Monthly Archives: January 2017

Will The SP Rise Dramatically In a Melt-Up?

When stocks go up far too fast this is called a “melt-up”. It happened in 1999-2000. Currently various metrics like PE ratio, Price to Sales, Price to GDP show that stocks are at roughly the same degree of being overpriced as the tops of the bubbles of 1929, 1966, 2007. The great bubble of 2000 was briefly higher for a few months. Investor psychology may explain why extreme bubble tops occur. Demographics also help explain investor behavior. During 1999 the median aged Baby Boomer was 44. During ages 25-45 many people go through an aspirational stage where anticipate future promotions and pay raises and use borrowed money to consume a little extra in advance of the expected pay raise. Then

January 26th, 2017|mayflowercapital blog|Comments Off on Will The SP Rise Dramatically In a Melt-Up?

Dow Hits 20,000 Yet Barely Beats Bonds

The Dow hit 20,000 today. It doubled since March, 1999, almost 18 years ago. That’s an annual compounded appreciation of 3.8%, plus the dividend. Since the dividend of roughly 2% a year roughly offsets inflation, then the inflation adjusted total return was basically the 3.8% price appreciation. From 1998 to 2007 bond yields were often higher than this. The Long Government bond index total return was 2.8213 times it starting value since March, 1999, which is an annual return of 5.93%. The Dow had a total return of 3.0845 times its starting value since March, 1999, making a 6.52% annualized rate of total return (which is both dividends and appreciation). The Dow beat bonds by 0.7% a year. Traditionally the

January 25th, 2017|mayflowercapital blog|Comments Off on Dow Hits 20,000 Yet Barely Beats Bonds

Tax Cuts and Import Duties: How Will They Affect Investments?

The Trump administration seeks tax cuts on personal income and tax increases on imports. Assuming a taxpayer gets a three percent tax cut but also loses the deductibility of state income tax (which is 9.3% to 13.3% in California) they may not get a net income tax cut. If a consumer earns $100 and gets $67 after-tax and spends 20% on tangible goods subject to the Border Adjustment Tax they may pay 35% in hidden taxes (paid by the corporate importer) on the 20% that they spend on goods. That’s 7% of their after-tax income or about 4.6% of before-tax income, enough to wipe out the personal income tax cut benefit. If someone owns a corporation they will experience lower

January 24th, 2017|mayflowercapital blog|Comments Off on Tax Cuts and Import Duties: How Will They Affect Investments?

Anti-Import Laws May Result In Recession

The Trump administration and Congress are trying to restrict imports and reward exports through the proposed Border Tax Adjustment law with the goal of increasing domestic employment. One possible outcome is that domestic manufacturers will increase spending on domestic robotic manufacturing for expensive high value added products. This would increase the GDP but not increase employment. The people qualified to do sophisticated work are already employed and thus an employer would have a difficult time increasing the number of qualified employees on short notice. The very unskilled people who are the ones with the highest rate of unemployment would not be able to participate in this type of employment. Presumably some progress will be made in creating jobs for low

January 23rd, 2017|mayflowercapital blog|Comments Off on Anti-Import Laws May Result In Recession

The New Administration: Will It Be The Man With The Pin?

Today Trump is inaugurated as president. Trump said stocks are a bubble. I agree. I remember Jeremy Grantham saying no leader wants to be the one with the giant pin who pops the bubble, which explains why the bubbles keep getting bigger. But Trump, who sold off his stocks recently, may end up doing society a favor and be “the man with the pin”. In Dec., 1989 in Japan there was a massive bubble and central bank governor Meino popped it, leading to a horrible but much needed crash. The possibility exists that similar things may happen in the U.S. Our society will be better off. Once people realize it is foolish to play with bubbles then people will focus

January 20th, 2017|mayflowercapital blog|Comments Off on The New Administration: Will It Be The Man With The Pin?

Will Tariffs Be Free For Americans?

The proposed border tax adjustment will act like an import tariff tax and has an interesting anomaly that it may act to increase the value of the dollar (reducing the cost of the imported goods) thus negating the cost to consumers of the tax. This unverified anomaly reminds me of the “print and pay” anomaly where G7 countries can issue huge amounts of sovereign debt denominated in their own currency and simply print up more to make the minimum payment and thus never be at risk of defaulting. An additional twist on G7 debt or high quality G20 sovereign debt is that the worse the economy gets the greater the degree of “crowding in” (instead of “crowding out”) occurs where

January 19th, 2017|mayflowercapital blog|Comments Off on Will Tariffs Be Free For Americans?

Rising Inflation: Will Bonds Be Hurt?

Inflation Year over Year (YoY) was 2.1%, up from 0.8% a half year ago. The problem is that a year ago oil hit a low of $27 and by June had reached $50, close to its current price. Thus YoY inflation data will be tainted because oil was too low in the first half of last year. By June of this year, assuming oil stabilizes (long term futures contracts show it stabilizing) and rent inflation becomes zero then inflation YoY will be 1.2%. Inflation now, ex-oil and ex-housing, is 1.2%. However if a trade war erupts there could be a classic recession with deep discounts on all types of goods thus plunging CPI into a negative figure. The housing rent

January 19th, 2017|mayflowercapital blog|Comments Off on Rising Inflation: Will Bonds Be Hurt?

Stocks Are Overpriced And Ready To Crash: What Should Investors Do?

Reading GMO’s Hell or Purgatory essay published 11-7-2016 on GMO.com I’m inclined to lean a little bit more toward their opinion that instead of a huge dip down to intrinsic value of 50% off of current stock prices that instead, stocks will drift down slowly and then slowly climb back close to today’s prices and result in only a modest annual decline in inflation adjusted total return. But who would want to own stocks if the total real return is declining and becomes slightly negative? What are alternatives to an asset that is forecasted to decline in value, on average, annually over the next seven years? Currently some long duration corporate investment grade bonds have an SEC 30 day yield

January 18th, 2017|mayflowercapital blog|Comments Off on Stocks Are Overpriced And Ready To Crash: What Should Investors Do?

Dramatic Increase in Tariffs Will Contribute To Causing Recession

Trump wants to have a 35% tariff on imports. This would reduce global trade, result in trade wars and thus reduce our exports. It would raise prices since domestic manufacturers would be able to get away with charging more. If half of all consumer expenses are tangibles and they experience either a 35% tariff multiplied by a 50% allocation to the wholesale cost of imported goods or a matching price increase by domestic vendors, then that could result in perhaps a one-time 17% increase to the CPI index for tangibles on top of the usual 1.5% CPI. I’m assuming no increase in inflation for services. Thus the total CPI would be about half of 17% or 8%.  Many things could

January 17th, 2017|mayflowercapital blog|Comments Off on Dramatic Increase in Tariffs Will Contribute To Causing Recession

Rising Tariff Taxes To Start Recession

If consumers have a choice between paying 22% more (because of new tariffs) for imported goods or paying far higher prices for domestic goods then they will continue to use imported goods. If workers in EM counties get $2 an hour versus $22 in the U.S. and labor is half the cost of domestic goods and services then EM labor has an unbeatable advantage over domestic labor, even with a 45% tariff. I doubt the new administration’s attempt to bring back the lost jobs will work. Instead, people will have to put up with higher costs and they will be forced to cut something else out of their budget, thus creating unemployment for the unlucky producer of goods and services

January 12th, 2017|mayflowercapital blog|Comments Off on Rising Tariff Taxes To Start Recession