Beware the Fed


There is an old axiom on Wall Street:  “Don’t fight the Fed.”

The Federal Reserve holds an enormous amount of power over the economy.  While the President is usually blamed for a bad economy and praised for a good one, the fact is that the federal reserve actually has significantly more power over the state of the economy.

Despite the name, the Federal Reserve is not an institution of the Federal Government.  The Federal Reserve is made up of a board of bank executives from around the country — the “Governors” — with one individual chosen as the Chairman.  The Chairman is chosen by the President and confirmed by the Congress, but the post is meant to be non-political.  The group meets periodically to discuss the state of the economy and any action that should be taken.  The power of the Federal Reserve over the economy is so acute that the discussions held during the meetings are kept in secret with notes from the meeting only being released several months after they meet.

Often traders will move the stock market up or down before the Federal Reserve meets based on what they expect the group to decide.  If the group’s decision surprises the market, the stock market will often move up or down several percentage points.  The announcements made by the Federal Reserve are purposely made rather vague since they know the power of their words.


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The Federal Reserve controls the economy through two levers, the Discount Rate and the Fed Funds Rate.  The discount rate (http://en.wikipedia.org/wiki/Discount_rate) is the amount that the Federal Reserve charges banks that borrow funds from it.  Generally, it is frowned upon for banks to borrow from the Federal Reserve directly and they generally get a scolding when they do so.  The exception is during the recent money crisis where borrowing from the discount window was encouraged since other sources of capital had dried up.

The Federal Funds Rate (http://en.wikipedia.org/wiki/Fed_Funds_Rate) is the rate at which banks loan each other for overnight periods.  The Federal Reserve does not control the Fed Funds rate directly, but instead adds money to the economy or takes it away to affect the rate.  This is done by selling notes, which has the effect of removing money from the economy, or buying notes, which injects money into the economy.  Like anything else, the more money there is in the economy to lend, the lower the price for borrowing (therefore the lower the interest rate).

Because the bank’s costs of capital decrease when the rate at which they can obtain decreases, they also tend to lower the rates they charge.  This trickles up into the economy (except, interestingly, credit card rates), such that most rates tend to fall.  Because the rate savings accounts provide drops, bonds become more valuable, so their price tends to rise, dropping the amount of interest they provide.  Likewise, because the return of common stocks becomes more valuable, stock prices also tend to rise.

This is the reason to not “fight the Fed.”  When the Fed is lowering rates, it’s best not to be short, and when the Fed is raising rates, it’s best to prepare for a fall.  Note that in the early ’90’s, the Federal Reserve lowered interest rates to bring the economy out of the early 90’s recession.  The stock market took off first, followed by the economy.  President Clinton was credited with the good economy that followed, but it was all touched off by the Federal Reserve.

In the late 90’s, when inflation was starting to pick up and internet stocks were trading at ridiculous prices, Fed Chief Alan Greenspan warned of what he called “irrational exuberance.”  The Fed began raising rates to pick the ensuing bubble.  A few months later, the bubble burst and the early 2000 recession occurred.  President George Bush Junior was blamed for this recession, but the stock market had already started to fall before he took office because of the actions of the Federal Reserve.  Finally, just before the latest recession, the Federal Reserve, concerned about housing prices, began to raise rates to dampen the economy.  This caused the housing bubble to burst, leading to the current state.

The action of the Federal reserve typically takes half a year to have an effect.  It takes time for companies to start borrowing and hiring after rates are lowered.  Likewise, when the economy has a good head of steam it takes time for the wheels to grind to a halt.  The Federal Reserve set rates at near zero in 2008 and had been waiting for the economy to pick up.  It appears that there has finally started to be some growth, and the Feds are starting to slowly raise rates because they fear inflation picking up.  As they do so, it is likely to slow the economy and may cause stocks and bonds to fall, at least temporarily.

