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.

Spider Farm You Won’t Believe

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Look closely at this picture.

spider_farm

Unbelievable!

Thanks to my Facebook friends.

Stop In the Name of Love

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This is the Federal Reserve Board (Fed) Chairwoman, Janet Yellen.

yellen (2)

She probably doesn’t dance like she used to, but she still gets around.

Pick your favorite caption to go with this photo.

1. I have 5 grandkids.  How many do you have?

2. You know the cop on the Monopoly board that sticks his hand out and says, “Go to jail”?  Well, I am nothing like him.

3. Congress, you silly old goats, will you stop harassing me?

4. Let’s make a deal.  I will not increase interest rates for 5 months in exchange for less harassment.

5. We give you five five mints in one. You know, five money printing presses in one country.

You have to hand it to Janet, she has a nice smile.

Have a great day!

 

Stocks Could Have Worst April Since 1970

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S&P 500 stocks dropped 9% in April 1970.  April 2015 could be similar.

buybacksbymonth

Our source for 1970 data is http://www.moneychimp.com/features/monthly_returns.htm

Here are the reasons April 2015 could be awful.

1. April 2015 is a buyback blackout period when corporations report earnings.

The dark columns in the above chart are the blackout months in which corporations cannot buy their own stock when reporting earnings.   After a blackout period in January 2015, corporation buybacks are the reason for the lift in the stock market in February 2015.  In fact, corporations have been buying twice as much stock as regular investors.  Like January, corporations cannot buy back stock during quarterly earnings reports in April 2015.  Here is more info.

http://www.zerohedge.com/news/2015-03-24/biggest-threat-sp-500-next-month-biggest-buyer-stocks-2015-enters-blackout-period

2. Oil companies will be reporting terrible earnings in April 2015

The price of oil has stayed around $50 a barrel, half of what it was a year ago, which is causing havoc with earnings.

“The Energy sector has witnessed the largest increase in the expected earnings decline (to -63.5% from -29.5%) since the start of the quarter. Overall, 30 of the 43 companies in this sector have seen EPS estimates cut by 20% or more to date”, per the website factset.com.

Also factset.com reports, “the Energy (-38.0%) sector is projected to report the largest year-over-year decrease in sales for the quarter.”

pe_ratio_10yrs

3.  Forward P/E Ratio is 17.0, above the 10-Year Average of 14.1

According to factset.com, “The current 12-month forward P/E ratio is 17.0. This P/E ratio is based on Thursday’s closing price (2089.27) and forward 12-month EPS estimate ($123.03).

At the sector level, the Energy (26.9) sector has the highest forward 12-month P/E ratio.

The P/E ratio of 17.0 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.7, and above the prior 10-year average forward 12-month P/E ratio of 14.1.“

In other words, stocks are overpriced and the P/E ratio is the highest it has been for 10 years.

Be prepared

8 Things To Do When Recession Happens

Good news

The good news is that corporations will probably buyback over $170 billion shares in May 2015 as the blackout period ends.

http://www.marketwatch.com/story/why-goldman-sees-a-buyback-halt-as-a-big-opportunity-2015-03-24?dist=afterbell

Hitting The Wall Lying Down

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Ever have one of THOSE days?

lazy_day

Well this guy did.  Can you pick the best caption?

1.  This beats a cement bench.

2.  I see’d when I should have saw’d.

3.  Next time I will take my dog for less than a 30 mile hike.

4.  In the dark this looks a lot like my bicycle.

5.  Dude, where’s my car?

6.  I like waking up smelling like pine.

Thanks

When A Sign Is Worth One Word

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Sometimes people hurry.  And when they do they make mistakes.

excellense

Here is another example.

secdee

The one word I was thinking of was “oops”.

By the way the second sign was an attempt to spell “secede” as in secede from the union.

Thanks to Brainjet.com.

24 x 7 Wayne’s World

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Looks like my Holiday Wish for a 24 by 7 COMEDY internet service will come true.

waynes_world
Okay it probably will NOT air Wayne’s World reruns for 24 hours a day every day of the week.

But the point is somebody either listened to me or had a similar idea.

Back before Christmas, I wished for 7 things.  One was a wish for “an internet casting site dedicated to COMEDY”.  Here is the Holiday Wish post.

https://michaelekelley.com/2014/12/18/holiday-wish-list/

Now it looks like NBC will launch such a service.

http://www.usatoday.com/story/tech/2015/03/03/nbcuniversal-plans-comedy-web-channel/24329459/?csp=tech

See, wishes do come true.

What do you wish for?

Bubble Gum and Baseball Captions

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Here is a whopper of a bubble by Bobby Abreu. Which is your favorite caption?

bubble_gum_bobby_abreu_getty

1. I was hoping to intimidate the pitcher.  Next time I will pop it at the plate.

2. I dedicate this pink rose to my Mom.

3. Let’s see my competition do this.

4. I hope I didn’t scare anybody.

5. I am able to do this because I played trumpet in grade school.

6. Next time I will shave first.  This could get messy.

Thanks to Getty Images, Bobby Abreu and my followers.

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!

Cute Chicks

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Hey I am talking about these cute baby owls.  Pick your favorite caption.

bird_fluffy

1. H’owl you doin’?

2. That new hair dryer works really well.

3. I feel incomplete.  Are you sure you can’t find the hair spray?

4. Here comes that pesky dog. Let’s pretend to be soft pine cones again.

5. Ah, who gives a hoot?

Have a nice day.