Eye Crosser #15: Negative Interest Rates

Well, just when we’d thought we’d heard and/or perhaps read it all, here’s a new twist to monetary policy, oriental style, and, perhaps, coming soon to a neighborhood near you! It’s called negative interest rates! First, of course, a definition from Investopedia.com, so here goes:

Definition: Negative Interest Rate Policy (NIRP)

During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic stagnation. However, if deflationary forces are strong enough, simply cutting the central bank’s interest rate to zero may not be sufficient to stimulate borrowing and lending. A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

Read more: Bank of Japan Announces Negative Interest Rates | Investopedia http://www.investopedia.com/articles/investing/012916/bank-japan-announces-negative-interest-rates.asp#ixzz3yfqvax3s

 

Now to be clear, the Fed has not implemented this policy. The Bank of Japan has. This policy affects the people of the country of Japan. However, since we are now an interconnected economically driven world, these negative interest rates will be an interesting policy to observe. It appears that the Fed has not ever used such a policy here in the U.S., but “never say never.”

What’s scary about the current stock market is that I see more and more “gurus” suggesting that one should “go to cash.” In other words, sell stock holdings and get out of the market. If one were also “barred” from stashing that cash, or any other dollars I may want to “keep safe”, from being deposited in a savings account or money market at a bank, because of negative interest rates, what’s a person to do? I surely don’t want the bank taking money from me because I am “holding my money” at the bank for safekeeping!!!

Because of the Great Depression, our family heard of stories of relatives literally putting money behind a loose brick in the basement* or under a floor board. There have been many, many changes to life in general in my lifetime including bank savings interest rates ( 1950’s) that went from 5% (at a bank) or 5-1/4% interest at a savings and loan (wow, remember those) to zero now. But we never feared a negative interest rate where we pay the bank for the “privilege” of keeping our “pennies” there.

*In the U.S. many homes have a basement. It’s a below ground area where the furnace, hot water tank, and perhaps the “extra” cash is buried (just kidding).

There’s a movie called Network. In the movie, a broadcaster is fired from his job and is so angry at the changes at the television station that he shows his outrage by publicly shouting “I’m mad as hell and I’m not go to take it anymore!” See YouTube clip: https://www.youtube.com/watch?v=q_qgVn-Op7Q

What’s interesting and disturbing about the movie is that it was made in 1976! Forty years ago! Yet, the tirade that actor Peter Finch let’s loose could be talking about today, TODAY, literally.

Anyway, enjoy the movie clip. It’s a good movie, rent it or stream it. I love the movies (well, most of them). To me it’s an escape for a little while. Yet, Hollywood sure gets “real life” once in a while. They are recently doing some “true to life” Wall Street theme movies but that’s “grist” for another post.

Oh, by the way, don’t bump your head when sticking it out of your window!
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Depth
Shiver

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Fed Policy in Year 2016

 
Editor’s Note, 9/19/2016: There is now “talk” that perhaps the Federal Reserve Bank (Fed) will raise the “fed funds rate” in December 2016. Here’s a discussion of possible effects of such a rate hike: CNBC on Fed Rate Hike
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Should the Fed respond to International economic conditions when contemplating its policy moves? This is a dilemma for its FOMC  committee to ponder. Here’s the “mandate” of the Fed:

“The Federal Reserve System, often referred to as the Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Federal Reserve’s responsibilities fall into four general areas.

  • Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
  • Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
  • Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.”

Here’s a link to the website: http://www.federalreserve.gov/faqs/about_12594.htm

According to the Federal Reserve Act, here’s the monetary policy objectives:

Section 2A. Monetary policy objectives

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]  Website link: http://www.federalreserve.gov/aboutthefed/section2a.htm

International monetary “agencies” such as the International Monetary Fund (IMF) have suggested that the Federal Reserve be cautious in its rate hiking policy decisions. Here are some background articles on this subject:

Fortune Magazine: http://fortune.com/2015/06/04/imf-interest-rates/

A quote from The Straits Times: “In a report on global economic issues prepared for the Nov 15-16 Group of 20 summit in Antalya, Turkey, the IMF singled out the prospect of higher US rates as a particular challenge to the slow-growing world economy.”  Website: http://www.straitstimes.com/business/economy/imf-urges-fed-to-delay-rate-hike-until-inflation-evident

 

Some do use the argument that the purpose of the Federal Reserve Bank is intended to look “internally” at the U.S. economy and make any adjustments accordingly. In other words, keep unemployment down to a specific per cent, keep interest rates at an optimum level, and keep prices stable (monitor inflation). Others, of course, want the elimination of the Fed totally. We, the people, however, do live in a world today that is so interconnected that a “sneeze” in one country can “infect” the economy of another country!

