Federal Reserve

Rising Yields: Will Bonds Crash?

This week the Federal Reserve gave many hints that they will raise rates at their March 15 meeting. How much does the Fed need to raise rates to fight inflation and prevent inflation from getting out of control? The 10y10y forward rate (a derivative of what the market thinks rates will be for the ten year in ten years) is 3.6%, which implies it will increase 1.1% over the next ten years from the current spot 10 year Treasury yield of 2.49%. This is a 0.11% increase a year. The implication is that after subtracting inflation that implies the “real” neutral rate is 1.6%. Assuming that the slope of the yield curve remain in a traditional upward slope then this

2017-03-21T15:03:06-07:00 March 3rd, 2017|mayflowercapital blog|Comments Off on Rising Yields: Will Bonds Crash?

Federal Reserve Unable To Bailout Investors In The Next Crash

The Federal Reserve is trapped in a situation where they wish they could raise rates just so they could have some ammunition in terms of the future ability to cut rates during next recession. They will need to cut rates 4% (which would result in rates at negative 3.5%) to stimulate but to do so they have to first raise them 3.5%. But that would create a recession and destroy their credibility. During the next crash they might be tempted to think that propping up stock prices by buying stocks would somehow help the economy. To do this they would need to get the law changed. But Republicans  in the House of Representatives tend to be Hard Money types that

2016-10-21T11:20:39-07:00 October 21st, 2016|mayflowercapital blog|Comments Off on Federal Reserve Unable To Bailout Investors In The Next Crash

Fed’s Declining Gravitas Implies Their Put Option Has Expired

The Federal Reserve had a meeting today and decided not to raise the rate. They raised the rate December, 2015 when the 2 year Treasury Note was 1% and haven’t raised it since then. Now the 2 year T-Note is 0.78%. So the free market is saying rates needed to come down 0.22% since the December rate rise! This is amazing because short term Libor went up a lot this year in reaction to a tightening of bank regulations that raised the cost of capital for banks and money market funds. Even with rising Libor, the 2 year T-Note yield dropped! On December 16, 2015 the ten year-T was 2.3%, now today it came down and is at 1.66%. Japan’s

2016-09-21T13:27:19-07:00 September 21st, 2016|mayflowercapital blog|Comments Off on Fed’s Declining Gravitas Implies Their Put Option Has Expired

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

A Stronger Solution For The Economy Than Rate Cuts

A possible solution to the dilemma that fiscal stimulus can’t work in the modern era when debts are excessive would be for the government, combined with the central bank, to take over the debt markets and inject helicopter money in the form of co-owning forgivable debts. This would require legislation (very unlikely to be passed) that authorizes the Federal Reserve to create sweetheart loans that are forgivable (with no tax on forgiveness of debt) should the borrower default and offer these loans to the private sector. The goal would be to overcome the objection that it is not safe to expand a business or expand consumption because one already has too much debt. For example, if someone wanted to borrow

2016-08-10T15:01:32-07:00 August 10th, 2016|mayflowercapital blog|Comments Off on A Stronger Solution For The Economy Than Rate Cuts

Today’s Fed Meeting: Continued Era of Low Rates

Yellen had a Federal Reserve meeting and press conference today and left the rate unchanged. The PPI inflation measure was released today showing a 1.2% annual core rate increase. The Fed was hoping it would have been 2%. The measures of inflation since the recession 8 years ago have been very low and have been declining. Before the Federal Reserve was created the U.S. had a long history of soft depressions and recessions with very low inflation except for war time. If my theory is correct that central banks like the Fed can’t really help to stimulate or inflate the economy then that means we could still experience the same long eras of low rates, low growth, low inflation as

2016-06-15T14:46:38-07:00 June 15th, 2016|mayflowercapital blog|Comments Off on Today’s Fed Meeting: Continued Era of Low Rates

What The Federal Reserve Should Do

The world’s central banks have tried to stimulate their economies with easy money policies. These only work when starting from a high interest rate and mainly can only work if conditions are relatively benign. In a deep recession the benefit of lower interest rates is not enough to encourage growth since potential borrowers are more concerned with inability to pay the principal payments than the interest expense. The Federal Reserve was established to be a lender of last resort, when no one else would lend, to weak banks during a banking crisis. It was also supposed to prevent inflation. Later the mandate was changed to also creating full employment in 1977. The people in the private sector who can make

2017-01-10T23:33:02-08:00 March 24th, 2016|mayflowercapital blog|Comments Off on What The Federal Reserve Should Do

Why Central Bank Rate Manipulation Makes Things Worse

    A big misunderstanding is when people don’t see that ultra-low rates encouraged reckless shadow bank lending in the form of very risky P2P and BDC loans which will be extremely disappointing to the naïve investors who bought them. When these loans experience default can’t be cured by cutting rates since the reason their rates are high is because they need a massive spread over the riskless rate due to poor credit quality. To refinance a defaulted P2P loan, that yielded 15% before default. would probably require negative 10% risk free rates to motivate new investors to fund a refi for this class of borrowers. But why would anyone take on so much risk?    The great error of the

2017-01-10T23:33:11-08:00 November 20th, 2015|mayflowercapital blog|Comments Off on Why Central Bank Rate Manipulation Makes Things Worse

Will The Federal Reserve Buy Stocks To Fix A Crash?

    When the SP finishes its downward move to half off of its all-time high (reached in 2015) in a year and the economy goes into recession what will the government do to stimulate the economy? The Federal Reserve can’t cut rates if they are at zero. They may try to raise rates very slowly this year by about 0.5% total over the next 12 months but usually rate cuts to cure the economy have been about 3% over a year, not a half percent. Thus the Fed cuts in 2017 won’t bail out the economy. The Fed might be tempted to use Quantitative Easing to stimulate the economy but political opposition to that is building from both sides of

2017-01-10T23:33:13-08:00 September 28th, 2015|mayflowercapital blog|Comments Off on Will The Federal Reserve Buy Stocks To Fix A Crash?

The Federal Reserve Decision Not to Raise Rates Today

    The Fed decided not to raise rates today. When they do raise rates it will take a while before it destroys the carry trade where speculators buy bonds using short term debt. A speculator can borrow at 1% and buy a bond yielding 3% and lever up 4 times the initial down payment equity in his account. That means the 2% spread is levered up and the speculator gets a 9% yield. A gradual rise in the cost to borrow will reduce this profit but not eliminate it. Thus initial rate rises won’t result in these positions being closed out so it won’t make long term bond yields go up. Also rising short term rates can hurt the economy

2017-01-10T23:33:13-08:00 September 17th, 2015|mayflowercapital blog|Comments Off on The Federal Reserve Decision Not to Raise Rates Today