It would not be wise to fight the Fed.  If you have money invested that you need within a couple of years, it might be wise to take opportunities to sell.  If you are invested long-term, however, it would probably be better to just stay put.  You don’t know if the effects will be immediate or if there will be a great run-up through this New Years’ season as there often is.  If President Trump is able to get a tax cut through, that will also add fuel to the fire and you might miss out on a great advance in stock prices before the Fed’s effect is finally felt.  The effects of the Fed are temporary and matter little if you’re investing for 20 years.  Missing a big move up in stocks because you’re sitting on the sidelines will.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Love Letter to the American Press


Mushrooms

Dear American Press,

You have always been an important part of my life.  From a young age I remember sitting at the breakfast bar in our house, reading through the local newspaper.  When I was younger still, I remember that they brightly colored Sunday comics were always anticipated and savored each week.  Through my teens I watched the local and national news each night.  Your anchors and reporters became uncles and aunts to me who would visit each night to tell about things happening around town, around the nation, and around the world.  I particularly remember being impressed by the local weather man, Stu Tracy, who would throw up the suns and rain symbols that would magnetically stick to the map.  I never understood how he would remember just where each symbol would go and was disappointed when he stopped creating the map real-time, instead having it setup before the forecast.

In college I made the decision to spend an hour each day in a particular chair in the student union and pour through the Wall Street Journal, cover-to-cover, as well as Barrons on the day it came out.  I also remember the start of CNN and ’round-the-clock coverage during the first Gulf War.  How amazing it was to be able to be there in Baghdad as the American bombs were falling.  I remember the chill in the air as Saddam Hussein fired scuds at American troops and Israeli cities that could be filled with chemical agents, never knowing where one might land.

              

Yes, I have loved you for all of my life.  But to truly love someone also means to be truthful when that person is making bad decisions that are hurting her.  To act like things were just fine when someone you love it tearing herself apart is not love, but enabling.  Having someone speak up may bring about anger and resentment, sometimes causing an irreconcilable split in the relationship.  It would be far easier to stay silent and not bring up difficult issues, but that would not be love.  God says to treat others as we would like to be treated; that should go doubly for someone we love.  If I were destroying my life, I would want someone to tell me.  So here goes….

Your reporting is full of incomplete and biased information – even some flat-out lies at times – and that is causing people to not trust you anymore.

OK – there it is.  Right out on-the-table.  I know that you think that people are generally ignorant and even dull, such that they would not know that you were trying to manipulate them through the facts you tell and the ones you leave out, the words you choose, and even the stories you choose to cover and those you don’t.  But they are seeing right through you and it is causing them to turn away.   They don’t want to be around you because you’re trying to get them to believe an alternative reality and then to act accordingly.  You want them to think that nationalized health care is a great thing, while they see the premiums rise and their doctor networks shrink.  You want them to believe that higher taxes, government programs, and strong regulations are the road to happiness for the middle and poverty class, but they have seen jobs disappear, wages stagnate or decline, and poverty increase as these things have come to pass.

Bottom line:  They no longer feel like they can trust you.

          

Need a little Honesty?  It’s such a lonely word.

And you see, trust is everything for you.  People don’t buy your papers or watch your newscasts because they like your witty writing and snappy graphics.  They don’t give a couple of hours of their valuable time each day to watch the evening news and read the morning paper because they want to be told what they should think, particularly when there are such clear holes in that thinking.  They do so because they have a need to know the truth about things for which they can not discover the facts themselves.  They cannot go to Iraq or Afghanistan and see the conditions and the interaction between the local people and American troops.  They cannot spend all day in Washington D.C. and see if their representatives are passing laws with which they agree and spending the people’s money wisely.  They cannot go to the police stations across the country and see if laws are being enforced fairly and effectively, if certain cities are safe or dangerous, and if government agencies are being run efficiently.  The desperately need someone to do this for them so that they then have the information that they need to make the right decisions.  

You are supposed to be the one who finds out the truth for them.

This is why your prevarication, equivocation, replacement of opponent viewpoints with straw man arguments, and manipulation of the facts is so damaging in your relationship with them.  If your product is truth, “All the news that is fit to print,” as one of your publications says, then damaging that trust is the worst possible thing that you could do to them.  They can tolerate mistakes, but they cannot tolerate lies and distortion.  There are plenty of more interesting things they could watch on TV for entertainment or tabloids they could find in the checkout line if they want to read great fictional stories.  They go to you for the truth, but you have let them down time and again, and they know it. 

