Monthly Archives: February 2016

Avoid Panic, Have a Positive Mental Attitude About The Election

Panic and runaway negativity should be dealt with very carefully. It seems when the risk of something dramatic approaches the press and public sometimes get overly worried. In my studies of how people get hurt by bubbles I have seen plenty of instances where there was too much negativity, even though it is important to avoid excessive risk and avoid being fooled by bubbles. Remember Y2K panic when it was thought that all the computers would fail and thus all mechanical devices would fail making cars and airplanes fail? Remember the comet Kahoutek that was supposed to be huge and light up the sky and then no one could even see it. Or the story that all the honey bees

February 29th, 2016|mayflowercapital blog|Comments Off on Avoid Panic, Have a Positive Mental Attitude About The Election

Inflation Rising? Are Bonds Doomed?

Core CPI rose 2.2% over 12 months, the highest in four years. Does this mean inflation is returning? Roughly half of core CPI is housing. This cost is determined by both owner’s equivalent rent based on recent home purchases and by actual rent for people who rent. The trouble with owner’s equivalent rent is that it is based on the most recent home purchase. If only rich people can afford to participate in a new housing bubble they may overpay for houses and make CPI go up in an unsustainable way. Eventually the truth will come out and home prices will go down to return to equilibrium. There was an article that a house in Vancouver, BC sold for $700,000

February 26th, 2016|mayflowercapital blog|Comments Off on Inflation Rising? Are Bonds Doomed?

Is It Time To Buy EM Stocks?

EM growth ex-China is now 1.97% a year, slightly less than Developed countries. If China’s true growth rate is not as good as claimed, or if it drops to match the EM world’s rate then surely global growth rates will fall below the 2% stall speed, leading to recession. The great growth rates that EM countries special were fueled by starting from a low cost environment where huge savings were feasible for Developed country businesses to move to EM countries. Also the ratio of debt to GDP was far better in EM countries in previous decades. Since people with lower income have a harder time repaying debt than someone in a high income bracket then the newly acquired debt in

February 25th, 2016|mayflowercapital blog|Comments Off on Is It Time To Buy EM Stocks?

Election To Make Interest Rates Go Way Up?

Interest rates and inflation have been dropping since 1981. Interest rate cycles can last 40 or even 60 years. The rate decline has gone on for so long and rates are so low so it is tempting to wonder when will the interest rate bottom be reached. In the elections a leading presidential candidate for one party and a strong runner-up in another party are radical “non-establishment” types offering policies that would drastically reduce cheap imports or require extremely high tariffs on imports. This would in turn significantly raise domestic wages. Over the past 35 years globalization has resulted in access to ever-cheaper imported goods which reduced the strength of domestic manufacturers and their employees to the point where wage

February 24th, 2016|mayflowercapital blog|Comments Off on Election To Make Interest Rates Go Way Up?

Contingency Planning For Future Crashes

Assuming that a big crash motivates central banks to have negative interest rates and forced “bail-ins” where bank depositors have to take a 20% haircut like in Cypress then what should people do to prepare for this? They shouldn’t rely on bank accounts. When a banana republic has severe financial problems they shut down the banks and then allow tiny cash withdrawals for basic living costs. In Greece the withdrawals allowed were $60 a day, not enough to pay mortgage payments or health insurance in the U.S. Thus it is unwise to have significant deposits at any one bank or any significant amount in the aggregate in different banks. Instead, it is better to have short term investment grade bonds

February 23rd, 2016|mayflowercapital blog|Comments Off on Contingency Planning For Future Crashes

Balance Between Bears and Bulls And Be Self-Aware of Bubbles

There is a growing amount of negative talk by investment advisors who are turning more bearish. However reasons not to fear a repeat of the 2009 crash is that the 2009 crash had mainly affected banks and real estate and those potential risks have been restructured and thus unlikely to repeat in the same manner. I feel the fair value of the SP is roughly 1100. It is possible a stock crash could come and yet the economy would have only a very light recession like in 2002. If someone has no risk-on investments and no debt then the coming stock crash should not be that big of a concern. People need to have a positive mental attitude and not

February 22nd, 2016|mayflowercapital blog|Comments Off on Balance Between Bears and Bulls And Be Self-Aware of Bubbles

Will Rising Inflation Make the Fed Raise Rates In 2016?

Today the CPI data was released by the BLS and it showed core costs rising. This resulted in a lot of chatter online that inflation may come back and the Fed would need to raise rates. This is funny since only a few days ago there was intense chatter online about the Fed going to negative interest rates. The Federal Reserve may raise rates for a total of three increases starting with the one they did December, 2015 and ending about a year later. That would make short term rates about 0.95% which is the average yield of two year Treasury Note in December, 2015. Even though the two year Note is a different maturity then the short term Fed

February 19th, 2016|mayflowercapital blog|Comments Off on Will Rising Inflation Make the Fed Raise Rates In 2016?

Why Recessions Are Hard To Predict

Recessions are almost impossible to predict because of “waterfall on a chart” events like “B” paper defaults that create a credit lockdown and flight to safety by lenders. When the economy starts to weaken then shaky businesses try desperately to get new lines of credit and they feed misinformation to their until finally something breaks and they can’t continue to mislead and then their lines of credit are cutoff. An example is during a period of credit expansion a weak company can refinance their debt into ever-larger loans to pay the payments on old loans, thus camouflaging their cash flow problems. The reason for the waterfall is because business owners don’t want to give up and may seek repeated refinancing

February 18th, 2016|mayflowercapital blog|Comments Off on Why Recessions Are Hard To Predict

Negative Interest Rates Won’t Create Positive Attitude About Economy

Negative interest rates have spread to $7Trillion of bonds. These are in the form of Developed country sovereign debt and are only negative by less than 1%. How will this affect consumers? In order to have consumers experience negative rates one rule of thumb is that loan rates are 2.5% over the wholesale cost of short term funds. Thus for consumers to get a negative rate on a mortgage the Fed Funds rate would need to be lower than negative 2.5%. It is unlikely that consumers will actually be paid to borrow money. In Denmark negative rates did cause mortgage rates for consumer first mortgages to be slightly negative where the borrower actually got a tiny payment from the bank.

February 16th, 2016|mayflowercapital blog|Comments Off on Negative Interest Rates Won’t Create Positive Attitude About Economy

Why Yen Went Up When Interest Rates Went Down

Japan’s central bank started a policy of negative interest rates on January 29, 2016 and promptly saw the Nikkei stock market decline from 17,500 to 14,900. The Yen actually went up value even though lower interest rates are supposed to make a currency drop in value. The reason why the Yen went up is because it is under priced compared to China’s currency so the Yen needed to rise at least 10% from the lows of 125 in May, 2015. It has now done so. The other reason for the Yen’s rise was because China needs to have a competitive devaluation to improve exports. China is in worse shape because they have a massive debt bubble and a far lower

February 12th, 2016|mayflowercapital blog|Comments Off on Why Yen Went Up When Interest Rates Went Down