Fed funds rate with Taylor Rule implied

Let's take a look at the fed funds rate with implied Taylor Rule

Calculated as follows:

Taken from the St.Louis Fed website.

This is part of a post from here that you can read about. I am wanting to clarify what he has posted here that I hope will help someone with a very basic understanding of economics.

Take a look at this chart:

We have a lot going on here. Let's look at each one individually:
1) Fed funds (black line): The fed funds line you see here is the interest rate at which banks trade with one another, over night, using funds provided by the federal reserve--which acts as a primary lender. Generally speaking, the funds held at the federal reserve are only for the most credit-worthy depository institutions, and not just any bank. The fed funds rate influences both monetary and financial policy, which affects employment, growth, and inflation.

Currently, the federal reserve has been hinting at a rate hike, taking rates from near zero where they currently are to whatever number they want. It is most likely that they will increase the rate in small intervals so as not to shake the economy anymore than necessary. With an increase in the fed funds rate, generally speaking, comes at collapse, or at least modest decline in stocks; both price and volume, but is seen as a boon for bonds. Also, if you're an avid old-school saver, you will receive a higher interest rate on your bank deposits.

2) We have the Taylor Rule (red line): First, the Taylor Rule is a prediction here; predicting that when inflation is at target and the output is at potential (the output gap is zero), the FOMC will set the real federal funds rate at 2%, (the historical average), in this example 2.5%. The Taylor Rule is a guideline whose purpose is to describe the interest rate decisions of the FOMC.

The Taylor Rule was developed by Stanford economist John Taylor, which he describes it as being used as a "benchmark for monetary policy".

Here is the formula: r = p + .5y + .5(p – 2) + 2 (the “Taylor rule”)

where
r = the federal funds rate
p = the rate of inflation
y = the percent deviation of real GDP from a target

So on this it is important to explain that the feds target for real GDP is potential output; the amount the economy can sustainably produce when capital and labor are fully employed.

Looking at variably y in the Taylor rule, we can interpret it as being the excess of actual GDP over output, thus giving us the "output gap".

Using the Taylor Rule will lead us to predict that the FOMC will increase the fed funds rate (tightening of monetary policy) by one half of a percentage point (0.5%). It also predicts that when inflation is at target and output is at potential, the FOMC will set the real fed funds rate at 2%.

 This figure shows how monetary policy was too weak relative to using the Taylor rule for periods 2003-2005 and 2011. How do we know? By comparing the fed funds rate to the Taylor Rule, we see that the fed funds rate fell below the Taylor rule during those periods. Is that a good or bad thing? Well, mostly it doesn't matter, also this chart is from 2011, but I thought it both useful and interesting to use as we can see how the Brookings institute predicted the fed funds rate four years ago in comparison the the actual fed funds rate and the zero bound defined by the solid line.


3) Next, referring back to our second figure, we have the Taylor rule Laubach-Williams natural rate, the natural rate is assumed to change over time due to various unobservable influences.

4) The Wu-Xia shadow fed funds rate is not bounded below by zero percent, unlike many short-term models. In other words, it models what the fed funds rate would do negative interest rates were possible, using a host of historical macroeconomic data.

So now you're probably wondering what the heck all these models are doing on the same graph!?! It's simply giving us a comparison of what each model looks like given the same inputs. I like the Wu-Xia shadow myself, where it shows fed funds rates actually falling negative because it can be argued that it gives us a more accurate picture of whats going on in terms of monetary policy. That said, it, like many other models in economics can be argued against as well. It is currently not the model of choice for most economists, especially the feds, but it is considered a powerful representation of current macro policy; i.e. it's not as revered as the Taylor rule.

And finally, putting everything together, what does this tell us? This tells us that it is probably not the time for the feds to raise interest rates because the Laubach-Williams natural rate is 2.6% below the corresponding 2.5% equilibrium value derived on our Taylor rule (red) line.

Well I hope that was informative, if you have any questions please do not hesitate to ask!

The Experts vs. The Rest of Us

So finance is a science, right? Or is it an art? Either way, some individuals are clearly better at it than others. At least, in terms of money managers, investors, and analysts. Right? Well, I think it depends.

***My personal opinion**
From my experience in dealing with financial experts, and sort of being a "financial expert" myself ... that is without the incredible amount of wealth that normally seems to accumulate with most experts... I don't think there is much of a difference in the outcomes of an investors performance given their technical training (or lack there of). This extends beyond simple investing and into market forecasts and the prediction of large-scale economic events (such as a recession).

