Category Archives: Publications

Never Ever Take The Last One

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The following is good advice for anyone with a significant other.

last_donut

What is ironic is this is the opposite of a pitcher of water.  When I was growing up in the southwest, we had a pitcher of water in the refrigerator.  [Note: This is long before refrigerator’s had a water line and built-in ice makers.]

Nobody would take the last cup of water from the pitcher because then you had to fill up the pitcher with water again.  We would rather die of thirst before doing that.

On the other hand, nobody hesitates to take the last donut or the last piece of pie.

I am here to advise you that if you want to have a long-lasting relationship, you need to offer the last piece to your significant other before you scarf it down.

But if your significant other is not around, try this.

last_donut_how_to

Just a thought. Now I am getting hungry.

 

The Kelley Monetary Policy Rule

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Everybody hates rules but this is a breakthrough policy to free the fearful Fed.

fear

Background

The Federal Reserve Board (Fed) has held the Fed Funds Rate (the interest rate the Fed charges banks) below 1 percent for 7 years.  That is unprecedented.   The Fed originally lowered the Fed Funds Rate to 0.25% to counteract the last Great Recession.

When the Fed lowered its primary interest rate, it also started Quantitative Easing (QE) by buying securities in order to pump money into the economy to stimulate it.  Now the Fed has stopped buying securities via QE.

Today

The next step according to the standard Fed playbook is to raise the Fed Funds Rate, completing the unwinding of the previous actions.

Unfortunately the Fed Funds Rate has not risen to normal levels because the Fed is afraid to hurt the economy.

What Is Normal?

https://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/

According to the above website, if the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.  Then 3.44% should be the normal Fed Funds Rate.

What Are The Fed’s Options?

How does the Fed get back up to the normal 3.44% Fed Funds Rate?  It can do one of these:

1.  Reverse QE by selling securities OR

2. Set the long-term interest rate to set a goal OR

3. Simultaneously raise the Fed Fund Rate AND offer another round of QE.

Ideally, the Fed should have raised the Fed Funds Rate while phasing out QE from 2011 to 2014.

The best is option 3 which has the most influence and least fear.

But How Fast?

A return to normal Fed Funds Rate involves small baby steps in a gradually higher Fed Funds Rate while offering a phased out QE.

If the Fed only raised the rate .25% each quarter, it would take 13 quarters or over 3 years to get to 3.50%.

Kelley Monetary Policy Rule

The Taylor Rule involves raising the Fed Funds Rate 1 percent for each 1 percent in inflation.  We have no inflation so the Taylor Rule is of no help.  The Kelley Monetary Policy Rule states the Fed Funds Rate will be increased gradually and QE will be reduced gradually to zero at a rate inversely proportional to the Fed Funds Rate.

This should eliminate any fear by the Fed or the financial market and get us back to normal.

Good luck.

Why Another Recession Is Coming – In English

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Friends, here is a tutorial on how we got here and how to prepare for the worst.

ssminnow
Easy Money

The Federal Reserve (Fed) offered Quantitative Easing (QE) 3 times.  At first it saved the big banks and the stock market started going up.  But then the Fed kept giving out easy money to the big banks.

Leveraged Loans and Junk Bonds

The banks, that received the QE money, issued junk bonds and leveraged loans that were used for debt creation not real products and services.  Specifically QE went to Mergers and Acquisitions (M & A) and oil investments.  Here is an example.

Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed [leveraged loan] money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million [2%] came in the form of equity, with the remainder made up of debt financing. [The New York Times]

Do you think any of us could buy a house with 2% down? Nope.

New Bubbles

For 2014, three things happened.  The dollar reached a new record high, the Dow Jones hit a record 32 times and leveraged loans went back to 2008 pre-recession levels.  Some economists are calling this a bubble.  Here is a chart to prove it.

See https://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/

Some Good News

The good news is the stock market is up, gas prices are low and unemployment is back to 2003 levels.

But the Economy Struggles

The economy is struggling for several reasons.  First, the easy money went into debt rather than real products which creates jobs.  Secondly, very little money went into infrastructure which also creates jobs.