My savings are getting “killed” by the low interest rate policy we have been experiencing. There are thousands of other’s savings in the same boat as I. For me personally, I would love the Fed to raise savings interest rates; interestingly, (pun intended), savings rates are controlled by the banks not the Fed. They are indirectly affected by the Fed Funds Rate, (as I currently understand the complicated nature of interest rate manipulation).

So, getting back to my question at the beginning of this posting, “Should the Fed respond to International economic conditions when contemplating its policy moves?”  I hate to say it but it’s not the Fed’s job according to its monetary policy mandates. I tend to take things literally, so my interpretation of the Fed’s responsibilites would probably cause unintended consequences for someone. But then again… would I be any different than anyone who has messed around with our economy, economic policies, enacted poorly thought-out or “special-interest’ intended laws?

I could say “we’re only human” but look how far that reasoning has gotten us!!!

 
Hike

Signs of the Times #4: Killer Apps

 

On January 11, 2016, I wrote an article entitled “Signs of the Times #3: Thoughts on Jobs and Jobs Training“. In that article I said that: “It appears that we are experiencing a massive economic quake of disruptive technology. I took a look at history around the year 1900 because that’s when electricity, the telephone, the combustion engine, to name only three inventions, were discovered and adapted to general use for business and the consumer. What’s different this time is the speed at which discovery and integration into “general or common” use is accelerating. Adaptability is the key to any success and, of course, we humans adapt to different things at different paces.”

I have been thinking about the phrase that I’ve heard several times in the past: “There’s an App for that!” and indeed my mind started clicking about the “science and impact of Apps (software applications)” because of a local program that highlighted an enterprising man who started a snowplowing and lawnmoving business. It works around such a smartphone app. Customers can contact and schedule snow plowing jobs or lawn mowing jobs just by using the scheduling “app”. I don’t know why that particular news piece should have triggered my brain but it did. I got to thinking about how many times I have heard the quip “There’s an App for that!” Another comment I have heard is that something is a “killer app.” Well, these “killer apps” are killing jobs and businesses yet creating jobs and businesses.

Interestingly, today, January 22, 2016, I came across an article featured on the World Economic Forum website. It is entitled: The Fourth Industrial Revolution: What It Means and How to Respond. The article first appeared at another website: www.foreignaffairs.com. Written by Klaus Schwab, the article really speaks to what’s happening to our world. I enjoyed reading the article and hope that you do too.

I know that it’s little solice to read that someone else “sees” what you know or have been thinking, feeling, perceiving anyway and already, but Klaus Schwab is Chairman of the World Economic Forum…the economic meeting being held at Davos, Switzerland during January, 2016. The “Big Money” is attending Davos and the “Big Companies” are attending Davos festivities.

As I said in my article quoted above, “What’s different this time is the speed at which discovery and integration into general or common use is accelerating. Adaptability is the key to any success and, of course, we humans adapt to different things at different paces.” Funny thing (at least to me) I’m one of the “resisters” to technology in the sense that I truly don’t want a “‘smart phone”. I’m happy with making call, getting calls, using speakerphone if I need it. I’m one of those millions who grew up in the pre-cellphone days. I was an “early adapter” when personal computers were first becoming commercially available. Heck, I started learning to use a computer when IBM had “memory typewriters” and then I started using the “Trash 80” (Radio Shack TRS80). That was in 1977.

But technology marches on and even though I don’t want a smartphone I’ll probably have one by the end of 2016! You can’t fight progress, you can only postpone it at your own risk.
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Expert
Zing!

Numbers #8: Measuring the Markets

There are many “models” used to measure the pulse of the United States stock market. Below are some of them. There are over 6,000 stocks traded over the New York stock exchange (NYSE). Here’s a laundry list of some of the U.S. stock markets indices. Each index contains a different “sampling” of stocks, however, any one stock can be listed in more than one index “basket”, e.g. Apple is traded on the NASDAQ market and is also included on the Dow Jones Industrial Index of 30 stocks. To be clear, the NASDAQ is a stock trading market place and the Dow Jones Industrial Average is a listing of 30 stocks.

