Monthly Archives: September 2016

Housing Inflation: Is it Accurate?

The CPI has 33% of consumer costs allocated for housing. Of this only a third is for actual renters paying actual rent, the rest is a hypothetical rent that the homeowner is deemed to pay to himself and is based on his ego-fueled guess about how much his house could rent out for. No one verifies if the homeowner is bragging so he can boast to the survey taker how great he is because he lives rent free in a home that “should” rent for a huge sum. If the real world status of such a person was properly recorded in the CPI then there would be no rent increase for someone with a fixed mortgage. Since home ownership is

2017-01-10T23:32:52-08:00September 30th, 2016|mayflowercapital blog|Comments Off on Housing Inflation: Is it Accurate?

Tax Cuts Can Stimulate The Economy

Supply side trickle down economics does work. Some people criticize it but it works. During the era of ultra-high interest rates imposed the Federal Reserve in 1979-1986 tax cuts helped to offset the deflationary aspects of high interest rates. The 1986 tax law outlawed many tax shelters and tax rates were cut. The result was that tax revenues as a percent of GDP remained about the same. Basically the tax cuts were financed by closing loopholes. Thus the “huge tax cuts” of 1986 were a myth. This law and additional changes in 1988 closed tax loopholes for real estate that resulted in real estate investors losing money so that real estate crashed and the Savings & Loan industry crashed. This

2017-01-10T23:32:52-08:00September 29th, 2016|mayflowercapital blog|Comments Off on Tax Cuts Can Stimulate The Economy

Will Saudi Sale of U.S. Bonds Hurt The U.S.?

Congress has passed a bill into law that would allow the families of 9-11 victims to sue Saudi Arabia for the 9-11-2001 attacks. The Saudis threatened to sell their holdings of U.S. Treasury bonds. The effect on the global markets will be minimal. Once the bonds have been sold then The Saudis will probably replace the sold items by buying an asset class that is very similar and thus the total impact on global investment grade bonds will be minimal. Liquid assets such as G7 Sovereign debt tend to be fungible commodities so while one party is busy selling U.S. Treasuries and buying UK Gilts another party is buying U.S. bonds until an arbitrager notices a slight imbalance and reallocates

2016-09-28T15:17:47-07:00September 28th, 2016|mayflowercapital blog|Comments Off on Will Saudi Sale of U.S. Bonds Hurt The U.S.?

Political Developments Won’t Prevent Crash

Yesterday’s presidential debate, in my opinion, showed that Clinton is likely to win the election and thus the financial markets will be spared from disruptive radical change caused by anti-globalization. However, regardless of who wins, I expect disruption in the form of the authorities moving towards more fiscal policy and less use of central bank monetary policy. I recall experts saying the reason a candidate was able to pull off a surprise victory was because some voters had a hidden need for security, safety, stability, etc. If so, then the establishment candidate Clinton would seem to be the choice of voters rather than her opponent. I recall political experts saying that single-issue candidates usually do poorly. The Republican candidate is

2017-01-10T23:32:52-08:00September 27th, 2016|mayflowercapital blog|Comments Off on Political Developments Won’t Prevent Crash

Understanding The True Meaning of Bonds And Cash

Cash and investment grade bonds with modest duration are a form of self-insurance against risk of a crash in risk-on assets. They are like the ballast in a ship that seems to waste space, weight, and money with no visible benefit, yet it is needed. An analogy could that in examining an insurance company the central asset they own to be used to pay for claims are investment grade bonds and cash. If investors want to act like their own insurance company they will have to load up on these assets. The way to understand the true meaning of cash is to see it as a tool to get a job done. The job is to rescue someone from a

2017-01-10T23:32:52-08:00September 23rd, 2016|mayflowercapital blog|Comments Off on Understanding The True Meaning of Bonds And Cash

Japan’s Failure To Cure Deflation: Should You Buy Yen?

The Yen is now about 100 to the dollar. Yesterday the central bank of Japan announced new policies and the market’s reaction was to make the Yen go up. Usually when a central bank is trying to stimulate the economy that creates cheap and easy money conditions. These actions should cause foreigners to flee because they would then fear devaluation and inflation. This should have made the Yen go down. It rose from a May, 2015 price of 125 to the dollar despite Japan’s central bank trying massive Quantitative Easing and negative rates to devalue the currency. Many other nations worried the attempted devaluation would be in violation of agreements to avoid big devaluations. Thus it is quite a surprise

2017-01-10T23:32:52-08:00September 22nd, 2016|mayflowercapital blog|Comments Off on Japan’s Failure To Cure Deflation: Should You Buy Yen?

Fed’s Declining Gravitas Implies Their Put Option Has Expired

The Federal Reserve had a meeting today and decided not to raise the rate. They raised the rate December, 2015 when the 2 year Treasury Note was 1% and haven’t raised it since then. Now the 2 year T-Note is 0.78%. So the free market is saying rates needed to come down 0.22% since the December rate rise! This is amazing because short term Libor went up a lot this year in reaction to a tightening of bank regulations that raised the cost of capital for banks and money market funds. Even with rising Libor, the 2 year T-Note yield dropped! On December 16, 2015 the ten year-T was 2.3%, now today it came down and is at 1.66%. Japan’s

2016-09-21T13:27:19-07:00September 21st, 2016|mayflowercapital blog|Comments Off on Fed’s Declining Gravitas Implies Their Put Option Has Expired

Central Banks Unable To Prevent Stock Crash

Tonight the central bank of Japan will release a plan about its monetary policy. The risk is they may shake up the fragile global bond markets with a surprise. The real surprise could come from the U.S. Federal Reserve, probably not at tomorrow’s meeting, but at the December meeting after the election. Many economists believe that the Fed should raise rates gradually until short term rates are 1.5% instead of 0.45% and long term rates are about 2.5% for the ten year Treasury instead of 1.68%. Since much of the world wants more stimulation through lower rates and lower currency values in their countries then when our central bank raises rates that will make the dollar go up in value

2016-09-20T11:24:05-07:00September 20th, 2016|mayflowercapital blog|Comments Off on Central Banks Unable To Prevent Stock Crash

Real Rates Negative For 26 Years

The cliché “There’s never been negative rates in 5,000 years” is wrong. The act of making a deposit in a bank only to see an uninsured bank fail and experience a huge loss of your account is like a form of negative total return for a bank account, which is like a negative rate of yield. This happened many times for 150 years before the 1934 FDIC legislation. When there were no banks people incurred many costs, including theft, to store their gold, so that was a form of negative “interest” on money. I saw an offer from a Custodian to hold physical gold for clients but at cost of 0.75% a year, so if one views gold as money

2017-01-10T23:32:52-08:00September 19th, 2016|mayflowercapital blog|Comments Off on Real Rates Negative For 26 Years

CPI Way Up: Are Bonds Doomed?

The CPI data was released today showing a 3% annualized rate for the core rate for the last month only. It showed a 1.1% annual YoY increase for the overall non-Core rate. The rent component went up 3.3% YoY. Since rents are a third of the index, then subtracting rent would mean a zero percent CPI YoY. Measuring rents fairly is a problem because 66% of consumers own homes, many with fixed costs, or no mortgage. Their housing costs are assuming to hypothetically go up along with rent increases for tenants, however, this is fiction for those who have bought in previous years. There is a growing surplus of new construction of apartments that will become available next year (nationally,

2017-01-10T23:32:53-08:00September 16th, 2016|mayflowercapital blog|Comments Off on CPI Way Up: Are Bonds Doomed?