Monthly Archives: March 2016

Imbalance Between Consumption and Income Implies Recession

The imbalanced situation where people consume more than they earn may be where younger people are not saving for retirement and are spending their entire earnings just to survive. As the years go by today’s affluent retirees will pass on. They may have spent down their nest egg and their children will not get a big inheritance. Then people on average will have less spending capacity than today. The difference between working and retired people is that retirees are supposed to spend down some of their net worth while workers are supposed to save. A balanced situation is one where a worker’s monthly contribution to his or her savings are offset by or matched by retirees’ consumption in excess of

2017-01-10T23:33:02-08:00 March 31st, 2016|mayflowercapital blog|Comments Off on Imbalance Between Consumption and Income Implies Recession

What The Federal Reserve Should Do

The world’s central banks have tried to stimulate their economies with easy money policies. These only work when starting from a high interest rate and mainly can only work if conditions are relatively benign. In a deep recession the benefit of lower interest rates is not enough to encourage growth since potential borrowers are more concerned with inability to pay the principal payments than the interest expense. The Federal Reserve was established to be a lender of last resort, when no one else would lend, to weak banks during a banking crisis. It was also supposed to prevent inflation. Later the mandate was changed to also creating full employment in 1977. The people in the private sector who can make

2017-01-10T23:33:02-08:00 March 24th, 2016|mayflowercapital blog|Comments Off on What The Federal Reserve Should Do

Will China Devalue The Yuan?

Many people wonder if China will devalue its currency, the Yuan, by a huge percentage dramatically as they did by 50% in 1994. The reason this is unlikely to happen is because the countries with the big three currencies (the U.S., EU and Japan) don’t want that to happen and will be willing help China to prop up the Yuan if it needs that. Basically the world is dependent on having the major EM currencies avoid devaluation because that might drive the dollar higher and thus make it even more difficult for EM debtors to repay loans to Developed country banks. If another Lehman-style crisis happened because of this, the world’s central banks would find that the zero bound problem

2017-01-10T23:33:02-08:00 March 23rd, 2016|mayflowercapital blog|Comments Off on Will China Devalue The Yuan?

Stocks Rose A Lot After February Low: What Next?

Stocks went to 1820 for the SP in February 11 and almost broke a key support level and are now 200 points higher. They may have gone up because yesterday the Federal Reserve decided not to raise rates for that day’s meeting. Also some people speculate the recent Shanghai G20 meeting which included Yellen may have had a secret agreement that the U.S. wouldn’t raise rates. If the U.S. raises rates that would make the dollar go up in value and thus hurt world trade and trigger global debt defaults and recession. By refusing to raise rates the Federal Reserve has sent a signal to speculators that they can continue to rely upon low cost money to speculate in stocks.

2016-03-17T14:40:01-07:00 March 17th, 2016|mayflowercapital blog|Comments Off on Stocks Rose A Lot After February Low: What Next?

Rising Political Turbulence Threatens The Economy and Stocks

The continued rise of political instability in the U.S. will undermine businesses’ confidence to expand. It will reduce consumer confidence for large purchases. Traditionally the weakest year in the cycle is right after the elections when it is the best time to raise taxes and impose new regulations. The economy has gone seven years since the last recession and eight years is a normal lifespan of cycles so early 2017 looks risky. Markets may not have priced in this risk of angry voters seeking big change. It is possible things will turn out OK like they did in 1948 when there were four political parties in the November election and the incumbent Truman looked sure to lose. Ultimately the voters

2017-01-10T23:33:02-08:00 March 11th, 2016|mayflowercapital blog|Comments Off on Rising Political Turbulence Threatens The Economy and Stocks

Rising Risk of Political Instability Threatens Stocks

The theme in the presidential campaigns that could create risk for investors is the idea of having draconian tariffs that would stop imports. This would be inflationary. It could also trigger a repeat of the 1929 Great Depression, which was triggered by a similar law. The federal government has grown its debt load tremendously over the past 10 to 20 years with no end in sight. The cause is spending on medical care. Either the U.S. will attempt to impose a European system of low doctor salaries and price controlled pharmaceutical or the government will have to raise taxes. If participants in health care such as doctors and pharmaceutical employees experience wage cuts and freezes then will be a major

2017-01-10T23:33:02-08:00 March 10th, 2016|mayflowercapital blog|Comments Off on Rising Risk of Political Instability Threatens Stocks

Election Year Drama: Are Things So Bad That Drastic Change Is Needed?

One political candidate uses a slogan that implies that they want to make America great again. However, America is already great so that candidate better get a different slogan. In my opinion, that topic is about a return to the fluke era of 1950’s prosperity when foreign competition had been wiped out by WWII, people had great work ethic after Great Depression, and very importantly there was a demographic of pent up demand for goods, low debt loads, and a shortage of workers because of less births in Great Depression of 1930’s. The 1950’s were a rare outlier event, which the country can’t return to. Many eras in U.S. history had long depressions where workers suffered terribly with no welfare

2017-01-10T23:33:02-08:00 March 9th, 2016|mayflowercapital blog|Comments Off on Election Year Drama: Are Things So Bad That Drastic Change Is Needed?

Flat Income Tax With a VAT tax: The Effect On Economy

One candidate for president offers a new type of tax called a Value Added Tax. It is like a sales tax paid by businesses and embedded in the price of goods so that it may be invisible to consumers. A primer on it is here. If income taxes were cut as part of deal to allow the VAT tax what are the economic implications? Increasing sales taxes, especially if structured as a hidden tax, makes consumption less appealing and thus demand for consumer goods could be dampened. On the other hand, a VAT might allow for the equivalent of immediate expensing of a businesses’ acquisition cost of capital equipment, instead of allowing the company to write off depreciation over a

2017-01-10T23:33:02-08:00 March 8th, 2016|mayflowercapital blog|Comments Off on Flat Income Tax With a VAT tax: The Effect On Economy

Inflation’s Hurdles Prevent Its Return

Recently there have been news reports of rising wages rising 1% faster than the CPI. Fed Vice-Chair Fischer was commenting about the risk of rising inflation. The labor force participation rate and unemployment are difficult to understand. If understood it could be the key to deciding if inflation was about to return. The workforce has three socioeconomic classes: One is composed of highly skilled, well paid professionals. Employers simply can’t find enough of them. This is partly because in a new era of rapid tech change these people are urgently needed. However, it is also because these people are often in two–income couples with identical careers. This puts them in a high tax bracket. In California and New York the

2016-03-07T13:27:07-08:00 March 7th, 2016|mayflowercapital blog|Comments Off on Inflation’s Hurdles Prevent Its Return

Improving Employment: Will Inflation Explode and Destroy Bonds?

The monthly employment report released today with the official U-3 unemployment rate of 4.9%. I prefer to use the U-6 rate of 9.7%, which is still about 2.3% higher than the average of two economic tops of 2000 and 2007. Assuming today’s increase of 242,000 jobs less 100,000 of monthly population growth continues for a year then that would reduce unemployment by 1.2% in a year. It will take two more years to reach full employment measured by U-6. The problem with employment is that if someone loses a good job and returns to the labor force with a lesser paying new job the unemployment statistics don’t adjust for lower quality of employment. If a person has a weak, shaky

2017-01-10T23:33:02-08:00 March 4th, 2016|mayflowercapital blog|Comments Off on Improving Employment: Will Inflation Explode and Destroy Bonds?