Monthly Archives: April 2016

Is Inflation Returning?

The most recent quarterly annualized core PCI increase was 2.1%, a 0.5% increase. Rent and medical care were the main reason for the increase. This is because as people recover from the recession they may seek to move to a better residence. If a consumer lost his home to foreclosure he may have responded to that by renting a very unattractive rental home to save money and as his confidence improved he then rented a better property. The BLS survey of rent is supposed to adjust for quality to avoid erroneous calculation of inflation but it may be hard to pin down an improvement in quality in some cases if the new apartment was the same size as the old

2016-04-29T13:07:52-07:00April 29th, 2016|mayflowercapital blog|Comments Off on Is Inflation Returning?

Central Banks Running Out of Tools: Stocks To Crash

Today Japan’s central bank refused to issue “helicopter money” saying it was unconstitutional. They refused to do anything today saying they needed time to study it. The Nikkei stock index fell 3.6% today (it was down 5% at the low of the day) when the news was announced. The Yen went up 3% which is bad for Japan’s exports. The worse their economy gets the stronger their currency becomes since it appears to somehow magically resist inflation, so foreigners want to hold the Yen. The central bank had recently experimented with negative interest rates but they are not producing results. Global central banks are finding that the zero bound problem is a real barrier to further rate cuts. It is

2016-04-28T14:02:17-07:00April 28th, 2016|mayflowercapital blog|Comments Off on Central Banks Running Out of Tools: Stocks To Crash

Investors Must Adjust To “New Normal” Paradigms

A chart of 53 years of new home sales activity shows the figure since the 2008 crash is at a record low. The chart shows a range of 0.28% to 0.53% of the population bought new homes from 1963-2008 except for a few outliers. Since 2009 it has struggled to climb from 0.125% to 0.2%. At present the ratio is about half of the long term median. Many bullish advisors claim that because home buying is lower than average then it will mean revert upward to the average, producing a massive boom. Another way of looking at this is that entry level consumers (young college grads) can’t buy a home because they can’t get the down payment, they can’t qualify

2017-01-10T23:33:01-08:00April 27th, 2016|mayflowercapital blog|Comments Off on Investors Must Adjust To “New Normal” Paradigms

QE and ZIRP Don’t Create a Wealth Effect

Central bank Quantitative Easing bubble making doesn’t really promote a wealth effect that stimulates consumption because the beneficiaries doubt the soundness of the stock rally caused by QE and thus refuse to spend their newly acquired wealth. Investors seem to be more alert to the possibility that stock market values are unreliable and thus they won’t allow rising stock prices to encourage excessive consumption. Stocks, except for the nine FANGS stocks, have been flat and in the case of the NY Composite stocks topped out on July 3, 2014 (on an inflation-adjusted basis) and are now down 5%. A consumer / investor who “benefits” from a rising stock market would say if he lost 5% over two years, excluding dividends,

2017-01-10T23:33:01-08:00April 26th, 2016|mayflowercapital blog|Comments Off on QE and ZIRP Don’t Create a Wealth Effect

Will Gold Go Much Higher?

Based on logic, extrapolating for its correlation with inflation, the intrinsic value of gold may be roughly $700 to $800 or perhaps as high as $1,000. It recently has traded in the $1,078 to $1,280 range. Those observations are based on data before the recent unprecedented extremes of global Quantitative Easing and negative interest rates. Using logic one might project that QE is harmless, even deflationary so those extra dollars created by QE won’t be used to chase after gold and thus gold will slowly drift down to the $700 target. A new way of thinking is that behavioral economics should also be considered in addition to extrapolating from CPI’s long term relationship with gold. If central banks throughout the

2016-04-25T16:47:36-07:00April 25th, 2016|mayflowercapital blog|Comments Off on Will Gold Go Much Higher?

How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

Puerto Rico will default on a large bond payment due May 2. How will the markets react? The hedge fund industry owns a very large portion of Puerto Rico’s bonds, doesn’t want a default, and is hoping that somehow the commonwealth can simply borrow more to have the cash to make scheduled payments. That is irrational since there is no way the island can afford its existing debts. Congress is working on passing a bill that would allow the commonwealth to use the bankruptcy courts to cut the debt balance. This is the humane thing to do and is the island’s only hope. Voluntary negotiations with creditors to ask for a cut in debt balances won’t work since some creditors

2016-04-22T14:39:43-07:00April 22nd, 2016|mayflowercapital blog|Comments Off on How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

Placebo Effect Fools Investors Making Stocks Rally

A curious phenomenon exists where an asset, when its value has been damaged, actually increases in value.  For example a corporate bond, upon being downgraded, can then be bought back at a discount (or even marked up in accounting records as a defeasance of the debt without buying it) by the issuer thus saving money and thus creating profit as a result of their own misfortune. A similar phenomenon occurred when governments increased their debts during the 2008 GFC crash. One might think if the government’s economic health was weakened by additional debt that the value of the debt would go down because of a ratings downgrade. However, the phenomenon of “crowding-in”  where a bad economy motivated people to seek

2016-04-20T14:56:13-07:00April 20th, 2016|mayflowercapital blog|Comments Off on Placebo Effect Fools Investors Making Stocks Rally

Stocks Up Near All Time Highs: Should Bears Quit?

Stocks are near all-time highs with the SP at nearly 2,100, only 1.5% below the all-time high of last year. Is this the start of a new upward leg of a bubble that will get bigger? The fundamentals (things like corporate earnings, PE ratios, stock price to GDP, etc.) don’t support current price levels and indicate prices need to go down.  Professional investors worry that they relied on fundamentals in the past to forecast lower stock prices only to see the bubble get even bigger, so now they worry this will happen again. The reason stocks went up so much since 2013 was due to irrational reasons for the rise in PE ratios, called “multiple expansion”, and it was also

2016-04-19T14:24:31-07:00April 19th, 2016|mayflowercapital blog|Comments Off on Stocks Up Near All Time Highs: Should Bears Quit?

Will Saudi Arabia Sell Off U.S. Treasuries and Create a Crash?

The Saudi government is threatening to sell off their holding of $750Billion of U.S. Treasuries if Congress passes a bill regarding sensitive matters about the 9-11 incident. How would this affect the markets? A massive sale would depress bond prices, making rates go up. This would make the dollar go up in value since higher yields would create an inflow of foreign investors. The Federal Reserve would probably be the buyer of the Treasuries to offset the effect of the sale. Then if the Fed acts there will be no effect on the market except a new supply of freshly printed dollars will be in the market looking to invest in something. It may be after calming down and thinking

2017-01-10T23:33:01-08:00April 18th, 2016|mayflowercapital blog|Comments Off on Will Saudi Arabia Sell Off U.S. Treasuries and Create a Crash?

GDP Growth to Go Into Recession Mode

Economist Lakshman Achuthan of ECRI said at the Levy Institute Hyman Minksy seminar that productivity growth is only 0.4% and labor force growth 0.4% and the total equals a 0.8% GDP growth rate. Since 2008 GFC, the economy lost 1% annual contribution of capital intensity (investment) despite low interest rates, and the low Labor Force Participation Rate is not that important. Capital intensity has turned negative. Productivity growth is low because of companies refusing to do new capital investment. The resulting economic weakness makes it more feasible for companies to push vendors and employees to work harder for lower pay thus creating excessive corporate profits. But this is unsustainable since eventually underpaid workers will max out their ability to borrow

2016-04-15T15:51:14-07:00April 15th, 2016|mayflowercapital blog|Comments Off on GDP Growth to Go Into Recession Mode