                   

Lips are Movin’ $1.29 at Amazon                

Right now, I see that you are shaking your head.  You say that you may stretch things from time-to-time, but your overall purpose is to guide people to a bigger truth and the way you see the world, so changing things around once in a while or selectively leaving some things out that would just confuse people is justifiable.  And that is a big part of the problem.

You lack so much diversity of thought, since all of your employees coming from places where only one point-of-view was allowed, that you don’t even know that you are seeing the world through terribly distorting lenses.

People – evil people who want to seize control in America by centralizing power in a large government – have gone into the universities, then even the high school and grade schools, and filled them with people who all have the mindset that big government is good and socialism (and even communism) are better than free enterprise and capitalism.  The education you received did not include all of the facts, plus it included a lot of unverified conjectures.  If anyone questioned what was presented as facts, they were chastised and humiliated by the teacher and their peers.  People who initially didn’t believe in socialism either dropped out of the major or were made to change their minds.  They may have seen the inconsistencies, but they felt it was for the greater good that they just go along.  And so they came out of the classrooms and went into the newsrooms unable to objectively examine the facts.  They were sent with a mission to convince the readers and viewers that the orthodoxy they were taught in their schools is the right one.  

They became propagandists rather than journalists, even if they did not realize it.

Even once your journalists enter their careers, they continue to shelter themselves from other opinions.  Your newsrooms are echo chambers where everyone agrees with what they say, and your employees live in cities where everyone feels the same.  They are so sheltered that they come to think that their opinions are those of the average American.  They also think that they are far smarter than most people.  That everyone else has the intellect of a child compared to them.  Smart people think the way they do – anyone else is either ignorant or trying to take advantage of the foolish.  Hmm….  They are so convinced that they know better that even when they are proven wrong, such as in the last election when they were sure which candidate would win and the other did, they think there must be some sort of mistake.  Or some boogeyman like the Russians changed things.

          

And another thing….

Referring to the land occupying 90% of the United States as “fly over country” and thinking that those who live there are unimportant isn’t a good way to keep readers and viewers.

Now before you say that they watched and they read and they listened just fine before the internet came along and took their attention, let me counter.  You are right that fewer people are reading your newspapers and watching your evening news casts because of the internet, but it is not because the internet is more exciting or convenient.  If that were the case, people would be flocking to your online content as they stopped getting a daily paper.  But they aren’t, are they?  And no, it isn’t because of right-wing propaganda from talk radio and Fox News either, although both of those sources are part of your problem. 

Alternative news sources like the internet, Fox news, and talk radio are providing the facts that you are leaving out.

They are also providing alternative viewpoints and explanations.  They are giving different reasons why things may happen as they do.  They give different predictions about the effects of policies and government actions.  They also provide logical explanations for their predictions and assessments, rather than just focusing on people’s emotions or dictating how people should feel and what they should do.  They don’t just provide conjecture, using a snooty voice to make their listeners think they need to think the same way or they are stupid.  “Obviously, trickle down economics don’t work.”  “Even a fool should know that raising tax rates brings in more money for the government.”    The alternative news sources are resonating with the hearts of people because those who have worked a real job, built something, or had the real experience of trying to raise a family can tell logical explanations and ideas from, well, what they’re stepping in sometimes in fly over country.

So, it is with great sadness that I now need to tell you that I’m leaving. I no longer want you to show up on my doorstep in the morning.  I won’t be there with you before dinner or at night before going to bed.  I won’t waste my time listening to what you have to say, because I cannot trust what you are telling me and I have better things to do.  I also will not be telling you what I have to say, by writing letters to your editors, since doing so only helps you continue on your destructive course and gives you hope that continuing along the same path will eventual lead you to a better place.

No, it is better to step away and let you hit rock bottom, for it is often only by hitting rock bottom that people decide that they need to change.  I wish you best of luck.

Take care of yourself, because I won’t be there until you change your ways.

With great sadness, love,

SI

Got a comment?  Please use the form below to let me know what you think.  Please also leave a comment or contact me via vtsioriginal@yahoo.com if you’ve got an investing question you’d like to see featured.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Hey Republicans – Here’s Your Chance. Don’t Blow It.


McKiosk?

                        McKiosk?

