Monthly Archives: December 2015

2016 New Year Forecast

I expect the global economy to gradually weaken in 2016 and possibly go into recession in early 2017. Central banks and their Quantitative Easing and zero rate policies will continue to lose credibility thus undermining support for stocks and real estate. The dollar will go higher, EM countries will experience greater difficulties with debt service because of this and because of the commodities crash. It is far too early to expect oil to hit a bottom. Expect the bottom for oil to be in the $20’s. Since stocks have an excessively high PE10 ratio of 26 versus a fair value of roughly 15 then stocks need to drop roughly 40%. This valuation is supported by similar ratios such as the

2017-01-10T23:33:04-08:00December 31st, 2015|mayflowercapital blog|Comments Off on 2016 New Year Forecast

Global GDP May Lead To Recession And A Crash

People hope that Emerging Market countries with their higher GDP growth will bail out the Developed world by providing enough growth to prevent the global economy from falling into stagnation. But the ironic thing about growth rates is that in most cases the higher the growth the lower its quality and thus the lower probability that its growth rates are genuine, sustainable, and reliable. Additionally, the higher one’s income the more one can afford to take on the risk of having excess debt. So EM countries havea dual risk: they have poor quality of growth and they have less per capita income which makes it harder to service debts. The reason this is important is because since 1997 the global

2017-01-10T23:33:05-08:00December 30th, 2015|mayflowercapital blog|Comments Off on Global GDP May Lead To Recession And A Crash

Junk Credit Markets Have Already Crashed: Recession Coming

Junk bonds and similar subprime financing devices like BDC and P2P lending are what will fail and soon cause a recession. About a year ago the news media ran articles saying not to worry because the interest coverage ratio was roughly a fifth better than at the top of 1989 junk bond bubble. But interest rates were much higher then, so that implies if rates were (hypothetically) the same in both eras then about a year ago junk bonds would have reached a peak similar to the 1989 top. The news reports of a year ago need to be revised to reflect the serious deterioration in debt service ratios for energy companies and how that affects other allied industries like

2017-01-10T23:33:05-08:00December 22nd, 2015|mayflowercapital blog|Comments Off on Junk Credit Markets Have Already Crashed: Recession Coming

Central Bank To Print Money To Buy Stocks

   Japan’s central bank plans to print money to buy a new non-existent ETF that will focus on stocks that make new capital expenditures. See the Barron’s article “Bank of Japan plans to buy non-existent ETFs a desperate attempt to rescue Abenomics”. In theory this would stimulate the economy.  However it could result in simply boosting GDP by growing a business that is losing money. This strategy has already been tried in much of the world where the government pressures banks to loan money to businesses that don’t qualify so that jobs can be created by recklessly growing a company even though it is unprofitable. This is the same error as China made pouring printed money into new unprofitable capital

2017-01-10T23:33:05-08:00December 21st, 2015|mayflowercapital blog|Comments Off on Central Bank To Print Money To Buy Stocks

Globally Integrated Economy Means U.S. Rates Already Peaked

    The said IMF global growth is estimated to be 3.3%; my guess if China’s rate is exaggerated and subject to a dropping to a much lower rate then perhaps global growth will fall to the mid-2% range like in the U.S.; if most Developed countries are like the EU, Japan and the EM engine of growth suddenly declines to 2.5% then I would expect global real GDP to be close to going below the stall speed of 2%.    If the global financial economy is integrated then global conditions contribute heavily to domestic inflation or disinflation. The U.S. is only 20% of the world’s economy so we should respect the possibility that conditions in the rest of the world

2017-01-10T23:33:05-08:00December 17th, 2015|mayflowercapital blog|Comments Off on Globally Integrated Economy Means U.S. Rates Already Peaked

Will Fed’s Rate Rise Damage Bonds?

How will bonds be affected by the Fed’s plan to raise rates 1% over the next 12 months? A portfolio with a duration of 4 would lose roughly 4% of value. A portfolio of 30 year bonds would have a duration of 22 and would lose 22% of value. However if the economy is soft and inflation stays low then higher short term rates may persuade some leveraged owners of long term bonds to sell their bonds. On the other hand if short term rates weaken the economy then it would be bullish for long term bonds and they would go up in value.    When an investor uses short term loans at institutional rates to buy long term bonds

2017-01-10T23:33:05-08:00December 16th, 2015|mayflowercapital blog|Comments Off on Will Fed’s Rate Rise Damage Bonds?

Fed: That’s The Rule, No Exceptions Allowed!

   The Fed raised the rate today. It reminds me of when a low income person owed 57 cents in city income tax, so they called the city and was told they didn’t have to pay since it was under a dollar. Later they were arrested and jailed by the police for delinquent taxes because of an outstanding lien for 57 cents. The policeman said I’m simply following the rules, I have to do it.     The Fed is simply following the “rules” which are that after the economy gets close to (alleged) full employment then real interest rates shall be 2% instead of the current near zero rate. That’s the textbook rule and it must be followed no matter

2017-01-10T23:33:05-08:00December 16th, 2015|mayflowercapital blog|Comments Off on Fed: That’s The Rule, No Exceptions Allowed!

The Role Of Open End Mutual Funds

The proper way to use open-end mutual funds is to invest in relatively simple strategies and invest in low to moderate risk asset classes. What I mean by moderate risk would be “quality” equities using the style advocated by Buffett and Grantham where an emphasis is placed on buying companies with the best moats, ROE, industry leadership, low debts, etc. The other type of “moderate risk” would be investment grade bonds that take on duration risk or possibly the asset class of “BB” grade below investment grade bonds where the fund company appears to put an emphasis on risk control instead of chasing after yield.    High risk asset classes that, if in an open-end mutual fund, need to be

2017-01-10T23:33:05-08:00December 15th, 2015|mayflowercapital blog|Comments Off on The Role Of Open End Mutual Funds

Today’s Bond Market Turbulence

Today junk bonds declined 0.87% in price and the 20 year Treasury ETF TLT declined 1.3% in price. Usually if junk bonds decline then Treasuries go up, so this was rare situation. Probably investment grade rates rose out of fear of the Federal Reserve’s likely rate increase to be announced on December 16, 2015. Junk bonds had already declined a lot last week after Third Ave. Focused Credit Fund mutual fund announced a freeze of redemptions.  I expect that the Fed may still go ahead with the rate increase just so they can claim they were prudent in fighting inflation. But eventually the rising amount of evidence of a growing global economic weakness will probably result in the rate increase

2017-01-10T23:33:10-08:00December 14th, 2015|mayflowercapital blog|Comments Off on Today’s Bond Market Turbulence