Monthly Archives: July 2019

Fed Rate Cut: An Unhelpful Placebo

        Today the Federal Reserve cut the rate by 0.25%, the first cut in 11 years. They did this a half year after they raised rates when they said there was a need for more tightening. Rate cuts are not that useful and lack substantial impact on the economy. Most borrowing is done with short term or intermediate term debt which may be fully amortized over a few years, thus the principal payments as a percentage of the total payment are quite high, so a tiny 0.25% cut in the rate (tax-deductible for business and many homeowners) is a very tiny portion of the total payment. If a business manager is worried there will be no demand for a new

2019-08-04T15:15:50-07:00July 31st, 2019|mayflowercapital blog|Comments Off on Fed Rate Cut: An Unhelpful Placebo

The Federal Reserve Could Make The Economy Worse

Some Federal Reserve governors want to make the economy run “hot” by rapidly increasing the money supply to cause inflation. They mistakenly believe that higher inflation will force consumers to overconsume and that will trigger economic growth. This is wrong because consumers and business managers won’t be fooled by inflation and will not sustainably increase spending and investing. As the Fed increases its degree of interference with and disruption of the economy then business managers will have to adjust for this which will include assigning a higher risk premium (a hurdle rate used to decide if a project is going to be successful) to business activities. When that happens the cost of capital will be higher that it otherwise would

2019-07-26T15:23:31-07:00July 26th, 2019|mayflowercapital blog|Comments Off on The Federal Reserve Could Make The Economy Worse

Should the Fed Take Out an Insurance Policy?

    The cliché now being used that the Federal Reserve ought to “cut interest rates in take out an insurance policy to prevent a recession” is wrong. By cutting rates with an eventual move to either zero real rates or even zero nominal rates, this causes problems for both retirees, and future retirees who are saving for retirement. It causes problems for banks, insurance companies, and pension funds. At some point if rates are too low for too long then retirees will respond by cutting their standard of living, reducing consumption and this will negate the stimulus from cutting borrower’s rates. Negative or zero rates will ruin banks and insurance companies, leading to a wave of banking failures and then

2019-07-17T16:41:42-07:00July 17th, 2019|mayflowercapital blog|Comments Off on Should the Fed Take Out an Insurance Policy?

Will Bonds Perform the Same as in the 1970’s Inflation Era?

   During the 1970’s there was a significant increase in inflation in the US and the UK which made interest rates rise, thus damaging long term bonds. Gold’s price rose during the 1970’s and was the best asset during that era. Stocks spent the inflationary era of 1966 to 1982 going down 50% and then their prices returned to their starting points after a 16 year bear market, so on a nominal price return basis investors made no gains, however they did get dividends. Could this time be different where yields are repressed by central banks and not allowed to rise in tandem with inflation? There was a precedent for that in the UK in the 1970’s the real rate

2019-07-12T16:11:06-07:00July 12th, 2019|mayflowercapital blog|Comments Off on Will Bonds Perform the Same as in the 1970’s Inflation Era?

Surprise Jobs Increase is Misleading

   The headline new employment rose 224,000 last month, far in excess of the 171,000 three month average. The global economy is reducing its economic activity, so the increase in domestic jobs looks suspicious. Half the jobs gain came from the hypothetical birth-death model. Employment growth in five months from actual data from companies (not from the birth-death model) has been zero. Multiple job holders increased 301,000, if not for them, the jobs number would have been negative. Almost 60% of Household survey employment growth was from self-employed people. So these could be starving rookie independent contractor sales reps, not people with real jobs. The age 25-55 prime aged sector only increased by 29,000 last month and for the past

2019-07-05T17:45:04-07:00July 5th, 2019|mayflowercapital blog|Comments Off on Surprise Jobs Increase is Misleading