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Investors Mistakenly Place Faith In Government’s Ability to Fix a Crash

       The great crash of 2008 was mainly based on failed financial markets where banks owned bad mortgages that had been falsely rated as investment grade. The non-financial part of the economy was not that badly hurt by the crash.     Some bullish advisors have leapt to the conclusion that financial assets, which can be difficult to fairly value, somehow incorrectly dropped in value in 2008 because of some irrational, unfounded panic for no reason. The claim is that because no one knows the future in terms of whether or not a mortgage borrower will be able to pay his loan each year for 30 years then perhaps it is impossible to fairly value a loan so why

2019-04-17T18:41:19+00:00April 17th, 2019|mayflowercapital blog|0 Comments

Stocks Very High: When Will They Crash?

    Today the SP index of stocks closed at 2907, very close to the all-time high of 2940. It is tempting to wrongly leap to the conclusion that the ten year old economic cycle will never go into a recession and thus stock prices will grow infinitely upward. Junk bonds and similar junk quality loan assets continue to rise in price, implying the market thinks no crash is coming. As junk bond prices rise this makes their interest rate lower and thus attracts more borrowers, thus stimulating the economy. I have for a long time advocated that the tipping point in flipping over into a recession is the reduction of the availability of cheap, plentiful junk financing. If the supply

2019-04-12T16:44:34+00:00April 12th, 2019|mayflowercapital blog|0 Comments

What Happened to The Tax Cut Stimulus?

   The 2017 tax law cut taxes a lot for corporations, with only minor cosmetic changes for most individuals. Where did the stimulus go? The top 100 giant multinationals may not have benefited from the new law as they lost their ability to have tax-free offshore transactions and must now pay a minimum of 12.5% tax if the move the new income to the U.S. or 14.5% if they insist on keeping income offshore. Income earned before the new tax law was enacted must be repatriated and a smaller tax rate is used. Thus the tax break went to medium and small companies. The tax law restricts the benefit for self-employed professionals in personal service companies, so the law is

2019-04-03T18:23:33+00:00April 3rd, 2019|mayflowercapital blog|Comments Off on What Happened to The Tax Cut Stimulus?

Will 2020 Be The Year of Investing During Negative Interest Rates?

   Assuming the Fed is going into a major easing cycle and will come close to the rates in the EU and Japan then what should U.S. investors do? Increase bond portfolio duration but only with bonds that offer significant call protection and only with investment grade bonds. Avoid BBB rated corporate or BBB rated Muni bonds. If you own bonds subject to a call provision (mortgage backed bonds, typically) be sure not to own them if they trade over par as they may be called and paid off at par thus depriving you of the bond premium. Be careful not to have too much duration as no one knows what the future will be like; there is no guarantee

2019-03-25T17:19:06+00:00March 25th, 2019|mayflowercapital blog|Comments Off on Will 2020 Be The Year of Investing During Negative Interest Rates?

Dramatic Policy Shifts By The Fed

   The Federal Reserve’s recent dramatic shift from tightening to implied loosening is the fastest shift of Fed behavior in 50 years. Some people have leapt to the conclusion that Fed chief Powell simply caved into pressure from Trump, betraying good hard money policies, and changed to easing because of Trump. The real reason for the easing is because Fed employees have researched and realized that the Fed and other central banks made many mistakes, including being too optimistic about economic recovery since the crash of 2008, so they want to be truly prepared for the coming recession. It is highly likely that economic cycles can’t last more than ten years. The current cycle was modestly extended by Trump’s tax

2019-03-22T19:02:14+00:00March 22nd, 2019|mayflowercapital blog|Comments Off on Dramatic Policy Shifts By The Fed

