Understanding The Fed: The Central Bank Influencing the Global Economy

The Federal Reserve System, commonly known as The Fed, is the central bank of the United States. It plays a crucial role not only in the U.S. economy but also in the global economy. But how does The Fed wield such influence? Let’s delve deeper into this powerful institution.

What is The Fed?

The Fed is the central bank of the United States, composed of three main entities: the Board of Governors, 12 regional central banks known as Federal Reserve Banks, and the Federal Open Market Committee (FOMC). Although it is the central bank of the U.S., The Fed is not entirely a government institution. The 12 Federal Reserve Banks, one of its primary entities, are owned by private banks.

The Fed was established in response to financial crises in the U.S. during the early 20th century. Following the financial panic of 1907, a group of people held a secret meeting at the Jeckyll Island Club in 1910 to discuss banking reforms. The discussions laid the foundation for the Federal Reserve System, which was officially established on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.

The Fed's main responsibilities include regulating interest rates and the availability of banking credit, setting national monetary policy, overseeing and regulating financial institutions, and providing financial services to the U.S. government and foreign official institutions.

The Fed’s Main Entities Structure

As the central bank controlling the U.S. economy, The Fed has a complex structure comprising three main entities:

1. The Board of Governors The Board of Governors is the highest entity within The Fed's structure. It is an independent central government agency. The U.S. President has the authority to appoint seven members to the Board of Governors, including the Chair and Vice Chair, who are then confirmed by the U.S. Senate. Board members serve 14-year terms, while the Chair and Vice Chair serve 4-year terms, with the possibility of reappointment. The Board of Governors' primary responsibility is to oversee the Federal Reserve System.

2. The 12 Federal Reserve Banks This entity consists of 12 regional banks that operate independently but under the supervision of the Board of Governors. Each bank is named after its headquarters' location, such as New York, Chicago, and San Francisco. These banks have a board of directors with nine members who oversee member banks, ensure liquidity within the financial system, provide key financial services, and enforce consumer protection laws.

3. The Federal Open Market Committee (FOMC) The FOMC is responsible for making key decisions regarding interest rates and other monetary policies. Its membership consists of seven members of the Board of Governors and five presidents of reserve banks, who collectively participate in discussions to shape monetary policy.

Why is The Fed So Powerful?

Despite one of its main entities being owned by private banks, The Fed has significant influence over the global economy. Three key factors contribute to The Fed's power:

1. Control Over the U.S. Economy The Fed is the institution that controls monetary policy in the U.S., the world’s largest economy. The Fed’s control over the U.S. economy gives it immense legitimacy and power. Even though the U.S. has experienced economic recessions, it remains the world’s largest economic power.

2. The Fed's Policies Affect Global Markets As the central bank of the U.S., The Fed’s policies often set the benchmark for central banks in other countries. Decisions like raising U.S. interest rates can attract global investors to deposit their funds in the U.S., which in turn affects international economies and markets.

3. The System Operated by The Fed The Fed operates a debt-based financial system, where it has full authority over money creation and regulating the currency supply. This power allows The Fed to control the U.S. economy and exert a significant impact on the global economy.

With full authority to set monetary policies, from interest rates to controlling the money supply, The Fed plays a critical role in maintaining economic stability not only in the U.S. but also globally.

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Three Key Indicators in Fundamental Stock Analysis

Fundamental stock analysis is a method used by investors to evaluate a company's performance before investing. The primary goal of this analysis is to assess the potential for long-term stock price appreciation, differing from technical analysis, which is more commonly used by traders for short-term trading.

Investors conducting fundamental analysis examine various ratios and indicators that reflect the company's financial health, operational performance, future prospects, and stock price valuation. This information is typically derived from the company's financial statements over the past five years. Through this analysis, investors can select high-quality stocks at reasonable prices. Below are three key indicators frequently used in fundamental stock analysis:

1. Price to Book Value (PBV)

Price to Book Value (PBV) is a ratio used to determine whether a company's stock price is considered expensive or cheap. This ratio serves as a critical reference for investors in assessing a company's valuation and making buy or sell decisions. The primary functions of PBV include:

• Assessing the company's valuation.
• Evaluating the risks and potential of an issuer in the future.
• Comparing the book value per share with the current stock price.
• Determining whether the stock price is expensive or still cheap.

The formula for PBV is:

To calculate the Book Value, an investor must divide the equity value by the number of outstanding shares.

2. Price to Earnings Ratio (PER)

Price to Earnings Ratio (PER) is a ratio used to evaluate the stock price based on the company's ability to generate net income per share. A high PER indicates that the company has significant potential for income growth; however, if the company fails to increase net income in the future, the stock could be considered overvalued.

