Monthly Archives: June 2016

Puerto Rico Bond Market Crisis: Will Mainland Bonds Be Hurt?

The Senate approved the bill (subject to a final negotiation between the Senate and the House of Representatives in a bill reconciliation committee) for a Control Board for Puerto Rico’s Muni bonds. This is in lieu of using Bankruptcy court, which is not allowed for Puerto Rico Munis. On July 1 the island will have a huge debt default. But the Control Board needs time to get organized and staffed and then negotiations and research will have to be done before the members of board decide how big will the haircut be. So for a few months the debts will be unpaid and in default. This could cause a panic in the bond market but I think most people will

June 30th, 2016|mayflowercapital blog|Comments Off on Puerto Rico Bond Market Crisis: Will Mainland Bonds Be Hurt?

Surprise Tax Bill May Hit Investors

$100 billion of income is to be recognized December, 2017 by offshore U.S. hedge funds according to Bloomberg Business Week’s 6-27-16 article “A Big Fat Tax Is Coming For The Hedge Fund Elite”. By December, 2017 deferred offshore gains for hedge funds must be repatriated and taxed. This may effect middle class people who own mutual funds that offer hedge-fund like strategies because some retail mutual funds have set up offshore entities to handle things like commodities speculation, etc. When the stock market has been weak for several years then there is a low probability of getting a surprise year end income distribution. The risk of a surprise taxable distribution usually happens at the end of a bull market when

June 29th, 2016|mayflowercapital blog|Comments Off on Surprise Tax Bill May Hit Investors

Unemployment Data Not As Good As It Appears

Initial claims for unemployment insurance have been dropping steadily for years and are the lowest ever in 42 years of records. They usually range from 25% to 35% of unemployed people and recently hit 23%. This is because not every unemployed person is qualified to get unemployment insurance. To get it, one must have been employed for a period of time (thus they are insured), and must have involuntarily lost their job. A person who entered the work force a few months ago, worked a few months and then got dismissed doesn’t qualify. This means the least skilled people including hard core long term unemployed, when they do get a job, are at a higher risk than most people of

June 28th, 2016|mayflowercapital blog|Comments Off on Unemployment Data Not As Good As It Appears

Brexit Doubts Not Justified

After Britain voted on June 23 to leave the EU many doubts have been expressed in the news media, but these are wrong. The decision to leave should be analogous to a bank that has a commercial loan outstanding to a shaky business borrower. The borrower has to be monitored for deteriorating financials and if they deteriorate the terms of the loan require that it be called in and closed out. This is to avoid even worse losses later. The EU has two serious structural defects that have never been fixed. One is the central bank doesn’t really get to act like a central bank because of constraints that individual nations are allowed to place on the central bank. This

June 27th, 2016|mayflowercapital blog|Comments Off on Brexit Doubts Not Justified

Brexit Will Result In A Better Economy

The dramatic crash caused by yesterday's Brexit vote will ultimately lead to a better world because it will encourage a global cleansing crash that will get rid of badly run companies and governments. For the U.K. the exit will eventually, after a long period of implementation, lead to a new era of free enterprise based prosperity. The U.K. is different from the continent of Europe. It needs to be independent. It has a tradition of democracy and freedom (Magna Carta, Parliament, and more) and free enterprise that much of the continent lacked and thus the two regions are incompatible. At first inefficiencies from the breakup and a lower standard of living will result from the breakup but eventually things will

June 24th, 2016|mayflowercapital blog|Comments Off on Brexit Will Result In A Better Economy

Brexit Happened: Markets Crashed. What Next?

Britain voted today to exit the EU. This is called Brexit. Stocks in Tokyo crashed 8% right now since the market is open in Japan. The Yen went up 4% which will trigger a currency war. The SP futures went down 6%, which would be about 120 points. The British Pound dropped 10.7%. This has provoked other EYU countries to consider doing a vote on exiting the EU. The Developed world has two main parts: one is the U.S., the other is the EU. The breakup or weakening of the EU will mean half of the main parts of the Developed world are moving into a less stable and more dangerous situation. The risk is this could be globally deflationary.

June 23rd, 2016|mayflowercapital blog|Comments Off on Brexit Happened: Markets Crashed. What Next?

CPI for Housing Cost Is Misleading

The main item that is causing CPI inflation is rent. The BLS calculates rent for renters in a straight forward manner. For owner occupied homes they use hypothetical rent called Owner’s Equivalent Rent. The problem with calculating rent is that roughly 60% of the population owns homes and these people are the most affluent who are most likely to have a good job that enables them to borrow money, which expands the money supply and causes inflation. Thus it is more important to study homeowner’s housing cost than renter’s rent. The rising “rents” figure for the homeowners is hypothetical. In reality, they pay a fixed mortgage and a variable property tax and insurance. The problem with “owner’s equivalent rent” is

June 22nd, 2016|mayflowercapital blog|Comments Off on CPI for Housing Cost Is Misleading

When Will Interest Rates Return To Normal?

Charts have been published claiming that interest rates are the lowest in 5,000 years of history. Is there some natural barrier to the momentum of ever-lower rates which when reached will makes rates begin to rise and return to normal levels? My interpretation of interest rate history is that in pre-industrial times before 1840 it is a bit too difficult to compare the rates of ancient times with that of the past 170 years.  During the 19th century rates were higher for the U.S. because we were an experimental and underdeveloped country far away from the trading opportunities in Europe. During the past 116 years since the start of the 20th century U.S. rates have typically been about 2% “real”

June 21st, 2016|mayflowercapital blog|Comments Off on When Will Interest Rates Return To Normal?

Is Preferred Stock a Good Bond-Like Investment?

Some people like preferred stock, which is similar to a bond and has higher yields. My reaction is that any bond-like thing with high yields is like a junk bond and could seriously damage a portfolio during a recession. An ETF of preferred stocks has about half of its assets in the banking industry. This is extremely risky because banks are levered about 12 to 1 and thus have a ratio of 92% debt and 8% equity. If a small amount of the bank’s loans fail then the stockholders and later the preferred shareholders will suffer the loss. In the great banking crash of 2008 some bank preferred stock received support from the government but generally it has been government

June 20th, 2016|mayflowercapital blog|Comments Off on Is Preferred Stock a Good Bond-Like Investment?

Why Is GDP Growth So Low?

GDP growth rates may be lower than in previous eras because of higher barriers to success in business due to the increasing complexity of modern times, including regulations.  It maybe that businesses feel it is too risky and that a project would have a low Sharpe ratio so it is not worth doing some projects. For example, 50 years ago many projects could be done with minimal rules regarding ecology or worker safety. Today a construction project to build a new factory requires accepting much greater risk that cost overruns may occur in order to meet environmental and labor mandates, etc. It could be argued that the extra costs will still flow to GDP so what is wrong with a

June 17th, 2016|mayflowercapital blog|Comments Off on Why Is GDP Growth So Low?