Archive for the ‘Federal Reserve’ Category

Maybe, the Fed’s 1/4% rate increase is just a shiny object …

January 4, 2016

In a prior post, we opined that the Fed’s 1/4% rate increase shouldn’t have a material effect on business investment or consumer mortgage rates.

For details, see Fed Watch: Is 1/4 of 1 percent a big number or a little number ?

But it will have a BIG impact on the cost to service the U.S. Debt … which is now over $18 trillion.

A basic math principle:  A little number times a very big number results in another very big number.

In this specific case,  $18 trillion times .25% equals $45 billion.

 

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That said, I don’t think that the Fed discount rate is the right number to watch … especially if you’re a stock market watcher.

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Fed Watch: Is 1/4 of 1 percent a big number or a little number ?

December 17, 2015

Ok, the Fed finally hiked rates by a whooping 1/4% ….

A common view: “geez, is the economy so bad that it can’t absorb a measly 25 bps increase in interest rates?”

Obviously, .25% isn’t enough to sway many corporate investment decisions … most corporate investments are projected to return mucho above the firm’s cost of capital …  not mere quarters of a point.  Reality is that firms have hurdle rates way above their cost of capital, reflecting implicit risk and organizations’ limited implementation capacity.

So, what’s likely to be the major impact?

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Here’s my take…

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Fed Watch: What’s the impact of 1/4 of 1% interest rate increase on you (and me)?

September 22, 2015

Last week’s Federal Reserve action (err, make that inaction) caused a stir in the financial markets.

Common view was: ” geez, is the economy so bad that it can’t absorb a measly 25 bps increase in interest rates?”

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Source

In yesterday’s post, I put the number in context, illustrating that the economic cost of a measly .25%  just on servicing the national debt is about $45 billion ( .25% times $18 trillion) ….  equivalent to roughly half of the Federal government’s annual cost for ObamaCare.

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Today, let’s take a couple of more views of the 1/4 of 1 % …. the impact on household incomes.

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Fed Watch: Is 1/4 of 1 percent a big number or a little number ?

September 21, 2015

Last week’s Federal Reserve action (err, make that inaction) caused a stir in the financial markets.

Common view was: ” geez, is the economy so bad that it can’t absorb a measly 25 bps increase in interest rates?”

Obviously, .25% isn’t enough to sway many corporate investment decisions … most corporate investments are projected to return mucho above the firm’s cost of capital …  not mere quarters of a point.  Reality is that firms have hurdle rates way above their cost of capital, reflecting implicit risk and organizations’ limited implementation capacity.

So, what’s going on with the Fed’s decision?

Some pundits are arguing that the Fed is just trying to prop up the stock market with low rates that force investment into higher risk intruments (i.e. stocks)..

That may be true, but it doesn’t seem to have done the trick last week.

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I think that there’s something else going on … something that I haven’t heard from any on-air pundits …

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What’s in your wallet?

June 6, 2014

A couple of interesting charts from the Fed’s Triennial Payments Study…

If you’re like most Americans, there both debit and credit cards in your wallet …. both debit and credit card usage is increasing … with debit card usage increasing by leaps and bounds..

 

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That said, cash is still king …

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$$$: Time to move to cash?

September 5, 2013

First, the disclaimers:

1) I don’t give investment advice.

2) I think Jim Cramer is a blowhard.

But …

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Last week, a friend of mine who seems to have a touch reading the market alerted me that he was moving strongly towards cash … away from stocks … and far away from bonds.

Hmmm.

Cramer must have been listening in.

Here are Cramer’s 7 reasons to move to cash …

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Top 5% says: “Thank you, Ben” … bottom 95%, not so much.

September 17, 2012

Punch line: Quantitative easing – pumping money into the economy – helps the top 5% who have most of their net worth in stocks & bonds … but does little to help the average man on the street … especially if he doesn’t have a job.

From the Washington Post:

:It is remarkable, really, that Democrats defend the Obama economy by pointing to the rise in the stock market since the president took office.

The Dow Jones was at 8,279.63 when Barack Obama took office. It’s now over 13,500, boast the Democrats.

Swell, the Wall Street crowd rakes it in and the rest of the country is setting records for unemployment, poverty and food-stamp use.

Imagine if the Republicans made such an argument. If a Republican were in office, the left would holler that this is a jobless recovery.

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Insightful analysis by Robert Frank of CNBC

Last month, the Bank of England issued a report that must have made Fed chairman Ben Bernanke squirm.

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent … and that about 40 percent of those gains went to the richest 5 percent of British households.

The latest round of QE announced by  Bernanke yesterday has sparked growing controversy about how Fed policy has mainly helped the wealthiest Americans.

One economist says QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy.”

The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans.

According to Fed data, the top 5 percent own 60 percent of the nation’s individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.

[Thanks to the first two rounds of quantitative easing] the wealthy quickly recovered much of their wealth as stocks doubled in value.

But the rest of the country, which depends on houses and jobs for their wealth, remained stuck in recession.

Most Americans have most of their wealth tied up in their houses (about 50 percent for most).

For the top 5 percent, homes account for only 10 percent of wealth, while financial assets account for between one third and 40 percent.

By boosting the value of financial assets, Fed has helped the economy of Richistan but not the broader United States.

Despite lowered rates, banks remain strict on lending, restricting access to credit for most Americans. The wealthy and the asset-rich, however, will now enjoy even lower rates on their credit.

Low interest rates also penalize savers, and while the wealthy as a group have the largest savings pool in America, they have only about 13 percent of their investible assets in cash, and the rest (more than 85 percent) in stocks, bonds, alternative investments and mutual funds – all of which have benefited from easing.

The critical  question, though, is whether putting more profits into the hands of the top 5 percent will really generate jobs for the rest of America. So far, the evidence is not promising.

Encore: Why the market goes up when the Fed “quantitatively eases” …

September 14, 2012

Yesterday Bernanke announced another (and apparently infinite) round of quantitative easing … that is, substantially increasing the amount of money in circulation

The stated logic: keep interest rates low so that businesses and prospective homeowners borrow.

The cynical interpretation: 56 days until election … Obama stands by Bernanke … Mitt says he’s fire him

The immediate impact: stock jumped over 200 points.

Why?

There’s a strong link between the supply of money and stock prices.

More money => lower interest rates +> higher comparative returns from stocks => higher stock prices.

That is, until inflation kicks in and borrows face higher rates …

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Here’s an archived post that gives more detail:

Back about 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

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The article summarized an econometric study that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

OK, fast forward to today.

Now, when the Feds expand the money supply, it’s called “Quantitative Easing” … or QE, for short.

Recently, Jason Trennert of Strategas Research Partners published a revealing chart that visually relates stock prices (the S&P 500) to the recent periods of quantitative easing.

Hmmm.

Looks like the supply of money and common stock prices are still related.

Partially explains why the Dow is over 13,000 despite a sluggish and uncertain economy.

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