura for a bit and grabbed some coffee from a coffee shop. I love small towns and villages, but always end up living in big cities like New York City or Toronto.

The name Leura comes from the Aboriginal language and means “lava”. Leura sits on volcanic rocks and many have been found in this area.