Archive for the ‘Law of big numbers’ Category

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: 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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