And Wage Inequality Is Greater Than Ever

The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965.   The rich have gotten richer.  Unfortunately the upper class does not change its spending patterns.  Several studies have proved this despite what politicians say.

So the economy has stalled even though the stock market is up.  Only the middle and upper classes have money to invest in the rising stock market.

Oil Price Drops and Leveraged Loan Bubble Bursts

Oil prices have dropped because of excess supply and over-leveraged oil investors.  For more information see this easy to understand website.

http://wolfstreet.com/2014/12/07/bloodbath-in-oil-patch-junk-bonds-leveraged-loans-defaults/

Solutions for the Federal Reserve and Congress

Here are some solutions because blogs should offer solutions rather than just complain about our problems.

There is still time for the Federal Reserve to pump up the economy by providing funding specifically for infrastructure which will create jobs and kick start the economy.  Also Congress, or better yet, each state can raise the minimum wage.  The economy will only take off if new jobs are created or lower class or middle class people get pay raises.

Here is a list of 7 suggestions that will not soak the rich.

http://www.marketwatch.com/story/7-ways-to-help-the-middle-class-without-soaking-the-rich-2015-02-05?page=1

But if the government drags its feet or does more of the same Quantitative Easing, here is what you can do to prepare for the worst.

Solutions for the Rest of Us

https://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Lessons From How The Great Recession Happened and What A CDO Is

http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf

Good luck!

Burnt Toast

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His Mom served burnt toast , but he was shocked when his Dad told this story.

toast
“When I was about eight or nine, my Mom burnt some toast .  One night what stood out in my mind was when she had made dinner for us after a very long and rough day at work. She placed a plate of jam and extremely burned toast in front of my Dad.  Not slightly burnt but completely blackened toast.  I was just waiting to see if anyone noticed the burnt toast and would say anything. But Dad just ate his toast and asked me if I did my homework and how my day was. I don’t remember what I told him that night, but I do remember hearing my Mom apologizing to Dad for burning the toast. And I’ll never forget what he said:

‘Sweetie, I love burnt toast.’

Later that night, I went to tell my Dad good night and ask him if he really liked his toast burned. He put his arm on my shoulder and said, ‘Your Mom put in a very long day at work today and she was very tired. And besides, a burnt toast never hurt anyone.  But you know what does? Harsh words!’


Then he continued to say ‘You know, life is full of imperfect things and imperfect people I’m not the best at hardly anything, and I forget birthdays and anniversaries just like every other human. What I’ve learned over the years, is that learning to accept each others faults and choosing to celebrate each other’s differences, is one of the most important keys for creating a healthy, growing, and lasting relationship. Life is too short to wake up with regrets. Love the people who treat you right and have compassion for the ones who don’t.’ “

Enjoy Life Now. 

Thanks to Victoria Potter and Tes Gold for sharing.

Fed Inflation Target of 2% Is Abnormal

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The Fed Fund Rate is at a historic low of 0.25, practically zero.  Why?

abnormal

Because the Fed has an Inflation Target of 2%.  Same as the World’s Central Bankers.

HISTORY

But that is totally abnormal when you look at the historical values of Inflation and the Federal Reserve (Fed) Fund Rate in the United States.

inflation_vs_fedfundrate

The 52 year average for the Fed Fund Rate is 5.45% and for Inflation is 4.01%.

That is a difference of 1.44%.  Notice the Fed Fund Rate is usually above the Inflation Rate.

If the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.

Instead the Fed Fund Rate is 0.25% which should drive an Inflation Rate of 0.25% minus 1.44% or negative 1.19%.  That means deflation!  Oops!

For another opinion, look at this:

http://www.marketwatch.com/story/fed-sharpshooters-cant-hit-2-inflation-target-much-less-4-2016-02-18

UPDATE 2023/01/12

The Fed currently targets inflation of 2% over the longer run as measured by the annual change in the price index for personal consumption expenditures.

‌But Wall Street increasingly sees this goal as unrealistic in a post-pandemic world and that 3% is more realistic.

TROUBLE

Hold onto your hats, Ladies and Gentlemen.

FYI: The Fed Funds Rate is the rate charged banks to borrow money.  The banks in turn charge us 16% to 23% on credit cards for the use of that money.  Ouch!