Check out these papers: here and here. To summarize both articles, they come to the conclusion that the experts are only "slightly" better at economic forecasting and at executing successful trades and investment decision making. There are actually more articles and papers on the subject that reinforce that statement that you can find through a Google search.

On an entirely theoretical scale, the reason why this seems to be the case is because markets are infamously tough to beat, and those that beat it, mostly beat it not because of any sort of magic, intensification of resources, or even because they're good at math and statistics; no. They beat the market because of two things: intuition, and guts.

Intuition may be attributable to some degree of luck, but you cannot make the argument that intuition itself is entirely luck, no. Most intuition comes from some level of knowledge of how markets work. Plain and simple. Maybe you have heard of Wave Theory, or maybe you haven't. A lot of folks I know have never heard of it yet, they're aware of it to some degree and that knowledge helps drive their investor sentiment. It helps guide them in what to buy, when, and for how long. These sorts of people notice trends before most other investors, and they also act much quicker than a similar person with an equal amount of knowledge, you might call it courage, fortitude, drive, whatever. The point is they are not afraid of execution.

That is most of investing.

Having spent most of my life working with math, especially the last seven years of it to very complex mathematical formulas and models, I can say with some degree of certainty that most successful investment strategies are more-so the product of intuition than they're good math. I can tell you what the price of a security should be, and how it should act under various situations and economic conditions, but I cannot tell exactly what will happen, even with perfect knowledge one slight change in a single variable will distort the entire investment environment.

That said, knowing the math can help. A great example of someone who is good with both math and at calling big economic events is Robert Schiller. But for everyday investment decision-making and money management, you don't need a highly polished educational background or to understand stochastic processes; no. You can simply observe trends, talk to your neighbors, and watch the news.

Again, these are my personal opinions based on my experience and knowledge. Feel free to prove me wrong with any number of papers and empirical facts, I would love that because I have yet to find any such paper.

Rate hike?!

Are rate hikes coming soon?

The folks at the federal reserve, including the head, Janet Yellen, would have you think so.

First, if a rate hike comes it will likely come in either September or December as those are the only two months that the federal reserve has scheduled press conferences. They have a meeting in October however there is no press conference scheduled for that time and quite frankly if you're going to be hiking rates you pretty much have to have a press conference.

After the recent turmoil in the markets, September could be too soon as the markets will not have had enough time to recover. December is also unlikely because liquidity tends to dry up at that time of year. According to some analysts, October could actually be the time to raise rates after-all.

Raising rates before December is increasingly likely, amidst the downturn in the recent bull-market. Why? Because of credibility. If the fed is going to maintain any credibility then they will have to stick by their previous statements and hike rates before years' end, and as mentioned earlier, December is not likely.

Global equity markets have lost $5 trillion in value over the last two weeks!-On expectations of slowing economic growth.

*remember, Yellen has indicated that any rate hike decision would be made without regard for scheduled press conferences!

Turning to the recent sell-off in US stocks which is to be blamed on the slowing of China's economy, the devaluation of the yen (which was China's attempt at reversing the recent slow-growth) and the lack of faith in the Chinese government to adequately control the housing bubble that has been growing for the last decade.

Here is Citi Banks' economist William Lee's comment: "If he (Fed Vice Chair Stanley Fischer) shows signs of worrying that the transitory downward pressures (commodity and energy prices and the appreciating dollar) are feeding through and becoming entrenched in wages and domestic prices—THAT would be a big event," the economist writes. "His concern would suggest reduced confidence in reaching the Fed inflation target in the medium term."

AMD

RiddlerThis here!

I want to take some time out of your day to discuss the financial situation of AMD and whether or not this is a stock we should be buying or selling. 

Some background: AMD (Advanced Micro Devices) is an American worldwide semi-conductor company located in Sunnyvale, California. Their main products consist of semi-conductors, servers, motherboard chipsets, graphics cards, and other technological devices.

• AMD is the second largest global supplier of microprocessors based on the x86  architecture and one of the largest suppliers of graphics cards worldwide.
• AMD is the only major rival of Intel in the central processor (CPU) market.
• AMD is one of two major competitors in the graphics processor unit (GPU) market. The other being Nvidia.