The formula for PER is:

By calculating PER, investors can gauge the growth potential of the stock they intend to purchase. Although PER is an important indicator, it is not the only factor to consider when making investment decisions. PER helps investors make better decisions by providing insight into the potential profitability of the selected stock.

3. Earnings Per Share (EPS)

Earnings Per Share (EPS) is a financial ratio that shows the company's net income divided by the number of outstanding shares (excluding treasury stock). EPS is used to measure a company's profitability, with a higher EPS indicating that the company has substantial revenue.

The formula for EPS is:

$$$$EPS=Net Profit−Preferred DividendsTotal Outstanding SharesEPS = \frac{\text{Net Profit} - \text{Preferred Dividends}}{\text{Total Outstanding Shares}}

EPS calculations are based on income statements and balance sheets. EPS represents the portion of the company's earnings distributed to each outstanding common share. Several factors can lead to a decline in EPS, including:

• The percentage increase in net profit is smaller than the percentage increase in the number of outstanding shares.
• A decrease in the total number of outstanding shares and profits.
• Rising profits despite a stagnant number of outstanding shares.
• A decline in net profit along with a decrease in the number of outstanding shares.

In addition to the three fundamental analysis indicators above, there are other important indicators such as assets and liabilities, dividends, cash flow analysis, and debt ratios. Understanding these indicators is crucial before deciding to invest in stocks.

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Emerging Market Currencies in Forex Trading

The term "emerging market" frequently appears in economic news and discussions, especially when talking about currencies. Are you familiar with this term? Emerging markets typically refer to countries that are developing or those with per capita income moving toward a middle level.

However, the meaning of "emerging market" has evolved. It now encompasses not just developing countries but also those experiencing significant industrial growth and economic expansion. Some of the most well-known emerging market countries are Brazil, Russia, India, China, and South Africa, collectively known as BRICS. Let's discuss the currencies of these countries one by one.

Brazilian Real (BRL)

The Brazilian Real (BRL) is one of the most frequently traded currencies in the forex market, ranking among the top 20 most popular currencies. BRL is usually traded in pairs with the Euro (EUR/BRL) or the US Dollar (USD/BRL). Brazil is categorized as an emerging market because its economy heavily relies on the export sector, particularly to China, the United States, and Argentina. Brazil's main export products include iron ore, soybeans, coffee, and automobiles. In 2018, Brazil's Gross Domestic Product (GDP) reached USD 3.365 trillion.

However, the BRL exchange rate has depreciated from 3.1 per USD in August 2016 to 4.1 per USD1 currently, due to national debt crises, declining commodity prices, and domestic political instability.

Russian Ruble (RUB)

The Russian Ruble (RUB) is often traded in pairs with the Euro or US Dollar (USD/RUB). The Ruble is known as one of the most volatile currencies in the world, making it attractive to traders looking for substantial gains from extreme price movements. Russia's economy began to recover after the collapse of the Soviet Union in 1991, particularly with increased oil and natural gas exports to the European Union, China, and Japan. In 2018, Russia's GDP was recorded at USD 4.213 trillion.

The Ruble's exchange rate is heavily influenced by crude oil prices and economic sanctions from the US and the EU. For example, the global sell-off of WTI Crude Oil in 2015 caused the RUB to depreciate by 42% against the USD within four months.

Indian Rupee (INR)

The Indian Rupee (INR) is commonly traded against the US Dollar (USD/INR). The Indian government implements a managed floating policy, meaning the Rupee's exchange rate is controlled not only by open market transactions but also by the Reserve Bank of India (RBI). In mid-2019, India's GDP reached USD 11.468 trillion, with the service sector contributing 45% of the total GDP.

India's economy is also supported by the agriculture sector and oil exports, mainly to trading partners like the United States, the United Arab Emirates, Hong Kong, and Saudi Arabia.

Chinese Yuan (CNY)

The Chinese Yuan (CNY) is the eighth most frequently traded currency in the forex market and ranks first among other emerging market currencies. The Yuan is typically traded in pairs with the US Dollar (USD/CNY). Although China is still considered an emerging market, it has the largest labor force in the world and is the second-largest exporter of machinery. In 2018, China's GDP reached USD 27.3 trillion.

However, the trade war between China and the US since 2018 has impacted the Yuan's exchange rate. At one point, the Yuan dropped by 1.2% to a level of 7.0275 against the US Dollar after the People's Bank of China (PBoC) lowered its reference exchange rate. Currently, the USD/CNY exchange rate is around 7.15 per 1 US Dollar.

