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“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|0 Comments

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|Comments Off on Negative Rates and the End of Central Banking

Negative Rates Explained

      Interest rates are very low or negative because of a need for investors to find risk-free sovereign bonds. During the 19th century there were many years of crashes when the only safe store of value, besides gold, was Treasury bonds; at times the real yield was near zero. The nominal yield was also quite low. Investors who buy bonds may engage in competition with other investors, thus forcing the price up, which makes the yield go down. It is like real estate investors: if too many buyers compete to buy a rental property to get yield from a property then prices will go higher and yields as a percent of the property will go lower.    Since

2019-08-21T17:45:12-07:00August 21st, 2019|mayflowercapital blog|Comments Off on Negative Rates Explained

Negative Interest Rates May Intensify

   Recently there has been an increase in news stories about the increasing amount of negative interest rate debt. I had hoped that the problem of negative interest rates would somehow go away as people realized they don’t provide a solution. Instead, the negative loans and bonds are increasing.    To understand negative rates imagine yourself with all your assets in the form of gold coins while living in a medieval city-state in Italy in the year 1500. To secure you gold you would have to deposit the funds with a goldsmith who had a safe.  They would charge you a fee since they are merely providing a storage service. If the town was undergoing a siege by powerful adversaries

2019-08-12T18:24:42-07:00August 12th, 2019|mayflowercapital blog|Comments Off on Negative Interest Rates May Intensify

Investing in Gold: The Paradigms Have Changed

    Traditionally gold has tracked the inflation rate, in a hugely lumpy manner, until the great stock crash of 2008. Based on its historical behavior of correlating with inflation it should only be about $800 or $1,000 an ounce; instead it trades at $1,513. The theoretical reason for the 50% premium over hypothetical intrinsic value is that this is like a call option on the future: what if future inflation is much worse, thus justifying a high price for gold today?     The reason to stop using the old paradigm that gold simply tracks the CPI inflation index and instead start viewing gold differently, is that CPI or PCE inflation indexes are something based on lifestyles of the masses; by

2019-08-07T16:39:27-07:00August 7th, 2019|mayflowercapital blog|Comments Off on Investing in Gold: The Paradigms Have Changed

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

The Federal Reserve Could Make The Economy Worse

Some Federal Reserve governors want to make the economy run “hot” by rapidly increasing the money supply to cause inflation. They mistakenly believe that higher inflation will force consumers to overconsume and that will trigger economic growth. This is wrong because consumers and business managers won’t be fooled by inflation and will not sustainably increase spending and investing. As the Fed increases its degree of interference with and disruption of the economy then business managers will have to adjust for this which will include assigning a higher risk premium (a hurdle rate used to decide if a project is going to be successful) to business activities. When that happens the cost of capital will be higher that it otherwise would

2019-07-26T15:23:31-07:00July 26th, 2019|mayflowercapital blog|Comments Off on The Federal Reserve Could Make The Economy Worse

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?

Will Bonds Perform the Same as in the 1970’s Inflation Era?

   During the 1970’s there was a significant increase in inflation in the US and the UK which made interest rates rise, thus damaging long term bonds. Gold’s price rose during the 1970’s and was the best asset during that era. Stocks spent the inflationary era of 1966 to 1982 going down 50% and then their prices returned to their starting points after a 16 year bear market, so on a nominal price return basis investors made no gains, however they did get dividends. Could this time be different where yields are repressed by central banks and not allowed to rise in tandem with inflation? There was a precedent for that in the UK in the 1970’s the real rate

2019-07-12T16:11:06-07:00July 12th, 2019|mayflowercapital blog|Comments Off on Will Bonds Perform the Same as in the 1970’s Inflation Era?