I won't go as in-depth as many analysts go, mostly because I feel it is unnecessary and I'd like to focus on the most important aspects of the company to determine whether or not they are at a simple buy or sell status. To do this, I read and scan a vast number of articles over a short-time frame and compare the information from each article. After digesting the information and summarizing the most important factual data, I then look into its historical performance and compare those numbers. Lastly, I run my own models and back-test them extensively. 

Currently: AMD has been underperforming in comparison to the market, and is considered a :penny stock" due to the <$5.00/per share price.

• As of Wednesday, June 17th, the share price for AMD was $2.36.
• At closing on Thursday, June 18th, the share price for AMD was $2.52.
  -Resulting in a $0.16 increase per share.
  -It's important to note that the increase in share price from Wednesday to Thursday was the result of an announcement AMD made at the Electronic Entertainment Expo (E3), where they announced their latest graphics cards; the Radeon R9 and the R7 300.

So what's the big deal surrounding the announcement of these two new graphics cards? Why did this announcement cause excitement surrounding price of their stock? 

Well, first: these are the first graphics cards produced by AMD that will utilize AMD's high-bandwidth memory (HBA).

FBR&Co's Christopher Rolland believes a target price of $3.50. Why? Because analysts believe that the price of both the Radeon R9 and the R7 300 are priced well. With the R7 marketed towards lower-end gamers and starting at a roughly $150 price range, while the R9 is geared towards 4K quality displays and starting around the $300 price range. 

Many analysts and investors are happy with the direction AMD is currently going and are optimistic in regards to its stock price. 

The company is currently is rated as UNDERPERFORMING, meaning no sell, and I'd argue a cautionary buy. 

*As of this writing the after-hours trading price has dropped to $2.47.

Using R, I did a simple chartSeries plot:

I'll be following AMD and posting more detailed analysis in the future, as well as focusing on several penny stocks. I will also be sharing several strategies and various other information as time allows.

Thanks!

And let me know if you have any questions, tips, concerns, or requests!

RT

January 5th, 2015

The DJIA took a hit today; dropping 331.34 points (-1.86%) ending at 17,501.65. The S&P 500 declined 37.62 points (-1.83%) ending at 2,020.58. The FTSE declined 130.64 points (-2.00%) ending at 6,417.16. Crude also declined $2.70 (-5.12%) and dipped around $49.99/barrel. Currently it's still hovering around the $50/barrel range.

First, crude oil is a dirty a business so why exactly is West Texas Intermediate crude dropping so much? Excess supply. We have huge growth in oil production coming from the United States right now as fracking continues to see expansion mostly in places like North Dakota, Texas, Colorado, and other states. The fracking business can be brutal and is highly competitive especially in places like the Bakken and Eagle Ford; already companies like Baker Hughes are downsizing both in terms of their employees and the number of rigs in operation.

 The low price of oil caused by excess supply is negatively affecting oil producers around the world, including here in the U.S.

Also, OPEC. OPEC has continued to push out a steady supply of oil in the face of the current supply gut in hopes that they might drive many of the smaller producers out of the business. This is pretty much an act of desperation on their part as the increase in U.S. production has negatively affected them, so we might call this a "tit for tat" move on their part. Other may just call it a price war.

Another reason? Slowing demand-- mostly stemming from China. The International Energy Agency cut its forecast by 230,000 barrels a day to 900,000 and OPEC revised their forecasts of demand for their oil from 29.4 million to 28.9 million barrels a day.
Demand for oil has been increasing steadily over the long-term.

And then there is the dollar. The dollar has been strong lately. Here is what MW has to say on it:
""Commodity prices are inversely correlated to the dollar. The oft-cited rationale is that a stronger currency makes dollar-priced commodities more expensive to buyers using other currencies.

The ICE dollar index DXY, +0.00% a measure of the currency against a basket of six major rivals, is up more than 12% since the beginning of the year and by around 1.9% since the beginning of December.

Binky Chadha, chief global strategist at Deutsche Bank, argues that the strong dollar is the primary factor in oil’s decline. After all, oil supplies have been building for a long time. It’s hard to believe that investors just “suddenly woke up” to the oil glut at midyear, he said.

Oil’s plunge started not long after the dollar rally began to accelerate, Chada notes, observing that it usually takes a rallying dollar a year and a half to cover the ground it’s gained in the last five months, Chadha told reporters earlier this month, which might make finding a bottom in oil “a function of where the dollar stalls.”