New York Stock Exchange (NYSE)
“A stock exchange based in New York City, which is considered the largest equities-based exchange in the world based on total market capitalization of its listed securities. Formerly run as a private organization, the NYSE became a public entity in 2005 following the acquisition of electronic trading exchange Archipelago. The parent company of the New York Stock Exchange is now called NYSE Euronext, following a merger with the European exchange in 2007.”
Read more: New York Stock Exchange (NYSE) Definition | Investopedia http://www.investopedia.com/terms/n/nyse.asp#ixzz3xkCiDUHl

NASDAQ
“A global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks. Nasdaq was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. The term “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, Intel and Amgen.” Read more: Nasdaq Definition | Investopedia http://www.investopedia.com/terms/n/nasdaq.asp#ixzz3xk637WGa

Dow Jones Industrial Average (DJIA)
“The DJIA is a price-weighted index, which means that the sum of the component stock prices is divided by a divisor. Instead of dividing by the number of stocks in the average, as is done in an arithmetic average, the Dow divisor is used. The purpose of this divisor, which is continually adjusted, is to smooth out the effects of stock splits and dividends. The result is that the DJIA is affected only by changes in the stock prices, so stocks with a higher share price have a larger impact on the Dow’s movements.

For example, if the DJIA rose by 50 points, it means that the cost of purchasing the 30 stocks in the index was $50 higher than the cost of purchasing those same 30 stocks yesterday, taking into account stock splits and dividends. In other words, those stocks are more valuable today than they were the previous day. Over time, the DJIA can be used as a benchmark for the economy.” Read more: What does the Dow Jones Industrial Average measure? | Investopedia http://www.investopedia.com/ask/answers/050115/what-does-dow-jones-industrial-average-measure.asp#ixzz3xk41bg3f

Dow Jones Utilities Index
“The Dow Jones Utility Average is a price-weighted average of 15 utility stocks traded in the United States. The DJUA was started back in 1929.” Read more: Dow Jones Utility Average (DJUA) Definition | Investopedia http://www.investopedia.com/terms/d/djua.asp#ixzz3xk5CmKUb

Value Line Index
“A stock index containing approximately 1,675 companies from the NYSE, American Stock Exchange, Nasdaq and over-the-counter market. The Value Line Index has two forms: The Value Line Geometric Composite Index (the original equally-weighted index) and the Value Line Arithmetic Composite Index (an index which mirrors changes if a portfolio held equal amounts of stock.) These indexes are typically published in the Value Line Investment Survey, created by Arnold Bernhard, the founder and CEO of Value Line Inc.” Read more: Value Line Index Definition | Investopedia http://www.investopedia.com/terms/v/valuelineindex.asp#ixzz3xk5jqDMF

S&P Small Cap Index
“An index of small-cap stocks managed by Standard and Poor’s. The S&P 600 SmallCap Index covers a broad range of small cap stocks in the United States. The index is weighted according to market capitalization and covers about 3-4% of the total market for equities in the United States.” Read more: S&P 600 Definition | Investopedia http://www.investopedia.com/terms/s/sp600.asp#ixzz3xk6zDe5d

S&P MidCap Index
“This Standard & Poor’s index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. Stocks in this index represent household names from all major industries including energy, technology, healthcare, financial and manufacturing.” Read more: S&P MidCap 400 Index Definition | Investopedia http://www.investopedia.com/terms/s/sp-midcap-400-index.asp#ixzz3xk7TaRL8

Russell 2000 Index
“An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.” Read more: Russell 2000 Index Definition | Investopedia http://www.investopedia.com/terms/r/russell2000.asp#ixzz3xk8HFKHr

Dow Jones Transportation Index (DJTA)
“A price-weighted average of 20 transportation stocks traded in the United States. The Dow Jones Transportation Average (DJTA) is the oldest U.S. stock index, compiled in 1884 by Charles Dow, co-founder of Dow Jones & Company. The index initially consisted of nine railroad companies – a testament to their dominance of the U.S. transportation sector in the late 19th and early 20th centuries – and two non-railroad companies. In addition to railroads, the index now includes airlines, trucking, marine transportation, delivery services and logistics companies.”
Read more: Dow Jones Transportation Average (DJTA) Definition | Investopedia http://www.investopedia.com/terms/d/djta.asp#ixzz3xk9J7YuN

Of further interest: By the Numbers #3: Those Naughty Market Indices, They Move Up and Down!

Great Recession Retrospective Redux

I started my blogging adventure on WordPress with a series of articles about the Great Recession (in my opinion another depression). I have decided to bring them all together in one posting. Why? Partly because many of the issues have never been addressed by the “powers to be”, partly because it’s nice not to have to rummage to find them, partly because it looks like deja vu all over again, and, as history repeats itself, reflection is not a bad thing. It may be “food for thought” as the year 2016 unwinds precariously before us. Besides, the documentary producers at Frontline did a great job of capturing the essence of the demise of the U.S. economy through Wall Street’s greed and the U.S. government’s political blunders (to put it kindly). I placed links to these Frontline documentaries in several of the following blog articles below.

