Rates Went Up When Yellen Spoke: What Will Happen To Rates?

The ten year Treasury yield went up from 1.57% to 1.63% today because of Yellen’s speech at the Fed’s annual meeting at Jackson Hole, Wyoming. Assuming that the U.S. economy was (hypothetically) firewalled from foreign influence then perhaps short term Fed funds rates should be at 1.5%, assuming the price of money should mostly reflect compensation for inflation. People have gotten used to high rates as the correct standard after living through the high inflation era of the 1970’s, followed by high rates for another decade in the 1980’s to wring out inflation, (even in the 1990’s rates were often over 5% for the Lehman Agg index). Thus it is logical that people’s emotions should cause them to feel that

August 26th, 2016|mayflowercapital blog|0 Comments

When Will Negative Rates End?

The maddening descent into global negative rates seems like it will never end as central banks continue to double down on their mistakes. Factors that will lead to its end are the growing problems that banks and insurance companies are experiencing as a result of negative or zero rates. These industries have a “must have” need for normal rates so that they can operate. If an extreme form of negative rates is implemented they will be unable to function. Then ironically the Federal Reserve will have to bail them out as they did for Bear, Stearns and AIG in 2008. This would result in voter anger at favoritism for rich banks, like what happened in 2008 with the TARP bailout

August 24th, 2016|mayflowercapital blog|0 Comments

When Will Negative Rates End?

Economists may be coming around to admitting QE and negative rates don’t work in a year or so. However, what happens to academic ideas is that when a particular school of thought is discredited their developers dig their heels in and don’t want to admit they are wrong. Thus central banks may try more of these dangerous placebos for a few more years. Investors should not count on the Fed admitting they were wrong and backing off from their misbehavior of QE and moving toward ultra-low rates. I believe the stock bubble has gotten so bad the Fed is trying to scare investors with threats of a rate increase but it will either not happen or it will be a

August 22nd, 2016|mayflowercapital blog|0 Comments

Interest Rates Are The Lowest Ever In 5,000 Years

Is the headline true? Not really. The economics authors who write these articles are comparing ancient loan rates to today’s short term Treasury rates in major countries. In a medieval environment someone might borrow two bags of rice and pay them back with three bags a year later, thus incurring a 50% interest rate. This is not the same as making a deposit of cash at a bank! There is also a difference in modern times between a very poor borrower with bad credit (or even good credit) who takes a cash advance on a credit card and pays 25% note rate and two points and then pays it off in a month. Then the points fee, when annualized, makes

August 19th, 2016|mayflowercapital blog|0 Comments

Should Investors Have a Very High Allocation to Stocks?

There is an idea floating around in the investment world that one can take on a very high amount of risk in equities because (allegedly) stocks always go back up a few years after a crash so all a retiree needs to do is to have enough cash to go several years without selling their stocks to pay for living expenses. Thus, allegedly, a wealthy retiree with $10million can have an equity allocation of 80% or 90%, instead of only 30%. Traditional financial planning theory is that one should allocate bond ownership in proportion to one’s age. For example, a 30 year old should have 30% in bonds, 70% in stocks and a 65 year old should have 65% in

August 17th, 2016|mayflowercapital blog|0 Comments

CPI Data Shows Low Inflation

The CPI was released today by the BLS. Core rate inflation (which excludes food and energy costs) had a 0.1% increase for last month or about 1.2% annualized. But the core rate, less rent, including owner’s equivalent rent (which is weighted at 33% of expenditures and had a 0.3% price increase last month) would be zero. The rent component of the CPI is misleading because only a third of the population are renters and they tend to have less purchasing power and less ability to qualify for a loan. The ability to get and use a loan is what increases the money supply and creates inflation. Thus the renters’ travails may not translate into inflation if they can’t respond by

August 16th, 2016|mayflowercapital blog|0 Comments

New Administration Likely to Raise Taxes

It seems highly likely that the November election has already been decided. The new administration will seek to raise taxes. If the Senate and the House of Representatives are controlled by the Democrats then taxes will rise. Typically the ideal time to raise taxes is right after an election. The economy has been growing at only 1% and capex expenditures have been growing at only half the rate of the typical recovery. Thus even a small tax increase could result in a recession. Recessions cause investors to flee stocks and move into bonds. Countering this tendency will be the fact that Democrats prefer more fiscal stimulus than Republicans, so that could act to offset some of the recessionary impact of

August 15th, 2016|mayflowercapital blog|0 Comments

Economists Bad Advice About Saving Makes Things Worse

Economists typically believe that during a recession that affluent people save too much so they seek to pressure them to spend more to stimulate the economy. One way to attempt to do this is to make interest rates low so that savers will subsidize borrowers because borrowers want to spend instead of save. This is not a good way to run the economy because savings need to be firewalled off from spenders otherwise an accident could happen resulting in loss of savings. People need to understand that savings (including bonds) are vital towards building a form of self-insurance against financial risks. If people are pressured by low rates to give up saving this damages the ability to consume in the

August 12th, 2016|mayflowercapital blog|Comments Off on Economists Bad Advice About Saving Makes Things Worse

What is a Fair Yield For Bonds?

The long run real yield, over a century, on the ten year Treasury has been 2.1% before tax. But that included decades when inflation was high and real yields low in the 1970’s, an offsetting era under Volcker in the 1980’s where real yields were about 4%, and an era in the Great Depression when real yields were 4% because they were 2% higher than nominal yields because of deflation. Also the 1941-51 era had low yields made artificially low by the Federal Reserve because of WWII. The best era that fits to the current post-2008 era is 1951-1965. At that time nominal yields were about 4% and real yields about 2%. Taxes took 1.6 percentage points of the 4%

August 11th, 2016|mayflowercapital blog|Comments Off on What is a Fair Yield For Bonds?

A Stronger Solution For The Economy Than Rate Cuts

A possible solution to the dilemma that fiscal stimulus can’t work in the modern era when debts are excessive would be for the government, combined with the central bank, to take over the debt markets and inject helicopter money in the form of co-owning forgivable debts. This would require legislation (very unlikely to be passed) that authorizes the Federal Reserve to create sweetheart loans that are forgivable (with no tax on forgiveness of debt) should the borrower default and offer these loans to the private sector. The goal would be to overcome the objection that it is not safe to expand a business or expand consumption because one already has too much debt. For example, if someone wanted to borrow

August 10th, 2016|mayflowercapital blog|Comments Off on A Stronger Solution For The Economy Than Rate Cuts