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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|0 Comments

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|0 Comments

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

Will The U.S. Become a Bankrupt Banana Republic?

   Looking 30 years ahead the growing federal deficit as forecast by a Congressional agency implies the U.S. will become a Banana republic with high interest rates and an unaffordable gigantic budget deficit. Since people may become alert to this and take steps ahead of time to overcome the problem then I expect the following things to occur: * Defense spending greatly reduced, resulting in less global stability and greater flight capital into the US and similar countries. The increased flight capital puts downward pressure on interest rates. * Social Security starting age raised to 72, forcing more workers to delay their retirement, creating a surplus of job seekers, which is deflationary. * Medicare and Medicaid spending reduced through new

2019-06-26T17:52:47-07:00June 26th, 2019|mayflowercapital blog|Comments Off on Will The U.S. Become a Bankrupt Banana Republic?

Complex Theories May Confuse You About The Stock Market’s Hidden Risk

    In the 1997-2007 mortgage housing bubble the enablers of the bubble tried to rationalize using the Gaussian Copula theory that a Mortgage Backed Security holding mortgages from different states would act diversify the risk of a default. But that rationale was wrong because it was assumed that the successful borrowers would offset the damage caused by the losers. Instead the winners, who are borrowers, are not obligated to bail out the loser or to pay extra to the lender to make up for the loss caused by the defaulting borrower, so the “diversification” was bogus. A similar phenomenon is happening where financial experts assume the central banks can bail out the economy by cutting rates deeply. The problem is

2019-06-19T17:06:19-07:00June 19th, 2019|mayflowercapital blog|Comments Off on Complex Theories May Confuse You About The Stock Market’s Hidden Risk

Negativity About the U.S. Dollar Is Wrong

    It seems a many financial advisors and financial commentators are making an increasing amount of negative comments about the U.S. dollar and U.S. Treasuries. I disagree with them. I remember the 1970’s when there were many scary headlines about the end of Bretton Woods monetary agreement, Watergate, Nixon’s resignation, the U.S. defeat in Vietnam, the two OPEC oil shortages of 1973 and 1979 that severely damaged the economy, and the US embassy hostage situation in 1979 in Iran, etc. The dollar went down in value and the economy performed poorly while inflation increased dramatically in the 1970’s. Gold went up from $43 in August, 1971 to a peak of $880 in January, 1980. The inflation-adjusted price return of the

2019-06-14T17:25:55-07:00June 14th, 2019|mayflowercapital blog|Comments Off on Negativity About the U.S. Dollar Is Wrong