So, without further ado, here are some stories of the Great Recession in all its Greek tradegy splendor:

A Taste of Events in the Great Recession crisis
Timeline and Overview of the Great Recession Crisis
Regulate Derivatives? No Way!!!!
Humpty Dumpty had a great fall even though there wasn’t a Wall!
The Nationalization of Wall Street
The U.S. Taxpayer as Lender of Last Resort–The TARP Program
Deja Vu all over again, a little bit about Greece, the crisis goes global!
Some details that help explain the Great Recession and Global Ecomony Crisis
Laboring over the LIBOR scandal
The “Flash Crash” and the “London Whale”
It’s a Credit Crisis! It’s a Liquidity Crisis! It’s a Solvency Crisis!
And now in the center ring: An Asset Bubble!!!

It’s a New Year, let’s hope for some sanity but… don’t hold your breathe too long.
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Fierce

Signs of the Times #3: Thoughts on jobs and jobs training

This is a compendium of my thoughts related to the above topic. During the months of November and December 2015, I posted six articles on the subject of jobs and jobs training. I’ve compiled the links to these postings below for your ease of use.

I’ve read the news headlines and articles that say the U.S. has experienced an increase in employment or, looking at it from the opposite viewpoint, we are experiencing a “decrease” in unemployment. Since this news is encompassing the “holiday” employment phenomenon which  probably reverses in January of the following year (meaning these temporary jobs disappear in January of the following year), to some the “good news” is questionable.

It appears that we are experiencing a massive economic quake of “disruptive technology.” I took a look at history around the year 1900 because that’s when electricity, the telephone, the combustion engine, to name only three inventions, were discovered and adapted to general use for business and the consumer. What’s different this time is the speed at which discovery and integration into “general or common” use is accelerating. Adaptability is the key to any success and, of course, we humans adapt to different things at different paces. Anyway, before I get too too wordy and boring, here are the six links to my postings. Enjoy or not, at your leisure.

Part 1: Jobs, jobs, jobs and the Mono-Economy of the New Millennium

Part 2: Past Prescriptions to Employment Problems

Part 3: Jobs, Jobs, Jobs, and Job Training Dilemma

Part 4: Jobs and Jobs Training – The more things change, the more they stay the same

Part 5A: Jobs and the Re-tooling of an Industrial Titan: Chicago

Part 5B: Jobs Training and the search for long-term solutions

 
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Learning

Why Credit Card Stocks May Outperform in 2016 – 24/7 Wall St.

More on the Federal Funds Rate:

Don’t be mislead by my posting  heading. The article,  linked below,  gives a nice explanation of the difference between the “rate on required reserves” and the “rate on excess reserves”.  Read down into the article a couple of paragraphs. Could one say the functioning of the U.S. economy is a bit “murky?” To the average “man on the street,” we sure need a detailed guidebook or more accurately our own personal  human economist to keep us “up” on the current shenanigans of the U.S. and world economic conditions.

Here’s the article’s source link:   ThinkstockCredit card companies could be some of the best performing large cap stocks come 2016. Visa Inc. (NYSE: V), American Express Co. (NYSE: AXP), MasterCard Inc. (NYSE: MA) and Discover Financial Services (NYSE: DFS) should all be on investors’ radar for the coming year. Here’s why. When the Federal Reserve raised its target rate […]

Source: Why Credit Card Stocks May Outperform in 2016 – 24/7 Wall St.

I previously made a posting entitled: What’s the difference between the Federal (Fed) funds rate and and the discount rate? The above article from 24/7 Wall St. gives a more detailed explanation of the Federal funds rate which is a very important Federal Reserve Bank “tool.”

 

 

Market Recap for week of January 8, 2016

Happy New Year! Or is it?

Is the U.S. stock market like the movie King Kong (circa 1933) or perhaps more like the movie Wall Street ? Is the gorilla the International marketplace and “the girl” Fay Wray the U.S. marketplace or maybe King Kong is Wall Street and Fay Wray is the American consumer; or how about “party time” as depicted in the movie The Wolf of Wall Street?

Any way you look at it, it has turned out to be a very scary week on Wall Street in the U.S. I guess the slowdown of China’s economy, being the second largest economy in the world after the United States, has caused much more chaos than anyone bargained for in our global economic universe.

Here are some links to help you “wrap your head” around just what’s happening “this time”!

Graph of 10 largest economies:  CNN.com World’s Largest Economies

Reuters: Wall Street has worst start to year ever

Wall Street JournalBad Week for U.S. stocks dims outlook

 New York TimesStock Market Ends Its Worst Week Since 2011

NBC News:  China Shares Turn Higher After Wild Start to 2016

Did the teeter totter flip both “riders” into the air at the same time? It would seem so. Here’s my reference to the U.S. market as a teeter totter:

The Stock Market as a Teeter Totter

P.S. Let’s be optimistic and say “Yes, it’s a Happy New Year.”