A couple of months ago, it looked like America was going to choose Socialism.  Like the Soviet Union and Venezuela, we would have seen jobs (continue to) stagnate, inflation rise, cronyism and corruption become the only way to become wealthy, and government in every aspect of our lives.  MSNBC was writing the obituary of the Republican party, and deservedly so, given the pitiful performance we saw the last time Republicans were in control of the White House.

Instead, Republicans have gained almost unprecedented control.  Not only do they control both houses of Congress and the White House, but the Governorships and legislatures of 25 states.  They now have the power to get most legislation that they want through and create or do away with all sorts of regulations.  They have gotten here by campaigning against an ever-expanding government, increased government control of virtually every aspect of the economy, and large amounts of government debt.  The question now is, will the Republicans actually do what they promised and replace government control with free enterprise and free markets, or is it all just talk and they’ll continue to use regulation and tax policies to enrich their friends as they’ve done in the past?

The last Republican President that we had who truly believed in the free market was President Reagan, and like President-Elect Trump, those in the Republican establishment hated him.  But President Reagan understood how government policies, in particular tax policies, affected the economy.  As he explained, as a high earning individual paying the highest tax rates on the last dollars of his income, there was a strong incentive for him to limit how many movies he made a year.  With progressive tax rates very high beyond a certain level of earnings, the second, third, and forth movies he made in a year would result in much less of a payday than the first one.  Since he was getting so little, relatively, there was a strong incentive for him to sit at the pool rather than get up and go into the studio, or travel somewhere in live in a trailer for several months, after he had made the first movie or two and had enough income to take care of his needs.

But movies don’t just make money for the stars.  There is a whole movie crew, caterers, set-builders, hotel workers, gas station attendants, restaurant workers, theater workers, and theater supplier network that benefits by more movies being made.  If Ronald Reagan just sat home rather than make more movies, there would be less work for these individuals.  Most of these people were not the wealthy, but the working class and those just starting in the economy.

So President Reagan cut the tax rates in the middle of a dismal recession, ignoring the cries that he would destroy government revenues and hurt the economy.  The terms, “trickle-down economics” and “Reaganomics,” were coined to mock the President and his policies.  What followed was an economic expansion that continued for 19 years until the higher tax rates imposed by Presidents George H.W. Bush and Bill Clinton brought the expansion to an end.  Instead of falling, government revenues actually grew with the economy.

Today, as government has taken control of the healthcare markets, we’ve seen premiums prices and deductibles soar.  More distressing, we’ve seen provider networks shrink and many doctors leave the market.  For the first time in modern American history we’re seeing people having difficulty getting the care they need because there are no providers that take their insurance near them and waiting times are growing to see the few that remain.  Imagine needing a heart surgery immediately and being told that it will be a month or two before you can get into the operating room!

The answers to America’s healthcare costs are simple and based upon free-enterprise principles.  Require everyone to save some of their money so that they’ll be able to pay for their own basic care out-of-pocket.  This will cut costs for everyone who is paying since they won’t need to pay for others’ medical care and since the costs for billing by the doctor’s office will be less.  Require everyone to get a major medical insurance policy so that they’ll be covered should a major health event occur.   Require doctors post their true, no-kidding prices in a way that would allow smart phone apps and websites to direct patients to the low-cost providers in their area.  This will eliminate the inefficient market that currently exists that causes aspirin to cost $10 each at a hospital or the same procedure to be $5000 at one clinic and $700 across town at another.  Get patients to care about the costs they are paying.  Get healthcare providers to compete for patients so they are motivated to improve quality and/or make their practices efficient.  Expand the deductibility of charitable giving to hospitals and clinics that treat those who cannot pay so those who would otherwise fall through the cracks could be covered.

You’ll notice above that I am suggesting the government require people to do things like save for healthcare and buy major medical insurance, which is not a free enterprise principle.  As with auto insurance, there are a lot of irresponsible people who will not save for healthcare or buy major medical insurance unless they are required to do so, so I do believe there is a government role to ensure people do the responsible thing.  This protects both them and society from the burden they will impose when they are not responsible.  True free-enterprise would be to allow those who don’t save to go without healthcare as a motivator to be responsible, but obviously that is not a choice in a compassionate society since there would always be some individuals who would get caught, so the requirement to at least save and buy insurance for major events, while not dictating how that money is saved and having competition among insurance providers, will strike a good balance that protects both society and individual freedom.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.