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Is There Hidden GDP Not Properly Calculated?

A Goldman Sachs economist Jan Hatzius, and an independent hedge fund manager John Burbank have said that GDP is not properly calculated because of all the free things on the internet. See this article. I disagree. Imagine a restaurant owner who charges $25 for dinner and can charge $5 for lunch if he wishes to breakeven. Suppose he offers a totally free lunch with limits on how many people can get it. Does that really create $5 of hidden GDP for each lunch? The GDP would be calculated from the restaurant’s purchases of its supplies, wages, rents, etc. and would thus not be an invisible achievement of the economy. Is that the same as a broadcast TV show paid for

May 20th, 2016|mayflowercapital blog|0 Comments

Diagnosis Of Rising Inflation: Is BLS Wrong?

There is a growing consensus that the Federal Reserve is more wary of the growing risk of inflation and will tighten regardless of foreign economic events that indicate a need to loosen. It wouldn’t surprise me if a few token tightenings occur this summer. The core inflation rate over 12 months reached 2%. A large reason for this rising rents which are rising about 3.5%. The problem is that due to the U.S. economy becoming like a Third World economy where the masses of people in rural areas have low paying jobs or high unemployment then people migrate and pile into cramped quarters in urban areas to look for better employment or more lucrative welfare benefits. This creates a situation

May 19th, 2016|mayflowercapital blog|0 Comments

Rising Rates: Is This The Start of a Secular Rate Hike Cycle?

Today the ten year Treasury yield jumped from 1.76% to 1.88%, a significant jump. Rumor is that the Federal Reserve will raise short term rates in June. My opinion is that if they do then it will act to encourage bond investors to believe that the Fed is fighting inflation and this will act to support bond prices for long maturity bonds, and suppress interest rate increases of the ten year bond. Thus the possible Fed rate increase may not hurt long term bonds. The big picture is that in the past 25 years the world’s economy has become highly integrated and interdependent. Thus if China, Japan, and the EU all experience a deep recession next year then the massive

May 18th, 2016|mayflowercapital blog|0 Comments

Will The U.S. Economy Be Like Argentina’s?

The political environment in the U.S. is moving towards a Latin American strongman socialist type of outcome. Such an economy would include severe restrictions on imports resulting in consumers being forced to buy expensive domestic goods with less than ideal competition between manufacturers so that their quality might be weak. In that scenario the government would stimulate the economy with inflationary make-work projects creating more employment for the least skilled workers and allowing some debtors to partially inflate their way out of debt. But eventually inflation would begin to gallop out of control and then on an inflation-adjusted basis people would be worse off. The stimulation to the economy might increase corporate earnings but those earnings could also be decreased

May 17th, 2016|mayflowercapital blog|0 Comments

Secular Change From Central Bank Manipulation to Fiscal Stimulus and Inflation

The rise of Trump implies that voters may seek a more aggressive solution to the economy’s problems than that offered by traditional politicians and the Federal Reserve. That implies a switch from lassie faire Federal Reserve easy money Quantitative Easing and Zero Rate policies to a Congressionally authorized targeted fiscal stimulus program to create jobs through make-work projects financed by deficits. I feel that as time goes by there will be a growing acceptance by professional economists that QE and ZIRP don’t work and can make things worse, leading to a search for an alternative to central bank easy money policies. That alternative is either Reagan style tax cuts (unlikely to be approved by voters) or old-fashioned Keynesian fiscal stimulus

May 16th, 2016|mayflowercapital blog|0 Comments

Politics Is Turning Against Business: Will Investments Be Hurt?

The implications of Trump’s popularity is that the traditional Republican constituency of moderate income blue collar traditionalists who would vote for Republican politicians that cut taxes for the rich has faded away. As the economy weakens then more traditional non-rich Republicans may defect to vote for a high tax Democratic slate rather than vote Republican because of some sort of traditionalist issues like guns, religion, gays, etc. When the country goes through economic hardship then the key issue for voters will be the alleged ability to create more jobs by restricting foreign trade (leading to a trade war and trade treaty cancellations) and restricting immigration. The Republicans haven’t won a popular vote presidential election since 1988 except for Bush, Jr.’s

May 13th, 2016|mayflowercapital blog|0 Comments

What Investors Can Learn From Trump’s Tax Returns

In trying guess what Trump’s taxes might look like I did some hypothetical thought experiments. I don’t know what his net worth is or other details of his finances. It was said in the news a long time ago that he had $4,000,000 of annual living expenses. Forbes said he has a $4billion net worth. The purpose of this essay is not to come up with a figure of what he earns but rather to discuss possible types of tax situations a wealthy real estate developer/investor might encounter. Assuming hypothetically he has a $300million net worth he might buy a portfolio of $900million of rental properties and use a mortgage for about 67% of the value. If it was an

May 12th, 2016|mayflowercapital blog|0 Comments

Failed Central Bank Policy Will Lead To Bear Market

Keynesian deficit based fiscal stimulus and extreme monetary policy such as Quantitative Easing and ZIRP are based on the assumption that wealthy people mistakenly hoard cash instead of spending and investing and if they can be tricked into spending then the economy will get out of stagnation or depression. The problem is that the object of the manipulation doesn’t want to be manipulated and is searching for evidence that such a policy might make him or her worse off. Thus these policies are less likely to work the more aggressive they become. During a time of runaway inflation accompanied by price controls consumers and merchants know they mast plan ahead for that. Merchants react during inflation by withholding artificially low

May 11th, 2016|mayflowercapital blog|0 Comments

China Debt Bubble Has Reached Saturation Point

Michael Pettis gave a speech today at the CFA convention where he discussed the massive growth in China over 30 years. He said that China reached its point of saturation of too much debt fueled unneeded development roughly in 1998 or maybe 2003. This would be at the point where additional investment is no longer socially productive, in other words when they are adding far more capacity than needed. Then by definition, debt grows faster than debt service capacity. Thirty countries have had cases since 1945 like this, it always happens where they overdo it with excess debt, he said. It is interesting that Pettis says that the saturation point in China was reached in 1998. That is roughly about

May 10th, 2016|mayflowercapital blog|0 Comments

More Cracks In The Junk Credit Market

Today the president of a P2P online lender and two other employees mysteriously and suddenly resigned. It was alleged that loans that the company sold to investors had something improper. The company had to buy back those loans and sell them to some other investor. I have been writing for a long time that P2P and BDC lenders are too risky. These lenders claim that there is a new era of online lending that enables them to find creditworthy borrowers that banks can’t find but that is a ridiculous theory. Banks can do anything that these online lenders do, if the underwriting is sound. These lenders simply recruit shaky “B” paper borrowers and play dumb when they “underwrite” the loan

May 9th, 2016|mayflowercapital blog|0 Comments