Big Rate Cut By Marketplace Today Hints At Stock Crash To Come

   Today the Federal Reserve held a two-day meeting and released a statement. They didn’t change their rates but the marketplace changed the rates dramatically downward. The ten year Treasury bond yield dropped from 2.61% to 2.525%, a drop of 8.5 basis points, several times a typical day’s movement. The technical traders who follow chart patterns have felt the rate might never go below 2.62% and would instead go above 3% and stay above that, thus the decline significantly below 2.62% is a shocking technical indicator matter, implying the “Invisible Hand” of the market “knows” that a recession will soon come. The futures market estimates a 50% probability of an eventual Fed easing of the Fed’s official rate. The drop

2019-03-20T18:01:03+00:00March 20th, 2019|mayflowercapital blog|Comments Off on Big Rate Cut By Marketplace Today Hints At Stock Crash To Come

Debt Crisis: Will High Interest Rates Occur?

   Yesterday bond guru Jeff Gundlach gave a scary lecture, warning about the danger of rising federal deficits which in turn could trigger a decline in the value of the dollar and a significant rise in interest rates. I disagree. I lived through the scary inflationary 1970’s when some yields hit 21% in 1981 and inflation hit 14%. Many frightening things happened in the 1970’s where it was common for people to worry that we were doomed, but eventually inflation was brought under control and the economy grew out of its problems. First, the recent contribution to the rising deficit is the Trump tax cut signed on 12-22-2017. But this is a temporary law constrained by the ten year time

2019-03-13T14:24:55+00:00March 13th, 2019|mayflowercapital blog|Comments Off on Debt Crisis: Will High Interest Rates Occur?

Will Rising Federal Deficits Cause a Repeat of the 1970’s Big Inflation?

     The annual federal deficit budget is 5% of GDP, or 7% if count some one-time excluded items. The percentage has been growing. The government has relied upon foreign investors and central banks to buy U.S. Treasury’s. The Treasury Bills have been used as the world’s money, thus absorbing the funding needs of the U.S. If foreigners decide to stop this then the dollar would drop in value and the Federal Reserve would have to monetize the deficit, creating inflation. As long as the other major economies have so many significant contingent financial problems (the negative interest rates in the EU and Japan, the huge debts in China and Japan) then the world economy will continue operating the same way.

2019-03-08T15:33:04+00:00March 8th, 2019|mayflowercapital blog|Comments Off on Will Rising Federal Deficits Cause a Repeat of the 1970’s Big Inflation?

Central Bank Bubble Making: A Misleading Activity Worsening The Economy

   Don’t be fooled by the central bank’s ability to reflate the intangible financial economy and recover from a crash. If a crash occurs in financial assets then rhetorically speaking one can allege that prices are somehow unknowable or shrouded in an undiscoverable mystery so it’s somehow OK for central banks and governments to manipulate markets and artificially prop up asset prices. When stocks, bonds, real estate, and banks collapse, the central bank can print money and buy these assets at artificially high prices while the government and legislature can decree that “mark to market” accounting is suspended and that people must use the high water mark for valuation purposes.  This ability to create a miraculous “recovery” has fooled investors

2019-03-06T17:44:43+00:00March 6th, 2019|mayflowercapital blog|Comments Off on Central Bank Bubble Making: A Misleading Activity Worsening The Economy

Federal Reserve Ending QT Policy This Year

   The Federal Reserve intended to reverse the effects of Quantitative Easing by selling off its bond portfolio in an act called Quantitative Tightening (QT). The program started in late 2017. Only about 7% of assets were sold since then and now the Fed has suddenly decided to cancel QT this year. At this rate perhaps 11% of assets will have been sold, instead of the intended 100%. Most of the assets are intermediate term bonds or mortgage backed bonds that likely will “run off” (be prepaid) in a few years. The prepayment will occur if a recession triggers rate cuts that motivate borrowers to refinance, thus prepaying their loans. Thus, assuming a recession is coming soon, the portfolio will

2019-02-27T15:39:09+00:00February 27th, 2019|mayflowercapital blog|Comments Off on Federal Reserve Ending QT Policy This Year