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Bank Repo Market Distress Not A Concern

     The bank Repo (repurchase) market where banks use a Repo transaction to get cash from their inventory of Treasury bonds has created some distress in the banking system resulting in the Federal Reserve offering to buy $60Billion a month to add liquidity to the system. Some bearish commentators have implied that this is a tip off of an impending financial crisis. I disagree. The problem is merely a minor technical difficulty in implementing new Dodd Frank regulations. Any time someone writes up a new regulation or even a voluntary safety procedure there is the possibility of unforeseen technical difficulties occurring which necessitate a fine tuning to handle the contradictory goal of making the new seat belt fit comfortably yet

2019-10-11T17:32:56-07:00October 11th, 2019|mayflowercapital blog|0 Comments

No Inflation in the Employment Report

     The BLS Payroll Report was issued today showing 136,000 new jobs. Of this perhaps 100,000 are needed for population increase, thus the real net gain was about 36,000 which is almost nothing out of a work force (total seeking or holding jobs) of 160 million. Job growth is not occurring in prime aged males, thus risk that growth is in low paid jobs held by other groups; growth of low wage jobs not inflationary at this point because these job increases mostly went to high school drop outs. The least skilled sector of society have many problems like no reserves, no 24 month job history, bad credit, etc. so they can’t qualify for an A paper loan that increases

2019-10-04T08:57:06-07:00October 4th, 2019|mayflowercapital blog|0 Comments

Using Bonds, and Gold To Short-Sell Stocks

When stocks crash, bond yields may go down, thus increasing bond prices. If yields are very low then investors may feel they have nothing to lose by owning gold, which has no yield, thus in a stock crash both gold prices and bond prices may rise together. If someone is bearish about stocks then one may decide to buy gold and bonds so as to benefit from a stock crash. It is far less risky to own unlevered gold and bonds than short-selling stocks and there are minimal carrying charges for gold and none for bonds. However sometimes bond investors are early to the party in terms of wanting to be bearish about stocks. The bond market tends to anticipate

2019-10-01T17:35:03-07:00October 1st, 2019|mayflowercapital blog|Comments Off on Using Bonds, and Gold To Short-Sell Stocks

Did Bankers Cause the Repo Crisis to Get Rich?

   The recent crisis in the Repo market last week may have been because the banking industry had gotten used to having only one or two of the big six banks provide last minute loans (Repo transactions) to their peer group and then suddenly these one or two banks simply weren’t available because they found other interesting things to invest in. Perhaps the banks decided it was worth it to temporarily pay an exorbitant interest rate to buy a two year Treasury Note yielding about 1.7%. The reason: if yields drop to zero then the banks borrow for free while earning a 1.7% yield (actually the yield about 10% more, about 1.9%, since it's free of state income tax) from

2019-09-23T19:04:52-07:00September 23rd, 2019|mayflowercapital blog|Comments Off on Did Bankers Cause the Repo Crisis to Get Rich?

“Repurchase” Market Crisis

         This week from Monday, Sept. 16 to Wednesday the 18th the banking system had a bank and bond market “repurchase” (repo) market crisis. The repurchase market (repo) is where a bond dealer buys a Treasury bond and then finances the purchase by selling it and agreeing to immediately repurchase it (allowing the dealer to get cash), somewhat like a loan. Normally the interest rate for these is about the same as the Fed funds rate, about 2%, but on Monday it spiked to 9.5%. The problem was caused by unwisely written overly strict rules such as the Liquidity Coverage Ratio which is a stress test based on extreme hypothetical conditions like the crash of 2008. Even though there has

2019-09-20T16:45:37-07:00September 20th, 2019|mayflowercapital blog|Comments Off on “Repurchase” Market Crisis

Debt Jubilee Led by Central Banks

   Perhaps central banks will decide to simply print up money and donate to those who have too much debt, which is a debt jubilee. This would be a way to stimulate the economy without hurting savers with negative interest rates. Unlike Fed rate cutting that lacks believability and effectiveness, this would be highly credible as consumers could feel the benefits and get emotional about it, thus stimulating demand. To make this work it would have to be similar to the tax code where those who are neediest get the best outcome. If someone is truly wealthy they shouldn’t get to benefit from debt forgiveness.    If done in a harsh recession it might not cause that much new inflation,

2019-08-27T10:51:38-07:00September 10th, 2019|mayflowercapital blog|Comments Off on Debt Jubilee Led by Central Banks

Negative Rates and the End of Central Banking

   Negative interest rates will act as a deflationary force that will reduce consumption and reduce investment in productive capital assets, as well as reducing consumer confidence. It will act to weaken the confidence of stock market investors thus resulting in a sell off of stocks. The central banks gambled and lost regarding their policy of negative rates. Their credibility has been diminished. Once people realize that central banks and their rate cuts can’t stimulate the economy then investors will stop believing in the myth of the central bank put option. This will exacerbate the stock sell off. The U.S. central bank bailouts and stimulus of 1998, 2003, and especially 2008 acted to create Moral Hazard (where the availability of

2019-08-27T10:23:24-07:00September 5th, 2019|mayflowercapital blog|Comments Off on Negative Rates and the End of Central Banking

Negative Rates Explained

      Interest rates are very low or negative because of a need for investors to find risk-free sovereign bonds. During the 19th century there were many years of crashes when the only safe store of value, besides gold, was Treasury bonds; at times the real yield was near zero. The nominal yield was also quite low. Investors who buy bonds may engage in competition with other investors, thus forcing the price up, which makes the yield go down. It is like real estate investors: if too many buyers compete to buy a rental property to get yield from a property then prices will go higher and yields as a percent of the property will go lower.    Since

2019-08-21T17:45:12-07:00August 21st, 2019|mayflowercapital blog|Comments Off on Negative Rates Explained

Negative Interest Rates May Intensify

   Recently there has been an increase in news stories about the increasing amount of negative interest rate debt. I had hoped that the problem of negative interest rates would somehow go away as people realized they don’t provide a solution. Instead, the negative loans and bonds are increasing.    To understand negative rates imagine yourself with all your assets in the form of gold coins while living in a medieval city-state in Italy in the year 1500. To secure you gold you would have to deposit the funds with a goldsmith who had a safe.  They would charge you a fee since they are merely providing a storage service. If the town was undergoing a siege by powerful adversaries

2019-08-12T18:24:42-07:00August 12th, 2019|mayflowercapital blog|Comments Off on Negative Interest Rates May Intensify

Investing in Gold: The Paradigms Have Changed

    Traditionally gold has tracked the inflation rate, in a hugely lumpy manner, until the great stock crash of 2008. Based on its historical behavior of correlating with inflation it should only be about $800 or $1,000 an ounce; instead it trades at $1,513. The theoretical reason for the 50% premium over hypothetical intrinsic value is that this is like a call option on the future: what if future inflation is much worse, thus justifying a high price for gold today?     The reason to stop using the old paradigm that gold simply tracks the CPI inflation index and instead start viewing gold differently, is that CPI or PCE inflation indexes are something based on lifestyles of the masses; by

2019-08-07T16:39:27-07:00August 7th, 2019|mayflowercapital blog|Comments Off on Investing in Gold: The Paradigms Have Changed