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(B)(N) The Federal Funds Rate

December 5, 2017
An Inconvenient Truth

An Inconvenient Truth About Money

Essay. Although the Federal Funds Rate is closely followed by investors and the banks for signals of emerging prosperity in an inflationary economy – but not the reverse which they already know about – its relationship to the “economy” is generally negligible – even stupid on the day-to-day (please see below) – except in two cases: the first case is a depression which might be “kick-started” with more cash money in the general float available at low rates of interest to encourage more borrowing and more spending by consumers and investors.

And, in the other case, in a war economy in which the government will need to borrow (or print) more money anyway and, accordingly, pay more for it in terms of a higher rate of interest in order to put more “boots on the ground”.

As usual, economists and politicians and, for the most part, investors and the financial media are straight-line kind of guys and they glibly interpolate the “economy” between these two colorful and easy to grasp “kick-starters” and “boots on the ground” to end-up speaking gibberish on the day-to-day.

The Magic Money

It’s prudent to ask where this new found money is coming from.

For example, fiscal restraint and balanced budgets worsened the Great Depression, which was a World Depression in 1930’s, and the depression did not lift until the Second Great War of WW II which was also the “The Second Great Waste” of men and materiel and infrastructure but it put a lot of spending money into peoples’ pockets and set the stage for “The 2nd Great Industrial Revolution in America” and the “Cold War” of the 50’s and 60’s and many, if not innumerable, hot wars ever since in the arms export markets for sovereignty, boundaries, ideology, religion, and the form of government but not so much in  the steadfast productivity of ourselves as we lurch from recession to recession overseen by the Central Banks and their monetary policy minutely edited by the politicians of the day.

In other words, the world of the 19th century was destroyed by two World Wars and then re-built fifty years later and what a dollar might buy in 1900 costs $25 today and if your investments haven’t been keeping-up, you were wealthy in 1900 and broke today.

And although that equation is generally unspoken – it’s a secret – it’s not hard to grasp; the chart below shows that the monetary policy of the last several years has been prudent but meaningless.

Exhibit 1 The Federal Funds Rate

Exhibit 1: The Federal Funds Rate and the Real Economy

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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