interest rates

Drama in Bond Market: What is Happening?

    The past 10 days since the weekend of Saturday, March 7th, when Saudi Arabia started a severe oil price war, have had some of the most dramatic financial market movements ever, even more shocking than a few parts of the 1929 and 2008 crashes. What is particularly unusual is the end of the pattern where bond prices rise when stock prices fall. Instead bond and stock prices both fell together recently by significant amounts. This is because stocks are still significantly overpriced and need to go down much more to reach fair value. Bonds have been hurt by the politicians’ promises of massive deficit fueled stimulation to try and offset the damage caused by Corona Virus quarantine, etc. There

2020-03-18T18:31:28-07:00March 18th, 2020|mayflowercapital blog|Comments Off on Drama in Bond Market: What is Happening?

How Will The Man With The Pin Affect Stocks?

      In 2018 Fed chief Powell promised to raise rates and make progress using the Quantitative Tightening (QT) program to reverse out the asset purchases of the QE program. But by December 24, 2018 stocks had dropped about 20% since the previous high point of stocks that was reached in September, 2018. Powell decided to end the QT program and start cutting rates instead of continuing to raise them. When politicians get elected after promising to cut government spending they often catch an illness called Potomac Fever when they start working in Washington. This illness results in them suddenly empathizing with various special interest groups that want handouts at taxpayers’ expense; thus they break the pledge to cut and instead

2020-01-17T17:58:51-08:00January 17th, 2020|mayflowercapital blog|Comments Off on How Will The Man With The Pin Affect Stocks?

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?

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

Employment Market Weakens, Recession Coming Soon

    The Employment report was released by the BLS today showing only 75,000 new jobs created, less than the 100,000 a month needed to keep up with population growth. Thus, on a relative population-adjusted basis, employment shrank by 25,000 jobs. Based on employment to population percentages before the GFC of 2008, the hidden unemployed are roughly 1.0% to 1.5% of the workforce, thus the unemployment rate is close to 5% instead of the official 3.6%. Many workers are labeled by the BLS as employed even though they have a speculative, high risk self-employment occupation with almost no income or they may have a waiter’s “job” with a $2.50 an hour minimum wage. The inverted yield curve of bond yields implies

2019-06-07T14:57:58-07:00June 7th, 2019|mayflowercapital blog|Comments Off on Employment Market Weakens, Recession Coming Soon

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?

Will 2020 Be The Year of Investing During Negative Interest Rates?

   Assuming the Fed is going into a major easing cycle and will come close to the rates in the EU and Japan then what should U.S. investors do? Increase bond portfolio duration but only with bonds that offer significant call protection and only with investment grade bonds. Avoid BBB rated corporate or BBB rated Muni bonds. If you own bonds subject to a call provision (mortgage backed bonds, typically) be sure not to own them if they trade over par as they may be called and paid off at par thus depriving you of the bond premium. Be careful not to have too much duration as no one knows what the future will be like; there is no guarantee

2019-03-25T17:19:06-07:00March 25th, 2019|mayflowercapital blog|Comments Off on Will 2020 Be The Year of Investing During Negative Interest Rates?

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

Debt Crisis: Will High Interest Rates Occur?

   Yesterday bond guru Jeff Gundlach gave a scary lecture, warning about the danger of rising federal deficits which in turn could trigger a decline in the value of the dollar and a significant rise in interest rates. I disagree. I lived through the scary inflationary 1970’s when some yields hit 21% in 1981 and inflation hit 14%. Many frightening things happened in the 1970’s where it was common for people to worry that we were doomed, but eventually inflation was brought under control and the economy grew out of its problems. First, the recent contribution to the rising deficit is the Trump tax cut signed on 12-22-2017. But this is a temporary law constrained by the ten year time

2019-03-13T14:24:55-07:00March 13th, 2019|mayflowercapital blog|Comments Off on Debt Crisis: Will High Interest Rates Occur?