If you want a better deal involving 6% and no banks, see my website.

https://michaelekelley.com/tag/crowdfunding/

SOLUTION

https://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/

[Thanks to Tyler Durden for the abnormal idea.  Data courtesy of Federal Reserve Economic Data, FRED]

Updated 01/12/2023

Asperger’s Character is Ticked Off

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Just when the little guy was getting some respect and understanding.

aspie_dude_nos

The Pentagon announced that a 2008 study found Russian President Vladimir Putin has Asperger’s syndrome.

aspie_panic

Of all the people at this point in history to be found to have Asperger’s syndrome, this just takes the cake.

Poor little guy will have to go home and muster up more courage and respect.

Thanks to Matt Friedman and his book “Dude, I’m An Aspie!”.  For more on Matt see

http://www.dudeimanaspie.com/

Enjoy!

A Wild And Crazy Year So Far

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I am talking about the stock market year-to-date.

wild_crazy_guys

Every day since the year started, the Dow Jones Industrial Average, the most widely watched American index, has swung up or down in the triple digits i.e. over 100 points.

2015_djia_daily

In fact, the average swing each day since Jan 1, 2015 has been 268 points for the Dow.

2015_djia_volatility

What does this mean to the average Joe?

In a nutshell, volatility means worry for the future. And investors hate volatility.

The good news is there were four large changes of the DOW of more than 300 plus or minus points before a recession happened in 2008.  So we can predict the next recession.

Here is an excellent detailed look at the current volatility by Forbes.

http://www.forbes.com/sites/billgreiner/2015/01/23/stock-market-volatility-and-what-its-return-means-for-the-global-financial-system/

Now that is wild and crazy.

Earn 6% Risk Free Without Big Banks

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Crowdfunding is doing what banks used to do – care about you. How about a hug?

6percent

How would you like to get 6% guaranteed interest without risk for your hard-earned savings?  Certificates of Deposits (CDs) are earning only about 1% at big banks. You could put it in the stock market and risk getting at most 4% to 10%.  But right now the stock market is very volatile with triple digit drops and rises. You could lose all your money.  That would be a -100% interest rate.

A safer arrangement is loaning your money to a crowdfunding company that in turn loans it to small businesses for a slightly higher interest rate.  Each crowdfunding company is the middle man of a perfectly legitimate transaction that big banks used to do.

Big banks are too busy giving 1% or less on savings while charging 26% on credit cards.  You do the math.  Big banks do not care about you at all.

Crowdfunding and crowd sourcing are really taking off as a means to raise money or get loans.  But most companies loan your deposits to small businesses.  Here is one such company.

https://lovefruitful.com/press-releases/financial-startup-waters-fruitful-seeds-for-savers-and-business-borrowers

I am not the only one talking about this.  Here is Clark Howard discussing crowdfunding.

http://www.clarkhoward.com/news/clark-howard/personal-finance-credit/crowdfunding-offers-new-twist-p2p-lending/nCtcp/

Here are two popular peer-to-peer websites that also deals with loans.

https://www.prosper.com/invest/

https://www.lendingclub.com/public/steady-returns.action

With the stock market being very volatile, now is a great time to get 6% guaranteed.

 

What Is Wrong With Capitalism?

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Sure capitalism is not perfect.  Is anything?  Let’s examine the problems.

pickpocket

THE FIRST PROBLEM

As long as the minimum wage is below the poverty level, our society will be amoral.

The poverty level is defined as annual wages below $28,450 for a family of 4.  Divided by 2,000 hours in a year, you get a poverty level hourly wage of $14.225 per hour (or less) for a family of 4.

Currently the national minimum wage is $7.25 and has not changed since 2009.

People trying to claw their way out of poverty will become pickpockets, blame co-workers for mistakes, cheat on time cards and steal supplies at work.  Is that the kind of society we want to live in?

THE FIRST SOLUTION

Raising the minimum wage would help $27.8 million people.

Here is why we should raise the minimum wage according to a small business owner.

http://www.slate.com/articles/business/moneybox/2014/04/a_small_business_owner_s_case_for_raising_the_minimum_wage_better_living.html

Spoiler alert:  He thinks it will grow his business.

