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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|0 Comments

How Safe Is The U.S. Dollar?

   The U.S. imports far less than it exports; by contrast some countries are very export dependent, for example Germany exports half of what it produces. We export 12% of our GDP and only 6% to places outside of North America. This allows us to have more leverage since the rest of the world needs us more than we need them. This is even more true due to the growth of domestic oil fracking. The result of a trade war would be skewed in the direction of hurting other countries more than the U.S. will be hurt. The U.S. also attracts more skilled immigrants than other countries (vital to manufacturing the winning new technology). The “Middle Income Trap” theory that

2019-05-16T12:54:46-07:00May 16th, 2019|mayflowercapital blog|0 Comments

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|0 Comments

Low Unemployment Yet Declining Interest Rates: Why?

     The Employment report was released today by the BLS. The unemployment rate dropped to a very low percentage of 3.6%, the lowest in 50 years. But factory jobs growth stalled this year. Manufacturing and mining produced the growth of GDP in 2017 and 2018 and now that has stalled. Factory jobs in April declined by 4,000. These good paying jobs are worth more in terms of stimulation and growth than a low wage, entry-level fast food job. The Labor Force Participation Rate has been stuck near 63%, but in 2007 before the crash, it was 66%, which is 4.8% (as a percent of a percent) less than in 2007. If these missing workers reported to the government that they

2019-05-03T15:40:47-07:00May 3rd, 2019|mayflowercapital blog|Comments Off on Low Unemployment Yet Declining Interest Rates: Why?

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?

Incorrect GDP Fools Investors

Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of

2019-04-26T15:19:59-07:00April 26th, 2019|mayflowercapital blog|Comments Off on Incorrect GDP Fools Investors

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?

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

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?

What Happened to The Tax Cut Stimulus?

   The 2017 tax law cut taxes a lot for corporations, with only minor cosmetic changes for most individuals. Where did the stimulus go? The top 100 giant multinationals may not have benefited from the new law as they lost their ability to have tax-free offshore transactions and must now pay a minimum of 12.5% tax if the move the new income to the U.S. or 14.5% if they insist on keeping income offshore. Income earned before the new tax law was enacted must be repatriated and a smaller tax rate is used. Thus the tax break went to medium and small companies. The tax law restricts the benefit for self-employed professionals in personal service companies, so the law is

2019-04-03T18:23:33-07:00April 3rd, 2019|mayflowercapital blog|Comments Off on What Happened to The Tax Cut Stimulus?