Tag Archives: finance

The Federal Reserve is Topsy Turvy [Yes I am old] But Can Be Improved

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The Federal Reserve has been slow to act for fear of market reaction. Here is proof.

  1. Kept balance sheet high for too long. Quantitative Easing (QE) has gone on too long.
  2. Drank the unemployment Kool-Aid and ignored other signals.
  3. Looked at CPI as temporary and ignored Wage Inflation.
  4. Did not increase frequency of meetings to once a month during tumultuous time.
  5. Reacted rather than be proactive.
  6. Targeted inflation at 2% when the previous 50 years averaged 2.5% inflation.

The Federal Reserve can take these steps to fix some things.

  1. Meet monthly.
  2. Reduce Balance sheet aka stop QE.
  3. Increase interest rates 0.25 each month and avoid 0.50 increases.
  4. Assume recession is coming and be prepared to stop tightening.
  5. Set inflation target at 3%.
  6. Add non-voting younger University Economics Professors to board.

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Explaining #BREXIT

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Why is this such a shock and what does it mean?.

brexit

 

SHOCK

The financial world is in shock  because they like the status quo.

The BREXIT was approved because the world aka the 99% including Britain wants change, any kind of change.  Which of course explains Donald Trump’s success in the US.

The polls probably did not reflect the last minute decision makers and instead reflected the people who were able to be polled aka the retired people on the street who had time to answer silly polling questions.  These are generally conservative people who do not like change.

WHAT DOES BREXIT MEAN? 

Well the financial world is in turmoil because they also do not understand what this means.  So you can expect the stock markets around the world to be very negative for quite a while.  There may be enough negativity that we may experience a recession, which a number of respected economists have predicted for months.

ANALYSIS

Change is coming.  The demographics show the population is becoming more diverse aka less Caucasian.  Also the young voters are saying “We are tired of inequality and of politicians paid by the rich to do their work.  Your generation had your chance.  Now it is our turn and we are going to do something different.”

If you want some other financial advice, see this.

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

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Japan – Why Negative Interest Rates?

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A number of countries have implemented a negative interest rate policy (NIRP).  Why?

neg_int_rates

Generally Central Banks try to stimulate their country’s economy by lowering interest rates.  This encourages banks and businesses to issue loans or take out loans.

Japan had a +0.1 interest rate and had nowhere to go but negative to lower interest rates in order to stimulate their economy.

Here is how it works.  Banks usually pay interest to use your money.  Instead a negative interest rate works like a safe deposit box. You pay to have the bank hold your money.

Unfortunately, people would rather have cash which results in hoarding and does the opposite of stimulating the economy.

For more information, see this website:

http://www.bloombergview.com/quicktake/negative-interest-rates

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Do Not Take Any Wooden Nickels

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I was a curious 6 year-old when my Grandfather said those words to me.

grandpa_and_me

At the time, I asked my Grandfather what it meant, but he just smiled.

But his words stuck with me and a few years later when I heard him say those exact same words to another 6 year-old, I had a better idea of what he meant.

He probably meant “do not take anything at face value.”

Today when I look it up, it means “be cautious in one’s dealings.”

That sums up my view of life and of finances.

When I see a curious 6 year-old in the future.  I know not to say, “Be cautious”.  That would be boring.  But saying “Don’t take any wooden nickels.” makes one think.

I owe a lot to my Grandfather for making me think about nickels and finances.

For more information on the history of wooden nickels, see

https://en.wikipedia.org/wiki/Wooden_nickel

 

Bonds Dry Up – Derivatives Explode

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Here is an excellent article about why derivatives are exploding.

nuclear

https://marketwatch.creatavist.com/story/7571

Here is a summary of that article.

The Volcker Rule was passed as part of the Dodd-Frank financial reform bill in 2010. It banned banks from trading securities with their own money, or proprietary trading. Nonetheless, banks had already wound down their proprietary trading operations in anticipation of the rule taking effect…

For larger investors, another trick to circumvent liquidity issues is to deal in more liquid synthetic securities such as derivatives contracts, which can be used to bet on the credit quality of a company without having to deal with the same liquidity problems of the bond market.

Douglas Peebles, chief investment officer and head of AllianceBernstein fixed income, says he finds himself using more derivatives. These allow buyers to invest in the same underlying assets, but in many cases, they can be assured of more liquidity that the actual bond. Bond guru Bill Gross, who runs the world’s biggest bond fund, also concedes that he has begun using derivatives in his Pimco Total Return Fund.

Here is another article.

http://www.marketwatch.com/story/4-reasons-why-the-bond-market-is-going-wild-2015-05-12

The reasons are “four Feds”, less yield for more risk, lack of liquidity, and fear of a bubble.

For more on derivatives and tranches see this article.

https://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/

 Good luck!