Monthly Archives: October 2017

Bond Yields Drop Despite Robust GDP and Rising Stocks

10 year Treasury Bond yields dropped more than usual, some 4.5 basis points today, even though the news that GDP for the 3rd quarter was 3% (released today), instead of the typical 2.3%. Traditionally the ten year might yield the sum of GDP growth and inflation, implying it should yield over 4%. Why did the yield actually go down today? Why is the yield at roughly half of what the traditional metric implies it should be?      I think people are deeply prejudiced to assume that past cyclical patterns will repeat and people are not open minded to looking creatively at new conditions. The era of 1945 post-war until the great crash of 2008 it was customary for nominal GDP

2017-10-27T13:48:10-07:00October 27th, 2017|mayflowercapital blog|Comments Off on Bond Yields Drop Despite Robust GDP and Rising Stocks

Reducing 401k Limits: Tax Planning For Investors

  What would happen if Congress cut annual 401k contributions from $24,000 (for those over age 50, or $18,000 under age 50) to $2,400? This would mainly affect affluent upper-middle class people, since moderate income people can’t afford to save that much. However, if people responded to this by increasing their savings in a taxable account then future capital gains would be taxed at the lower capital gains rate or even result in no tax if the taxpayer died before selling an asset. Also, the benefits of using a taxable account instead of a retirement account is that one could invest in tax exempt Muni bonds or buy rental real estate and get depreciation deductions and tax-deferred “1031” rollovers of

2017-10-26T12:58:31-07:00October 26th, 2017|mayflowercapital blog|Comments Off on Reducing 401k Limits: Tax Planning For Investors

Stop Worrying: Yields Aren’t Going Up

    Yesterday the “Bond King” Jeff Gundlach said the bond bull market is over since the ten year Note hit 2.4%. He’s has been concerned that rates will rise a lot. I disagree. I strongly believe in fundamentals rather than technicals. So what if a data point broke thru a line on a chart? The fundamentals for bonds are ultimately governed by unemployment. But unemployment data is misleading and unclear since people with fake jobs like independent contractors, temps, rookie Realtors with no customers, Uber drivers, waiters with a tipable job with a $2.50 an hour minimum wage are distorting labor market data. First these people lost a good traditional job, then they remained unemployed several years, and finally re-enter

2017-10-25T19:20:29-07:00October 25th, 2017|mayflowercapital blog|Comments Off on Stop Worrying: Yields Aren’t Going Up

Sociological Explanation for Rising Markets?

        The huge increase in PE ratios (double what is reasonable and traditional) along with the huge increase in debt to GDP ratio (also doubled) over the past 20 years requires an explanation. Of course, central bank policies encouraging growth of the money supply (part of which is connected to declining interest rates) were the main reason. Another reason may be a sociological one that in the past several decades there has been a tendency for high earning, degreed, credentialed professionals to get married to each other, whereas many decades ago there was a greater degree of married couples in a situation, where the spouse, usually the wife, had a non-professional, moderate income career. The benefit of

2017-10-24T09:58:35-07:00October 24th, 2017|mayflowercapital blog|Comments Off on Sociological Explanation for Rising Markets?

Tax Cut To Increase Inflation And Hurt Bonds?

  Interest rates rose because of news reports that Congress might finally be able to pass tax cut legislation. The 10 year Treasury Note, now at 2.38%, has the highest yield since March 20, 2017. Fundamentally Congress is unlikely to pass a true net tax cut because the deficit is so huge and growing. Thus the “cut” will simply move money around from one taxpayer to another. For example, they could offer a cut but then raise “effective” taxes by reducing the annual contribution to a 401k from $18,000 to $2,400, thus costing some people about $5,000 in extra federal taxes and more in state taxes, since states usually conform to federal tax rules.  Congress could cut taxes on high

2017-10-20T14:05:18-07:00October 20th, 2017|mayflowercapital blog|Comments Off on Tax Cut To Increase Inflation And Hurt Bonds?

Thaler Wins Nobel Prize For Behavioral Economics

   Richard Thaler won the Nobel prize for work on Behavioral Economics. In my years of experience working with consumer/investors in finance I have been shocked how many well educated consumers made irrational financial decisions because of the gravitational tug of emotions, including peer pressure. I am shocked at how society tolerates huge, irrational, unjustified stock market bubbles. The establishment viewpoint about finance, the Efficient Market Hypothesis (EMH), assumes stocks are always fairly priced because everyone is presumed to be rational and diligent in investing. In reality many investors don’t study the market and instead allow peer pressure to push them into poorly thought through investment themes. If the EMH was correct then there never would have been a huge

2017-10-10T13:56:34-07:00October 10th, 2017|mayflowercapital blog|Comments Off on Thaler Wins Nobel Prize For Behavioral Economics

Counterintuitive Economic Activities May Hurt Stocks, Help Bonds

The economic research firm ECRI wrote an article showing that wage growth can increase when the number of hours worked decreases. For example, when it is layoff time the boss lays off the weakest, lowest paid workers, because he prefers to keep the strongest, best qualified ones. This is called labor hoarding, which is useful for the company in case it suddenly becomes time to expand. Thus the weakening of the economy that leads to less hours worked actually raises average wages, creating a hugely misleading signal. When a worker who has suffered a devastating decline in employment opportunities seeks to reenter the labor force they will need to take whatever minimum wage job they can find instead of holding

2017-10-09T12:07:46-07:00October 9th, 2017|mayflowercapital blog|Comments Off on Counterintuitive Economic Activities May Hurt Stocks, Help Bonds

Avoid Overpriced Stocks Even If Bond Yields Are Low

One of the most important things to do to make a good return in investing is to avoid overpaying for assets. Thus during a bubble top it is important to avoid overpriced assets. During the crash of 1929 it took 20 years for stock market, based on price return, not total return, to breakeven, but on an inflation adjusted basis it took 30 years for price return to breakeven. Since taxes are not adjusted for inflation’s effect on the basis (acquisition cost) of an asset then additional appreciation would be needed to offset the effect of both taxes (including the phantom income created by inflation) and inflation. That might require waiting until 37 years after 1929 until 1966 when the

2017-10-05T13:34:59-07:00October 5th, 2017|mayflowercapital blog|Comments Off on Avoid Overpriced Stocks Even If Bond Yields Are Low