Growing Signs of Recession

The yield curve is flattening which implies a recession is coming, especially if it inverts and becomes negative. The difference between the 3 month Treasury versus the ten year Treasury ranged from 1.1% to 2.1% and is now 1.38%. If it drops another 0.18% the yield curve will be very close to its low point of the past year. After the market closed today IBM came out with a bad earnings report; its shares plunged 3.9% in after-hours trading. This could contribute to additional downward pressure on interest rates. China and Japan continue to look for ways to wiggle out from the pressure from Trump to open up their markets to American exports. One way for foreign nations to evade

April 18th, 2017|mayflowercapital blog|0 Comments

Are Low Rates Justification For High Stock Prices?

Discounting cash flows to estimate stock values far into the future should incorporate a factor for the risk of an error of the estimates, which may increase geometrically every 15 or so years. This means that even if interest rates are low the discount rate can be higher, the further out in the future one goes, because of an increase in risk premium. This means that the present era of the next 10 or 15 years is much more important to establishing the Discounted Cash Flow of an investment because the distant future has to be discounted so heavily that its returns regardless of outcome have less weight. Thus if interest rates remain very low for 10 to 15 years

April 5th, 2017|mayflowercapital blog|Comments Off on Are Low Rates Justification For High Stock Prices?

Who is Correct: Gundlach or the Disinflationists?

    Recently bond guru Jeff Gundlach has warned about the possibility that the ten year Treasury could gradually go up to 6% over several years. However, economists Dave Rosenberg and Lacy Hunt have warned that disinflation is likely and thus bond yields will decline. I certainly agree with Gundlach that the risk-reward trade off is bad in terms of chasing after high duration risk in a long duration bond. Trying to buy a ten year Treasury in hopes the yield (now at 2.56%) will drop as deeply as Germany’s did when it went down to 0.1% last year is far too risky, since the possibility exists that the U.S. ten year Treasury could revert to its old pattern of yielding

March 9th, 2017|mayflowercapital blog|Comments Off on Who is Correct: Gundlach or the Disinflationists?

Investors May Experience A Decline Like That of Workers

Investors may experience a decline in their well being that will parallel the experience of unionized workers in recent decades. The globalization and de-unionization of America’s workforce resulted in declining real income for well paid unionized workers, while those non-union workers who started at the bottom did make some gains because they came up from a low base. For 20 years the Federal Reserve has been cutting interest rates and increasing the money supply resulting in a massive increase in debt that was used, not to create factories and jobs, but was instead used to chase after stock and real estate bubbles. At some time that phenomenon will have a reversion to the mean and then stocks will be deprived

February 22nd, 2017|mayflowercapital blog|Comments Off on Investors May Experience A Decline Like That of Workers

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?

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?

New Border Tax Law’s Effect On The Economy

The proposed new tax law called the Border tax adjustment will tax goods imported by businesses and not tax goods that are exported. What is unknown is will services also be taxed. ran an excellent article and here warning that taxing services would cause a problem because when foreigners come here to pay for a university or a vacation this is a form of exporting of services yet it wouldn’t get tax benefits the way that tangible exports would. Thus if foreigners suffered from a rapidly rising dollar they would reduce purchases of U.S. based services and thus the economy would lose business in some areas. Thus the Border tax might not increase economic growth and employment. There is

January 11th, 2017|mayflowercapital blog|Comments Off on New Border Tax Law’s Effect On The Economy

Risk Of Crashes In China and The EU: Is It Possible They Never Occur?

A significant reason for expecting U.S. rates to stay low or temporarily go even lower is because of the contingent risk of a depression in China or the EU. But is it possible that they can avoid a crash by magically printing (with central bank money supply increases) their way out of trouble? The bond bull’s theory is that excessive, non-underwritten policy loans in China and the EU created an unsustainable debt bubble, which can’t last forever, and when it ends it will be deflationary. Is it possible that if China and the EU endlessly repeat the equivalent of the U.S. Federal Reserve bailout of AIG with printed money that somehow a miraculous result of a crash-free utopia will occur?

December 15th, 2016|mayflowercapital blog|Comments Off on Risk Of Crashes In China and The EU: Is It Possible They Never Occur?