THE SECOND PROBLEM

This problem involves cheating on taxes and tax loopholes. In other words, giving priority to me, myself and I.  As long as the tax system is overly complicated, humans are going to try to get away with something to get ahead of their neighbors.  This mess, of course, was created by Congress.

THE SECOND SOLUTION

What can we do?  We can plug the tax loopholes as proposed by Eric Schmidt. Google’s Chairman told angry British politicians last year: “plug the holes if you want more tax revenues”.

The result will be a reduction of our $18 trillion national debt.

THE THIRD PROBLEM

As long as you allow average national CEO pay to increase many times faster than inflation, you will have an amoral society.  Average national CEO pay increased to $15.2 million in 2013.

The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965.

pickpocket_wealthy

The result is the current wage inequality.

In order to keep up their fast rising salaries, CEOs and executives of financial institutions and other companies are taking huge risks with company and customer stock under the guise of pro-growth mergers and acquisitions using huge sums of leveraged loans.

Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million came in the form of equity [2%], with the remainder made up of debt financing, secured by the department store estate. [The New York Times]

When was the last time you bought something with only a 2% down payment?

THE THIRD SOLUTION

Create annual Top Ten lists of Most Narcissistic CEOs and Highest Paid CEOs.

Maybe this will get us back to a more equitable ratio.  1965 was a pretty good year even though the ratio was only 20 to 1.

CONCLUSION

Capitalism is fraught with greed but it doesn’t have to be.

As the Google IPO started out saying, “Don’t be evil.”  Better than that, let’s not be amoral.  Thus reform needs to start with each of us.

We should be thinking more about the people around us or, even better, the world around us.  The Mormons pledge 10% of their income.  So why shouldn’t everyone, that can afford it, give just 1%? 

Google stated in its “Letter from the Founders” as part of its original IPO paperwork, “We intend to contribute significant resources to the [Google] foundation, including employee time and approximately 1% of Google’s equity and profits in some form.”

In addition, let’s raise the minimum wage and try to close the gap between workers and CEOs.

Here are 7 suggestions to close the gap.

http://www.marketwatch.com/story/7-ways-to-help-the-middle-class-without-soaking-the-rich-2015-02-05?page=1.

~~~~o~~~~

WHAT IS AMORALITY

Here is a great article about Silicon Valley Amorality.  But amorality can be found everywhere there is capitalism.

https://www.linkedin.com/today/post/article/20141123194522-529261-silicon-valley-s-culture-of-amorality-water-will-find-its-way

AMORAL APP

There is an app to see how corrupt aka amoral you are. At least in Indonesia.

http://www.usatoday.com/story/tech/2014/11/25/corruption-indonesia-app/70086430/?csp=tech

LEVERAGED LOANS COULD CAUSE CRASH

https://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/

Thanks.  Have a great day.

Who’s Been Messin’ With My Workstation?

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We all love our workstations.  Even if our employer bought them and put a label on them.  We would hate to have someone move or change it.  Here is one such story.

post-it-notes

Upon visiting a customer site to perform a software upgrade, the three of us engineers couldn’t help but notice the Post-it notes all over the edge of the console.  There was so many notes that there was little room for one more.

The main operator’s name was Mike just like mine.  He was a really big guy like a former football player who had retired from the game and put on a few pounds.

When Mike went to lunch, one of our engineers decided to put one more Post-it note on his workstation. He wrote “Call your mother” on one and stuck it near the center top rim amongst the many others.  We all wondered if Mike would notice the new note with so many others covering the edge.

When Mike came back from lunch, a mere 5 minutes went by when Mike asked in a deep angry voice, “Who’s been messin’ with my workstation?”

The three of us engineers cracked up and laughed hysterically.  When we finally calmed down, the engineer that put the last Post-it-note on the workstation confessed.

Mike too had calmed down and understood it was a simple joke.

But this simple joke could have gone seriously wrong.  What if Mike’s mother had passed away?  Then the joke would have been a tragic reminder of a missed loved one.

So the moral of this story is always watch what you say. Anything you say may come back to haunt you.