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

2017-10-10T13:56:34-07:00 October 10th, 2017|mayflowercapital blog|0 Comments

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

2017-10-09T12:07:46-07:00 October 9th, 2017|mayflowercapital blog|0 Comments

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

2017-10-05T13:34:59-07:00 October 5th, 2017|mayflowercapital blog|0 Comments

Is the 4% Rule Still Useful?

  The financial planning profession believes that a retired person ought to limit their retirement spending to 4% a year of their portfolio, assuming a 30 year retirement (called the “Safe Withdrawal Rule” but there is no guarantee it will work since past performance of the market shouldn’t be used to rely on for the future). Now more articles are being written by financial journalists suggesting that we are in a new era of low interest rates and low stock market returns and thus the 4% figure should be cut down to 3% to avoid running out of money. The 4% figure was designed to survive a repeat of a 1930’s depression. The idea is when markets make high returns

2017-09-29T11:43:18-07:00 September 29th, 2017|mayflowercapital blog|Comments Off on Is the 4% Rule Still Useful?

Market Won’t Be Stimulated By Tax Cut

  The administration’s proposed new tax law may not actually end taxation of offshore subsidiaries, according to an article in the FT. In my opinion the items that are likeliest to have the biggest tax cuts and biggest source of stimulus are these items, and the possibility of a special low rate for pass through entities. However, these would be seen by moderates as unfair (especially a lower rate for elitist privately held pass-through entities) and not helpful in terms of a goal of not increasing the budget deficit. Thus these items may be unlikely to pass Congress, based on the administration’s difficulty getting other bills passed. If Congress truly ends taxation of U.S. based companies’ foreign earnings that may

2017-09-28T14:17:26-07:00 September 28th, 2017|mayflowercapital blog|Comments Off on Market Won’t Be Stimulated By Tax Cut

Bonds To Be Damaged by New Tax Law?

    The administration proposed new tax laws today, which may increase deficit spending, thus leading to inflation and higher interest rates. The ten year Treasury bond yield went up 8 basis points from 2.23% to 2.31%, making the bond’s price drop 0.7%. The increased debt would mean 8% higher U.S. Treasury debt balances over ten years or an increase of 0.7% in debt balances a year, which is less than inflation. Thus in real terms the debt balances won’t increase.         There is only a modest chance that Congress will make any big changes to tax laws. If the law is passed it will not threaten tax-free Municipal bonds, but will end the deduction of state income tax from

2017-09-27T13:57:37-07:00 September 27th, 2017|mayflowercapital blog|Comments Off on Bonds To Be Damaged by New Tax Law?

Fed’s Inflation Predictions Failed: Why?

   Janet Yellen wonders why inflation remains low and why traditional metrics no longer work to predict inflation. I believe this is explained by structural changes over three eras since the 1929 crash. The first era was during the depression of 1930s and continued through to the great inflation era of the 1970’s business managers were very cautious not to over-expand their businesses and thus there was a tight correlation between wage inflation, and economic growth, etc. The second era was when people got used to the 1970’s inflation they forgot some of the lessons of the Great Depression and began to take on more risk. But even then, they still made reasonable decisions not to unduly over-expand their businesses.

2017-09-26T16:04:59-07:00 September 26th, 2017|mayflowercapital blog|Comments Off on Fed’s Inflation Predictions Failed: Why?

Congress Unlikely To Create Tax Cut Stimulus Thus Increasing Risks of a Crash

Getting tax cuts, which will then result in stimulation of the economy, is unlikely to happen. The Republicans, over decades, have been eager to offer increased spending programs to compete with Democrats for votes. The total uncontrollable, mandatory spending on social welfare programs is so deeply entrenched and growing that there is no room to cut taxes. The source of huge future deficits will be from the government’s cost of health care programs and this can’t be changed due to demographic patterns. With the 60 vote Senate filibuster limit it takes a considerable consensus to make major changes, one that is unlikely to be achieved in an era where the president was elected by the Electoral College despite getting 3

2017-09-21T14:51:29-07:00 September 21st, 2017|mayflowercapital blog|Comments Off on Congress Unlikely To Create Tax Cut Stimulus Thus Increasing Risks of a Crash

Fed’s Quantitative Tightening Effect On Bond Investing

   The Federal Reserve today announced it would slowly sell off its holdings of bonds over many years. Selling bonds raises interest rates. Does this mean the Fed will accidentally start a significant movement towards much higher rates? I doubt it. The Fed is extremely sensitive to that risk and will let their fear of accidentally triggering recession act to inhibit them from selling too many bonds too quickly. The movement of rates is what will control the quantity of sales of the Fed’s bond holdings. If rates explode upwards the Fed would immediately stop the asset sales. There is no need for them to sell their bond holdings, it simply is a matter of wanting to feel they are

2017-09-20T14:06:43-07:00 September 20th, 2017|mayflowercapital blog|Comments Off on Fed’s Quantitative Tightening Effect On Bond Investing

Covert Tightening of The Economy: Are We in a Hard Money Regime?

   Economists like to claim they spotted some accidental covert tightening of the economy, for example, letting the dollar increase in value makes it harder to export goods and thus creates a move towards recession-like conditions that result in a “hard money” environment where savers are protected while debtors have a more difficult time paying debts. My opinion about covert or indirect tightening is that the non-professional work force has been subject to increasing volatility in their income flow thus disqualifying them from borrowing. This reduction in the ability to borrow means these workers borrow less and the money supply is thus expanded by a lesser degree than was desired or anticipated. Thus disinflationary or even deflationary pressure is exerted

2017-09-19T12:14:45-07:00 September 19th, 2017|mayflowercapital blog|Comments Off on Covert Tightening of The Economy: Are We in a Hard Money Regime?