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Key Steps in Fundamental Stock Analysis Every Investor Should Understand

For an investor aiming to succeed in the stock market, conducting a thorough analysis is a must. One of the most crucial analysis methods is fundamental analysis, a technique widely used by investors to select stocks with promising long-term prospects.

In fundamental analysis, investors evaluate stocks based on macro and microeconomic conditions, the relevant industry, and the company's financial reports. By leveraging this data and information, investors can make more informed investment decisions. Below are some essential steps in performing fundamental stock analysis.

Purpose and Methods of Fundamental Analysis

The first step in fundamental analysis is understanding its purpose. The primary goal is to determine whether a stock's current market price is overvalued or undervalued. Once this goal is clear, investors can begin gathering the necessary critical information.

There are two main methods in fundamental analysis: top-down and bottom-up. Both aim to achieve the same goal, but the analysis stages differ.

1. Top-Down Method: This approach starts with a global economic analysis, followed by microeconomic conditions, industry conditions, and finally, the company's condition.
2. Bottom-Up Method: This approach begins with a company analysis, then considers industry conditions, and lastly, micro and macroeconomic conditions.

Here are some factors investors should consider when using fundamental analysis:

• Macroeconomic Conditions: Investors should pay attention to global economic growth, including geopolitical conflicts that could impact the stock market. For example, Russia's invasion of Ukraine caused a spike in oil and gas prices and slowed global economic growth.
• Microeconomic Conditions: Factors such as interest rates, inflation rates, and domestic socio-political conditions should also be considered.
• Industry Sector Prospects: Investors need to assess how specific industry cycles and sectors are affected by macro and microeconomic conditions.
• Company Conditions: This is the most critical part of fundamental analysis. Investors must understand the company's business, products or services offered, financial health, and management quality.

Company Analysis and Data Sources

A company's fundamental factors can be categorized into two groups: qualitative and quantitative.

1. Qualitative Factors: These include the company's competitive advantage over its peers and the management's competence in running the business effectively and honestly.
2. Quantitative Factors: These include metrics such as Price to Book Value (PBV), Book Value (BV), Earnings Per Share (EPS), Price Earnings Ratio (PER), Debt Equity Ratio (DER), and Return on Equity (ROE).

Data for this analysis can be obtained from the company's annual and quarterly financial reports, as well as from public exposés typically held at least once a year.

Supporting Applications for Fundamental Analysis

To facilitate the analysis process, investors can utilize various applications and websites that provide the required data and information. Here are a few examples:

• RTI Business: This app helps investors quickly view an issuer's basic ratios, speeding up financial report analysis.
• Official Website of the Indonesia Stock Exchange (IDX): Provides information related to public exposés, annual reports, and company financial statements.
• Securities Applications: These apps are very useful for screening stocks based on predetermined criteria.

By conducting careful fundamental analysis, investors can make wiser investment decisions and avoid potential losses.

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Learning the Famous Harami Candlestick Pattern

Harami is a candlestick pattern consisting of two candlesticks, where the body of the second candlestick is smaller and falls within the range of the body of the first candlestick. The term "Harami" in Japanese means "pregnant," illustrating how the second candlestick seems to be "wrapped" within the body of the first one.

The Harami pattern can signal potential changes in market direction. There are two types of Harami that traders commonly monitor: Bullish Harami and Bearish Harami.

Types of Harami

1. Bullish Harami

   • Formation: It occurs after a downtrend, starting with a large bearish (red) candlestick, followed by a smaller bullish (green) candlestick that resides within the body of the first.
   • Meaning: Indicates a potential reversal from a downtrend to an uptrend. The second candlestick suggests that the downward momentum may be losing strength.
   • Confirmation: Traders typically wait for a third candlestick to confirm the upward price movement before acting on the bullish signal.

2. Bearish Harami

   • Formation: It appears after an uptrend, starting with a large bullish (green) candlestick, followed by a smaller bearish (red) candlestick that is within the body of the first.
   • Meaning: Indicates a potential reversal from an uptrend to a downtrend. The second candlestick shows that the upward momentum might be weakening.
   • Confirmation: Traders usually wait for a third candlestick to validate the downward price movement before acting on the bearish signal.

