Federal Reserve

Why The Fed Funds Market Has Had a Shortage of Lenders

   The mystery of the Fed funds market experiencing a shortage of available lenders and thus trading at high rates may be because U.S. banks don’t want to risk loaning to a high risk bank whose parent is based in the EU. If the EU breaks up then the ECB central bank would be unable to continue its existence and its going out of business would be a bigger catastrophe than the Lehman bankruptcy of 2008. If a European bank defaults on a repo loan in theory the ECB could loan money to the failed bank who could then make good on their repo loan. But this rescue wouldn’t happen if the ECB is eliminated. The global banking system is

2019-11-15T18:05:59-08:00November 15th, 2019|mayflowercapital blog|0 Comments

Negative Rate Policies To End

   The possibility of endless dropping of yields until rates reach negative 8% (as suggested by one expert) is nonsense. The economic crisis that enabled negative rates somewhat like the 1962 Cuban missile crisis where stakes of failure were so high that everyone needs to pitch in and help compromise to avoid war. It was a new era, despite the cliché that people never change and thus (the old cliché) wars will continue to occur; but that is no longer applicable. So by analogy, possibly the advocates of Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) will realize how dangerous it is and the opponents will be assertive enough to persuade government policy makers to stop it. Precedents for

2019-11-06T17:29:00-08:00November 6th, 2019|mayflowercapital blog|0 Comments

Bank Repo Market Distress Not A Concern

     The bank Repo (repurchase) market where banks use a Repo transaction to get cash from their inventory of Treasury bonds has created some distress in the banking system resulting in the Federal Reserve offering to buy $60Billion a month to add liquidity to the system. Some bearish commentators have implied that this is a tip off of an impending financial crisis. I disagree. The problem is merely a minor technical difficulty in implementing new Dodd Frank regulations. Any time someone writes up a new regulation or even a voluntary safety procedure there is the possibility of unforeseen technical difficulties occurring which necessitate a fine tuning to handle the contradictory goal of making the new seat belt fit comfortably yet

2019-10-11T17:32:56-07:00October 11th, 2019|mayflowercapital blog|Comments Off on Bank Repo Market Distress Not A Concern

Did Bankers Cause the Repo Crisis to Get Rich?

   The recent crisis in the Repo market last week may have been because the banking industry had gotten used to having only one or two of the big six banks provide last minute loans (Repo transactions) to their peer group and then suddenly these one or two banks simply weren’t available because they found other interesting things to invest in. Perhaps the banks decided it was worth it to temporarily pay an exorbitant interest rate to buy a two year Treasury Note yielding about 1.7%. The reason: if yields drop to zero then the banks borrow for free while earning a 1.7% yield (actually the yield about 10% more, about 1.9%, since it's free of state income tax) from

2019-09-23T19:04:52-07:00September 23rd, 2019|mayflowercapital blog|Comments Off on Did Bankers Cause the Repo Crisis to Get Rich?

“Repurchase” Market Crisis

         This week from Monday, Sept. 16 to Wednesday the 18th the banking system had a bank and bond market “repurchase” (repo) market crisis. The repurchase market (repo) is where a bond dealer buys a Treasury bond and then finances the purchase by selling it and agreeing to immediately repurchase it (allowing the dealer to get cash), somewhat like a loan. Normally the interest rate for these is about the same as the Fed funds rate, about 2%, but on Monday it spiked to 9.5%. The problem was caused by unwisely written overly strict rules such as the Liquidity Coverage Ratio which is a stress test based on extreme hypothetical conditions like the crash of 2008. Even though there has

2019-09-20T16:45:37-07:00September 20th, 2019|mayflowercapital blog|Comments Off on “Repurchase” Market Crisis

Debt Jubilee Led by Central Banks

   Perhaps central banks will decide to simply print up money and donate to those who have too much debt, which is a debt jubilee. This would be a way to stimulate the economy without hurting savers with negative interest rates. Unlike Fed rate cutting that lacks believability and effectiveness, this would be highly credible as consumers could feel the benefits and get emotional about it, thus stimulating demand. To make this work it would have to be similar to the tax code where those who are neediest get the best outcome. If someone is truly wealthy they shouldn’t get to benefit from debt forgiveness.    If done in a harsh recession it might not cause that much new inflation,

2019-08-27T10:51:38-07:00September 10th, 2019|mayflowercapital blog|Comments Off on Debt Jubilee Led by Central Banks

Negative Rates and the End of Central Banking

   Negative interest rates will act as a deflationary force that will reduce consumption and reduce investment in productive capital assets, as well as reducing consumer confidence. It will act to weaken the confidence of stock market investors thus resulting in a sell off of stocks. The central banks gambled and lost regarding their policy of negative rates. Their credibility has been diminished. Once people realize that central banks and their rate cuts can’t stimulate the economy then investors will stop believing in the myth of the central bank put option. This will exacerbate the stock sell off. The U.S. central bank bailouts and stimulus of 1998, 2003, and especially 2008 acted to create Moral Hazard (where the availability of

2019-08-27T10:23:24-07:00September 5th, 2019|mayflowercapital blog|Comments Off on Negative Rates and the End of Central Banking

Fed Rate Cut: An Unhelpful Placebo

        Today the Federal Reserve cut the rate by 0.25%, the first cut in 11 years. They did this a half year after they raised rates when they said there was a need for more tightening. Rate cuts are not that useful and lack substantial impact on the economy. Most borrowing is done with short term or intermediate term debt which may be fully amortized over a few years, thus the principal payments as a percentage of the total payment are quite high, so a tiny 0.25% cut in the rate (tax-deductible for business and many homeowners) is a very tiny portion of the total payment. If a business manager is worried there will be no demand for a new

2019-08-04T15:15:50-07:00July 31st, 2019|mayflowercapital blog|Comments Off on Fed Rate Cut: An Unhelpful Placebo

Should the Fed Take Out an Insurance Policy?

    The cliché now being used that the Federal Reserve ought to “cut interest rates in take out an insurance policy to prevent a recession” is wrong. By cutting rates with an eventual move to either zero real rates or even zero nominal rates, this causes problems for both retirees, and future retirees who are saving for retirement. It causes problems for banks, insurance companies, and pension funds. At some point if rates are too low for too long then retirees will respond by cutting their standard of living, reducing consumption and this will negate the stimulus from cutting borrower’s rates. Negative or zero rates will ruin banks and insurance companies, leading to a wave of banking failures and then

2019-07-17T16:41:42-07:00July 17th, 2019|mayflowercapital blog|Comments Off on Should the Fed Take Out an Insurance Policy?

Complex Theories May Confuse You About The Stock Market’s Hidden Risk

    In the 1997-2007 mortgage housing bubble the enablers of the bubble tried to rationalize using the Gaussian Copula theory that a Mortgage Backed Security holding mortgages from different states would act diversify the risk of a default. But that rationale was wrong because it was assumed that the successful borrowers would offset the damage caused by the losers. Instead the winners, who are borrowers, are not obligated to bail out the loser or to pay extra to the lender to make up for the loss caused by the defaulting borrower, so the “diversification” was bogus. A similar phenomenon is happening where financial experts assume the central banks can bail out the economy by cutting rates deeply. The problem is

2019-06-19T17:06:19-07:00June 19th, 2019|mayflowercapital blog|Comments Off on Complex Theories May Confuse You About The Stock Market’s Hidden Risk