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Building a Bullish Case

The best case for stock bulls is to say that since stocks are mostly owned by the upper 10% of society and these people’s earned income have gone way up, compared to blue collar workers, due to ever-increasing complexity of various professions such as engineering, medicine, the practice of law, CPA practice, etc. then stock prices are a reflection of these professional’s ability to earn and save rather than GDP or the average person’s earnings. The earnings of professionals went up far faster than workers because a talented professional today can be far more productive than 50 years ago; by contrast, an uneducated blue collar worker’s productivity didn’t go up that much. Assuming a finite amount of stock and a

2017-04-06T13:46:56-07:00 April 6th, 2017|mayflowercapital blog|Comments Off on Building a Bullish Case

Are Low Rates Justification For High Stock Prices?

Discounting cash flows to estimate stock values far into the future should incorporate a factor for the risk of an error of the estimates, which may increase geometrically every 15 or so years. This means that even if interest rates are low the discount rate can be higher, the further out in the future one goes, because of an increase in risk premium. This means that the present era of the next 10 or 15 years is much more important to establishing the Discounted Cash Flow of an investment because the distant future has to be discounted so heavily that its returns regardless of outcome have less weight. Thus if interest rates remain very low for 10 to 15 years

2017-04-05T15:18:40-07:00 April 5th, 2017|mayflowercapital blog|Comments Off on Are Low Rates Justification For High Stock Prices?

Gridlock May Be Disinflationary

    The future of politics is that Congressional Republican leaders don’t want Trump to boss them around or gain control so these leaders will maintain the status quo of the Senate filibuster and thus allow it to help the Democrats to block legislation, thus creating gridlock that is coming from inside of the Republican party but which can be blamed on Democrats.  Then Trump will be unable to create dramatic fiscal stimulus and will end up being a do-nothing president. House Speaker Paul Ryan doesn’t want to unite with Democrats to create a majority voting block that can bypass the Freedom Caucus. By announcing that policy he is basically refusing to play politics with Trump and is allowing the Freedom

2017-04-04T15:16:08-07:00 April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

Are Modern Stock Markets Safe Enough To Justify High Prices?

   The Great Depression was worse than the crash of 1981 or 2008 because there were no stabilizing institutions or programs like Social Security, welfare, FDIC, SEC, TARP, QE, etc. so the all-in impact meant that people in distress were in deeper trouble compared to victims of modern day crashes. However, there was one bright, risk reducing spot in the 1930’s: dividends were very high, around 6%. The big yields acted to lower duration of stocks and thus reduce risk. Also in those days people were used to the idea they had to be responsible and take care of themselves. So prudent investors would have parked cash in the least risky banks and in Treasuries before the crash; prudent people

2017-04-03T14:27:34-07:00 April 3rd, 2017|mayflowercapital blog|Comments Off on Are Modern Stock Markets Safe Enough To Justify High Prices?

Inflation Alarm Bells Ringing: They Are Wrong

    The PCE inflation index was released by the BEA today showing a 2.1% increase in inflation. The 10 year Treasury bond yield dropped by 2 basis points. The PCE is more cautious and reliable than the CPI. At first glance it may be tempting to panic and fear that inflation is returning and that it will somehow morph into a 1970’s nightmare of high inflation. However, if one subtracts the effect of oil prices then the increase was not so threatening. Oil has increased 80% over the past year. Oil is about 4% of the economy. So the 80% oil price increase multiplied by 4% is 3.2% contribution to inflation which is slightly more than the 2.1% overall

2017-03-31T18:01:13-07:00 March 31st, 2017|mayflowercapital blog|Comments Off on Inflation Alarm Bells Ringing: They Are Wrong

Will Tax Cuts Create Inflationary Stimulus?

    The Trump administration seeks massive tax cuts to stimulate the economy. The textbook economic response is that tax cuts stimulate the economy and cause inflation. However generic textbooks assume debt loads are much lower than today’s debts. High debts act to slow down consumption so the extra after-tax income from a tax cut may simply go to debt service instead of simulative consumption. The other problem is that the political will by Congress to cut taxes is lacking. When Reagan was elected in 1980 the tax code had no inflation indexing and thanks to the horrific inflation of the 1970s tax rates for moderate income workers were pushed into high brackets thus creating an unearned windfall for the IRS

2017-03-28T13:34:01-07:00 March 28th, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Inflationary Stimulus?

Political Developments Imply Lack of Stimulus

    The defeat of the Republican’s anti-Obamacare bill today implies that the Republicans, including Trump, will be heading in the direction of a traditional Republican Establishment doing-nothing type of regime instead of a dynamic, aggressive libertarian agenda of deep budget cuts and deep tax cuts. It is far too dangerous for elected Republicans to remove traditional welfare state benefits such as Social Security, Medicare, food stamps, etc. The same applies to the ACA subsidy for health insurance. The rural, low paid, blue collar workers who voted for Trump may have no choice but to depend on Obamacare because health care at age 55-64 can cost $15,000 a year a person and lower-middle class people might only earn $30,000 thus making

2017-03-24T15:58:06-07:00 March 24th, 2017|mayflowercapital blog|Comments Off on Political Developments Imply Lack of Stimulus

Rates Dropped Since Fed Increased Them Last Week

     Last week the Fed raised the Fed funds rate 0.25% when the ten year Treasury Note was 2.6%. Today stocks crashed down 1.2%. Now the ten year Note yields 2.44%, a drop of 16 basis points since the Fed‘s rate increase. The market has decided that the Fed’s tightening will be disinflationary so the market has cut the yield for long term bonds. The result is a flattened yield curve, which is a bearish sign for stocks. The House of Representatives Tea party members appear ready to block Trump’s healthcare legislation. The implication is that Trump will be unable to make substantial changes and thus he can’t implement inflationary stimulus infrastructure building programs or inflationary tax cuts. The structural

2017-03-21T15:04:17-07:00 March 21st, 2017|mayflowercapital blog|Comments Off on Rates Dropped Since Fed Increased Them Last Week

Strategic Retreat By The Fed In Wednesday’s Rate Increase

     The Fed’s rate hike of Wednesday was a watershed event. They hiked even though they sluggish economy didn’t warrant a hike. They hiked in part because the free market already had the two year Treasury at 1.4% on March 15. The new fed funds rate is now about 0.875%, so the fed still needs to raise by 0.4% to 0.5% to reach the market’s estimate of interest rates. The Fed has decided to follow the market instead of lead it. The Fed has realized that QE was a mistake that made things worse. They realize that negative interest rates would vastly damage the economy and thus there is a zero bound line, even though it is possible to make

2017-03-17T14:14:50-07:00 March 17th, 2017|mayflowercapital blog|Comments Off on Strategic Retreat By The Fed In Wednesday’s Rate Increase

Fed Raises Rates Yet Bond Yields Drop

Today the Fed raised their short term rate 0.25% to a range of about 0.875%. However, the free market has had the two year Treasury Note at 1.38% or near there for several weeks. Some people feel the free market short term rates are more reflective of the real world than the Fed’s artificial rate. If so, then the Invisible Hand of the market has already priced in the remaining 0.5% increase coming from the Fed later this year. The ten year bond yield dropped 9 basis points today as so as the Fed made their announcement. The market feels Fed tightening will fight inflation and thus increase the value of long term bonds. The comments that we are near

2017-03-15T18:21:07-07:00 March 15th, 2017|mayflowercapital blog|Comments Off on Fed Raises Rates Yet Bond Yields Drop