Application in Trading

1. Timeframe and Validity:

   • Daily Timeframe (D1): For more valid signals from the Harami pattern, it is advisable to use the daily timeframe. This timeframe provides a clearer picture and stronger signals.
   • H4 Timeframe: After understanding the Harami pattern, traders can utilize the 4-hour (H4) timeframe for trading. This timeframe is also useful for confirming signals from patterns formed in higher timeframes.
   • Lower Timeframes: Avoid using timeframes lower than H4, as candlestick patterns may form too frequently, potentially generating false signals.

2. Support and Resistance:

   • Bullish Harami: Its accuracy increases if the pattern forms near or at a support area, indicating that prices may rise after hitting the support level.
   • Bearish Harami: Its accuracy improves if the pattern forms near or at a resistance area, suggesting that prices may drop after touching the resistance level.

3. Stop Loss Placement:

   • Bullish Harami: Place the stop loss a few pips below the lower shadow of the first candlestick. This protects against potential price movements that go against your position.
   • Bearish Harami: Place the stop loss a few pips above the upper shadow of the first candlestick. This helps avoid losses if the price moves against your bearish position.

4. Example Cases:

   • Bullish Harami: Suppose the first candlestick (bearish) has touched the support area, followed by the second candlestick (bullish) forming a Bullish Harami. Traders might wait for confirmation from the third candlestick before entering a buy position or use a pending order around the upper shadow of the second candlestick.
   • Bearish Harami: If the first candlestick (bullish) has touched the resistance area, followed by the second candlestick (bearish) forming a Bearish Harami, traders may wait for confirmation from the third candlestick before entering a sell position or use a pending order around the lower shadow of the second candlestick.

Visualizing the Harami Pattern

• Bullish Harami:
  • The first candlestick (bearish) is large, followed by a smaller candlestick (bullish) within the body of the first candlestick.
• Bearish Harami:
  • The first candlestick (bullish) is large, followed by a smaller candlestick (bearish) within the body of the first candlestick.

The Harami candlestick pattern is a valuable technical analysis tool for identifying potential trend reversals. By understanding both Bullish and Bearish Harami formations and their practical applications in trading, you can enhance your ability to read market movements and make more informed trading decisions. Always ensure you use an appropriate timeframe and consider support and resistance levels in your analysis.

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Fundamentals of Technical Analysis: Understanding Price Action

Price Action is a method of technical analysis that focuses on the price movements of an asset or currency pair. Instead of relying on complex technical indicators, price action seeks to understand price patterns based on past movements. This approach heavily depends on direct observation of price charts and market movements, reflecting the market's reactions to trader sentiment.

Price Action Is Not a Trading System

1. Not a Rigid System: Price action is often misunderstood as a rigid trading system with strict rules. In reality, it resembles a discretionary trading approach that relies on the trader's experience and intuition. There are no algorithms or software solely based on price action. Traders who use price action must be able to read and interpret price charts flexibly.

2. Reliance on Experience: Unlike indicator-based trading systems that provide clear signals, price action requires experience and practice to master. Direct observation of price charts and movement patterns is crucial in price action analysis.

Price Action Is Universal and Consistent

1. A Time-Tested Method: Price action is not a new method. The use of candlestick charts for price analysis dates back to the 18th century in Japan. While modern technical indicators are widely used, the fundamental principles of price action remain relevant. This indicates that price action can be utilized across various market conditions throughout history.

2. Continuity and Consistency: Although there may be periods when this method seems to underperform, price action remains a consistent approach. The price patterns and formations always reflect market sentiment, even if the outcomes are not instant or always meet expectations.

Keys to Understanding Price Action

1. Consistency and Discipline: Mastering price action requires consistency and discipline in practice. You need to invest time in studying various price patterns and the market's reactions to them.

2. Interpretation Based on Historical Data: Price action provides information based solely on past price movements. This means that while price patterns offer indications, there is no guarantee that future price movements will follow the same patterns.

3. Direct Observation: Frequent and direct observation of price charts is essential. Experience in reading charts will enhance your understanding of market sentiment.

4. Learning from Patterns: Familiarize yourself with various price action setups, such as candlestick patterns, support and resistance levels, and chart patterns like head and shoulders, double tops/bottoms, and others. These are foundational for predicting price movements based on established patterns.

5. Do Not Rely Solely on Patterns: While price action patterns provide important signals, they should be combined with knowledge of market conditions, fundamental news, and other factors. This combination will offer a more comprehensive view of market direction.

Price action is a powerful tool in technical analysis that emphasizes understanding price movements through direct observation and pattern analysis. While it does not utilize technical indicators, this method requires dedication and experience to truly understand and apply it effectively. By consistently practicing and studying price patterns and market sentiment, traders can enhance their ability to make better trading decisions.

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