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

Will Border Tax Adjustment Cause Inflation?

If the proposed Border Tax Adjustment becomes law there are three scenarios: Scenario A. The consumers and business simply ignore it and consumers pay it to access foreign made goods. This would increase consumer prices since the tax would be embedded in the retail cost of goods. However consumers would react to higher prices by cutting back on purchases thus provoking some retailers and manufacturers, including foreign companies to cut costs. Also the dollar might go up slowly to partially offset this, making the cost of imported goods lower than it would have been. In this scenario little or no increase in domestic employment results. This in turn avoids inflation that is caused by rising wages that enable larger bank

2017-02-23T10:56:13-08:00 February 23rd, 2017|mayflowercapital blog|Comments Off on Will Border Tax Adjustment Cause Inflation?

Irrational Exuberance 20th Anniversary

Today is the 20th anniversary of Greenspan’s famous comment about being aware of “irrational exuberance” in stock markets. At the time stocks had risen 23% that year. He asked rhetorically (to paraphrase) “how do we know if stock prices are too high”? My answer to that is to use a ratio of price to earnings, or price to sales, price to GDP, also price to Book Value and price to reconstruction cost (Tobin’s Q). When people buy stocks they perceive they will benefit by buying something that has already risen in price so they are literally attracted to something that is expensive. This is called a “Giffen Good” phenomenon by economists where consumers dislike cheap things and pursue the purchase

2017-01-10T23:32:50-08:00 December 5th, 2016|mayflowercapital blog|Comments Off on Irrational Exuberance 20th Anniversary

Rates Likely To Stay At Current Levels For A Year or Two

If lowering interest rates doesn’t transmit benefits to those most in need and damages future retirees, pension beneficiaries, life insurance companies, banks, etc., then perhaps there is no significant benefit in further lowering of rates. The old rule of thumb that the Fed has to cut rates 4% to stimulate would imply that the economy needs negative rates but this is not feasible because of behavioral economics consumers won’t tolerate this in terms of how it would affect insurance, bank accounts as well as pensions. Ultra-low rates can provoke naïve investors into foolishly lending to junk bond type of borrowers such as undocumented P2P loans, BDC’s, etc., but on a risk-adjusted basis these are bad for investors who were planning

2016-10-18T14:43:41-07:00 October 18th, 2016|mayflowercapital blog|Comments Off on Rates Likely To Stay At Current Levels For A Year or Two

Long Term Trends As A Result of The Demise of Quantitative Easing

A huge generational shift is taking place in the financial markets as Quantitative Easing (QE) and other monetary policy experiments are terminated and replaced with fiscal stimulus. The era of 1996-2016 saw the debt to GDP ratio in the U.S. double from a century long range of 125% to 175% before 1997 (excluding WWII) to the current 345%. The era of the past 29 years since the crash of 1987, which resulted in Greenspan cutting rates to help stocks, has been one of central bankers rushing to help stocks. Investors have become brainwashed over the past 20 years to believe that it is their right and the Fed’s duty to make stocks a low risk proposition and thus they have

2016-10-17T10:11:14-07:00 October 17th, 2016|mayflowercapital blog|Comments Off on Long Term Trends As A Result of The Demise of Quantitative Easing

Bearish Activity In Today’s Market A Worrisome Trend

Pharma stocks crashed over 2% today and small caps declined 1.8%; the SP was down 1.2%. The reason is that the marketplace is anticipating that a Democratic victory will reduce corporate profitability, thus reducing stock prices. The projected huge growth in the federal deficit over the next several decades is attributable to health care, which the government pays for half of the population’s needs. Thus the government has a strong need to cut health care expenses. The rest of the world bargains hard through national single payer systems to cut these costs. It is only a matter of time before the U.S. moves in that direction thus reducing the earnings of medical stocks and dampening the earnings of doctors, which

2017-01-10T23:32:52-08:00 October 11th, 2016|mayflowercapital blog|Comments Off on Bearish Activity In Today’s Market A Worrisome Trend

Report of Rising Income Is Wrong

Rising incomes per the Census Bureau were the best in 50 years with a 5.2% gain from 2014 to 2015. Is that because high-skilled people have less unemployment than low skilled workers thus more of the low skilled people have been removed from database covering the average income? In investments there is a statistical anomaly where failed companies disappear thus making the average go up more than it would have if the failed companies still were nominally in existence and trading for tiny sum. This is called survivorship bias. A similar thing can happen with discouraged ex-workers who permanently drop out of the work force. If there are ten workers earning $10 an hour and ten workers earning $100 an

2017-01-10T23:32:53-08:00 September 14th, 2016|mayflowercapital blog|Comments Off on Report of Rising Income Is Wrong

Why a Fed Rate Increase Might Not Damage The Economy

There is speculation that the Fed will increase the rate at the September 21 meeting. If they do, it won’t hurt the economy because when people make business decisions they use a hurdle rate composed of many limiting factors that the proposed project must jump over, or cross, the hurdle. Interest rates are not that terribly important when ranked along with other components of a hurdle rate. The other components are risk premium that the proposed venture will fail, difficulty in paying the amortization of loan principal (remember paying loan principal is not a “cost” in accounting), difficulty in making a profit due to factors others than interest expense. Stocks tend to produce a return of 4% more than bonds

2017-01-10T23:32:53-08:00 September 13th, 2016|mayflowercapital blog|Comments Off on Why a Fed Rate Increase Might Not Damage The Economy

Shrinking GDP Validates Low Interest Rates

GDP data released today shows the economy grew at a 1.2% annualized rate in the second quarter. The previous quarter’s rate was 0.8% annualized, so the six month average is 1.0% annualized. The stall speed for falling into a recession is 2% GDP growth. Another concern is that unemployment is at 4.9% and yet the economy is growing at only 1%. If the unemployment is so low then GDP should be growing at about at least 3%. The reason why unemployment is low when GDP is also low is because the lack of productivity growth means that employers have to hire lots of low skilled, low paid people who laboriously manually do things that should have been automated.  The reason

2016-07-29T16:19:15-07:00 July 29th, 2016|mayflowercapital blog|Comments Off on Shrinking GDP Validates Low Interest Rates

Deflationary Aspects of the Internet

The paradigm about internet marketing is that people would get used to reading free content and eventually settle down and become loyal consumers of websites that offer free quality content. That plan has been greatly discredited because there are too many choices resulting in dilution of the value of free content. Another paradigm is that people will reveal their data to a giant intent company who can then use the data to sell targeted advertising. Buyers of those ads should be careful since in modern times people are very busy and so a viewer of online ads may habitually instantly click to get away from the ad so he can read what he wants to read. Many people use ad

2017-01-10T23:32:54-08:00 July 27th, 2016|mayflowercapital blog|Comments Off on Deflationary Aspects of the Internet