Federal Reserve

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|0 Comments

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|0 Comments

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

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?

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?

Investors Mistakenly Place Faith In Government’s Ability to Fix a Crash

       The great crash of 2008 was mainly based on failed financial markets where banks owned bad mortgages that had been falsely rated as investment grade. The non-financial part of the economy was not that badly hurt by the crash.     Some bullish advisors have leapt to the conclusion that financial assets, which can be difficult to fairly value, somehow incorrectly dropped in value in 2008 because of some irrational, unfounded panic for no reason. The claim is that because no one knows the future in terms of whether or not a mortgage borrower will be able to pay his loan each year for 30 years then perhaps it is impossible to fairly value a loan so why

2019-04-17T18:41:19-07:00April 17th, 2019|mayflowercapital blog|Comments Off on Investors Mistakenly Place Faith In Government’s Ability to Fix a Crash

Dramatic Policy Shifts By The Fed

   The Federal Reserve’s recent dramatic shift from tightening to implied loosening is the fastest shift of Fed behavior in 50 years. Some people have leapt to the conclusion that Fed chief Powell simply caved into pressure from Trump, betraying good hard money policies, and changed to easing because of Trump. The real reason for the easing is because Fed employees have researched and realized that the Fed and other central banks made many mistakes, including being too optimistic about economic recovery since the crash of 2008, so they want to be truly prepared for the coming recession. It is highly likely that economic cycles can’t last more than ten years. The current cycle was modestly extended by Trump’s tax

2019-03-22T19:02:14-07:00March 22nd, 2019|mayflowercapital blog|Comments Off on Dramatic Policy Shifts By The Fed

Big Rate Cut By Marketplace Today Hints At Stock Crash To Come

   Today the Federal Reserve held a two-day meeting and released a statement. They didn’t change their rates but the marketplace changed the rates dramatically downward. The ten year Treasury bond yield dropped from 2.61% to 2.525%, a drop of 8.5 basis points, several times a typical day’s movement. The technical traders who follow chart patterns have felt the rate might never go below 2.62% and would instead go above 3% and stay above that, thus the decline significantly below 2.62% is a shocking technical indicator matter, implying the “Invisible Hand” of the market “knows” that a recession will soon come. The futures market estimates a 50% probability of an eventual Fed easing of the Fed’s official rate. The drop

2019-03-20T18:01:03-07:00March 20th, 2019|mayflowercapital blog|Comments Off on Big Rate Cut By Marketplace Today Hints At Stock Crash To Come