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|0 Comments

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?

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

Employment Market Weakens, Recession Coming Soon

    The Employment report was released by the BLS today showing only 75,000 new jobs created, less than the 100,000 a month needed to keep up with population growth. Thus, on a relative population-adjusted basis, employment shrank by 25,000 jobs. Based on employment to population percentages before the GFC of 2008, the hidden unemployed are roughly 1.0% to 1.5% of the workforce, thus the unemployment rate is close to 5% instead of the official 3.6%. Many workers are labeled by the BLS as employed even though they have a speculative, high risk self-employment occupation with almost no income or they may have a waiter’s “job” with a $2.50 an hour minimum wage. The inverted yield curve of bond yields implies

2019-06-07T14:57:58-07:00June 7th, 2019|mayflowercapital blog|Comments Off on Employment Market Weakens, Recession Coming Soon

If Stocks Crash Can The Federal Reserve Repair The Damage?

    When the recession comes, stocks will go down. The Fed can’t cut rates enough to prevent or heal a crash. Typically the Fed needs to cut rates by 5% in a crash; since they are now at 2.4% they would have to go to negative 2.6% which can’t be done without destroying the economy, and thus it won’t be cut to a negative rate. The intrinsic value of the SP is 1,800 (the peak was 2,954); the intrinsic value of the SP could even be as low as 1,100. If the Fed can only provide about half of the rate cuts needed to heal the next crash then perhaps stocks would get stuck at halfway between intrinsic value and

2019-05-16T13:33:54-07:00May 16th, 2019|mayflowercapital blog|Comments Off on If Stocks Crash Can The Federal Reserve Repair The Damage?

Will China Tariffs Be Inflationary?

     The 25% tariff against imports from China won’t be inflationary. Consumers in the U.S. will simply buy less goods because they have a limited budget. Thus if they chose to buy imported goods from China, that suddenly cost 25% more because of the tariff, they will simply buy less of other items. The higher cost will inspire domestic competition and more likely inspire additional competition from other EM countries that have lower wage costs than China. Based on the fact that China devalued by 50% in 1994 a 25% devaluation by China, in response to the tariffs, will occur. This would trigger a retaliatory devaluation by Japan which has used devaluation to compete and stimulate its economy. This would

2019-05-14T15:06:33-07:00May 14th, 2019|mayflowercapital blog|Comments Off on Will China Tariffs Be Inflationary?

Can The Federal Reserve Prevent A Deep Stock Crash?

   The current stock market is a repeat of the irrational NiftyFifty stock market of 1973 with very high Price/Earnings ratios in the 1970’s which had nothing to do with low yields, bailouts, implied promises of Fed put options, corporate buybacks, QE, etc. – it was plain and simple irrational investor emotions in 1973 that created a stock bubble that lead to a crash. OK so the Fed did overstimulate in 1972 election but in those days it was a broadly dispersed benefit instead of today’s QE benefiting only stocks. It is tempting to feel a new era of permanently high PE’s has occurred but leaping to that conclusion is wrong as it is motivated by a desire to conform

2019-04-29T18:42:34-07:00April 29th, 2019|mayflowercapital blog|Comments Off on Can The Federal Reserve Prevent A Deep Stock Crash?

Stocks Hit New Highs: Should You Buy?

Today the SP index closed 2 points higher, (now at 2933) than the previous all-time high, which was in September, 2018. With the PE10 ratio at 31 this ratio shows stocks are priced at double fair value, implying that eventually stocks will crash 50% and stay down for a long time. It may be tempting to short sell stocks but as Keynes said, “stocks can go up longer than you can remain solvent”, so shorting is too risky. Since stocks are mostly bought by the affluent top 10% of society and these people are doing quite well in their careers then they can take their lucrative earnings and invest in stocks, thus fueling the bubble. But is it right to

2019-04-23T15:42:25-07:00April 23rd, 2019|mayflowercapital blog|Comments Off on Stocks Hit New Highs: Should You Buy?

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

2019-04-12T16:44:34-07:00April 12th, 2019|mayflowercapital blog|Comments Off on Stocks Very High: When Will They Crash?

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

2019-01-03T13:54:46-07:00January 3rd, 2019|mayflowercapital blog|Comments Off on Dollar Flash Crash: What Next?