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QE And NIRP Monetary Policy is a Dangerous Trap

My concerns about QE: 1. It was a placebo that won’t work next time thus creating a surprise, not yet fully discounted by the stock market. 2. QE and associated polices of NIRP and bailouts, including the Japanese and Swiss central bank’s purchase of equities have created moral hazard that encourages speculators to operate in a riskier manner thus building up a higher degree of hidden risk that eventually will bubble to the surface and disrupt the economy. Imagine investors seeking to make income from writing naked put options. If they were lured into a false sense of security that they are entitled to a perma-bull fantasy of central banks bailout of markets then they may act recklessly and take

2019-02-20T19:26:13+00:00February 20th, 2019|mayflowercapital blog|0 Comments

QE And Monetary Policy is a Confidence Game And a Placebo

   Quantitative easing (QE) and monetary policy don’t truly work except in the limited context of a placebo effect. Sophisticated business managers and investors plan around avoiding being manipulated by these activities, thus these manipulations don’t work. The ones who are unaware of the manipulation are the naïve working people who leapt to the conclusion they should buy a car or a house using low rate loans. Now look what happened where it was reported that the number of people with a 90 day delinquency on their car credit loans is the highest ever. If the economy is so good then why such a high default rate? The asymmetric nature of QE is that it does worse damage to the

2019-02-14T14:30:38+00:00February 14th, 2019|mayflowercapital blog|0 Comments

Employment Report Very Misleading

   The monthly employment report released today by the BLS said 304,000 new jobs were created and the rate of unemployment went up to 4.0%. The U-6 discouraged person’s rate went up 0.7% from the cycle low of July, 2018. Once unemployment reverses a downtrend and goes up by 0.4% or more that is a sign of new recession. If one respects the U-6 rate then that confirms a recession has already started.    The payroll-based BLS report uses a Birth-Death model of hypothetical jobs that added 122,000 jobs. But this is hypothetical. (This assumes business are so disorganized and slow that they need a long time to report new employment to the government – this is not correct, as

2019-02-01T17:38:53+00:00February 1st, 2019|mayflowercapital blog|Comments Off on Employment Report Very Misleading

Zero Rate Central Bank Programs Weaken The Economy

The asymmetry of zero rate programs: when rates are cut that hurts retirees who get most of their income from bond yields. It also destroys the consumer confidence of retirees. When people close to retirement age feel they can’t earn enough yield to afford to retire then they will refuse to retire, thus hoarding jobs needed by young people, which increases the supply of labor, thus suppressing wage growth. This is deflationary. When rates are cut the nature of amortized debt means that the payment doesn’t decline as much as one would think because as rates decline the amortization of principal increases, so the total payment doesn’t go down as much as if it were an interest-only loan. Also, lower

2019-01-31T14:33:58+00:00January 31st, 2019|mayflowercapital blog|Comments Off on Zero Rate Central Bank Programs Weaken The Economy

Will The Dollar Become A Worthless Currency?

      People worry the rising deficit will make the dollar drop in value. The annual federal deficit is 5% of GDP, about $1Trillion a year. The long run average federal tax revenue is 18% of GDP. Assuming a 2% CPI adjustment is applied to the deficit then the deficit is growing by 3% of GDP a year in real terms. For example, a debt of $21Trillion if it increases by 2% a year when inflation is also 2% is basically not an increase in real terms. Eliminating the Federal Budget Deficit Could Help Raising taxes by 3% from 18% of GDP to 21% would be enough to fix the problem. A compromise is to raise taxes by 1.5% of GDP

2019-01-11T17:33:10+00:00January 11th, 2019|mayflowercapital blog|Comments Off on Will The Dollar Become A Worthless Currency?

Debt Hysteria Confuses Investors

      The US dollar is best, cleanest dirty shirt in the world’s dirty clothes hamper. Our capitalism makes the tax base stronger than that of other countries and this taxable income can be used to service government debt. If domestic debt increases too much, possibly the outcome of excessive debt will be a situation where the government gets all of its needs met first, crowding out most of the private sector, so excess debt might not be a problem for government which pays interest-only. The risk is that private sector would undergo a wave of bankruptcies that would clear out debt and ironically induce more desire to own safe government debt, resulting in a further increase in spread between government

2019-01-10T12:45:13+00:00January 10th, 2019|mayflowercapital blog|Comments Off on Debt Hysteria Confuses Investors

Jobs Increase Not Inflationary

   Today the monthly Employment Situation report was released by the BLS showing a huge 312,000 increase in jobs in the payroll survey. The unemployment rate increased from 3.7% to 3.9% as more people decided to join the work force and seek employment. Fundamentally, because the unemployment rate increased, that is the bottom line: new entrants to the labor force acted to dampen inflation by increasing the supply of workers. The household survey said 419,000 jobs were added with 90% of the total job increase from unincorporated self-employed. That type of “employment” can be a zero income gig experiment rather than a traditional real job. Prime age employment shrank by 11,000, with a 48,000 decline the month before. 146,000 of

2019-01-04T13:20:48+00:00January 4th, 2019|mayflowercapital blog|Comments Off on Jobs Increase Not Inflationary

Dollar Flash Crash: What Next?

The dollar crashed last night against the Yen in a Flash Crash, dropping 3% (a very significant figure), before settling in to a 1% decline to 107.5 Yen to a dollar. This demonstrates a potential risk that the Yen could appreciate roughly 10% or even 20% to reach fair value. Its price is held down by Japan so that they can encourage exports through devaluation. If global investors get burned by a US stock crash they may decide to withdraw funds from the US, thus making the dollar go down and the Yen to go up. This would force Japan to have even deeper negative interest rates, thus pulling down global interest rates.    If Japan devalues that can cause

2019-01-03T13:54:46+00:00January 3rd, 2019|mayflowercapital blog|Comments Off on Dollar Flash Crash: What Next?

Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

   Stock buybacks remind me of the mortgage backed securities bubble of 2008 where banks sold packages of loans to other banks, creating a debt and real estate bubble. One bank would create poor quality loans, get an inflated rating from a ratings agency, package the loans into securities and then sell them to another bank, where the seller alleged they were investment grade bonds. The new owner of the loans could then tell regulators that the bank owned securities were rated “AAA” by ratings agencies, thus passing a bank regulator exam when instead they should not have passed the exam. This fueled the 1997-2007 housing bubble, and created the illusion of economic growth and stability when instead it was

2018-12-28T17:13:57+00:00December 28th, 2018|mayflowercapital blog|Comments Off on Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

Fed Raises Rates, Market Cuts Them

         The Federal Reserve raised the short term fed funds rate by 0.25% today. The Fed funds rate of 2.5% is higher than the 3 month T-Bills rate of 2.35%, thus inverting part of the yield curve. The 2 year Treasury yield inverted, becoming higher than the 5 year Treasury yield. The difference between the 2 year and 10 year Treasury are only 11 basis points, so they entire yield curve is moving towards inverting. The 30 year Treasury bond’s yield dropped below 3.0%. Stocks crashed hard making new lows for the year. Many stock market charts show technical trading indicators, such as trendlines and momentum, that have been broken, thus leading to a full stock market correction. A plunge

2018-12-19T14:21:37+00:00December 19th, 2018|mayflowercapital blog|Comments Off on Fed Raises Rates, Market Cuts Them