negative interest rate

Central Bank Bubble Making: A Misleading Activity Worsening The Economy

   Don’t be fooled by the central bank’s ability to reflate the intangible financial economy and recover from a crash. If a crash occurs in financial assets then rhetorically speaking one can allege that prices are somehow unknowable or shrouded in an undiscoverable mystery so it’s somehow OK for central banks and governments to manipulate markets and artificially prop up asset prices. When stocks, bonds, real estate, and banks collapse, the central bank can print money and buy these assets at artificially high prices while the government and legislature can decree that “mark to market” accounting is suspended and that people must use the high water mark for valuation purposes.  This ability to create a miraculous “recovery” has fooled investors

2019-03-06T17:44:43+00:00March 6th, 2019|mayflowercapital blog|Comments Off on Central Bank Bubble Making: A Misleading Activity Worsening The Economy

Federal Reserve Ending QT Policy This Year

   The Federal Reserve intended to reverse the effects of Quantitative Easing by selling off its bond portfolio in an act called Quantitative Tightening (QT). The program started in late 2017. Only about 7% of assets were sold since then and now the Fed has suddenly decided to cancel QT this year. At this rate perhaps 11% of assets will have been sold, instead of the intended 100%. Most of the assets are intermediate term bonds or mortgage backed bonds that likely will “run off” (be prepaid) in a few years. The prepayment will occur if a recession triggers rate cuts that motivate borrowers to refinance, thus prepaying their loans. Thus, assuming a recession is coming soon, the portfolio will

2019-02-27T15:39:09+00:00February 27th, 2019|mayflowercapital blog|Comments Off on Federal Reserve Ending QT Policy This Year

QE And NIRP Monetary Policy is a Dangerous Trap

My concerns about QE: 1. It was a placebo that won’t work next time thus creating a surprise, not yet fully discounted by the stock market. 2. QE and associated polices of NIRP and bailouts, including the Japanese and Swiss central bank’s purchase of equities have created moral hazard that encourages speculators to operate in a riskier manner thus building up a higher degree of hidden risk that eventually will bubble to the surface and disrupt the economy. Imagine investors seeking to make income from writing naked put options. If they were lured into a false sense of security that they are entitled to a perma-bull fantasy of central banks bailout of markets then they may act recklessly and take

2019-02-20T19:26:13+00:00February 20th, 2019|mayflowercapital blog|Comments Off on QE And NIRP Monetary Policy is a Dangerous Trap

A New Era For Investors

             Stock market investors often discuss the topic that there is a “new era” where the old economics rules allegedly don’t apply. This concept usually happens when bullish people try to justify the high price of stocks after a huge runup. The stereotype is that a wise person says there is no new era, so avoid bubbles, etc. But there could be a new era. The new era maybe one where the Federal Reserve ceases their 30 years of massive rate cuts and bailouts that started in the crash of 1987. The Federal Reserve needs to raise rates to a “normal” level of rates. Based on that fact that the U-3 unemployment rate is very low, at 4.4%, the appropriate

2017-05-08T10:29:22+00:00May 8th, 2017|mayflowercapital blog|Comments Off on A New Era For Investors

Federal Reserve Unable To Bailout Investors In The Next Crash

The Federal Reserve is trapped in a situation where they wish they could raise rates just so they could have some ammunition in terms of the future ability to cut rates during next recession. They will need to cut rates 4% (which would result in rates at negative 3.5%) to stimulate but to do so they have to first raise them 3.5%. But that would create a recession and destroy their credibility. During the next crash they might be tempted to think that propping up stock prices by buying stocks would somehow help the economy. To do this they would need to get the law changed. But Republicans  in the House of Representatives tend to be Hard Money types that

2016-10-21T11:20:39+00:00October 21st, 2016|mayflowercapital blog|Comments Off on Federal Reserve Unable To Bailout Investors In The Next Crash

Rates Likely To Stay At Current Levels For A Year or Two

If lowering interest rates doesn’t transmit benefits to those most in need and damages future retirees, pension beneficiaries, life insurance companies, banks, etc., then perhaps there is no significant benefit in further lowering of rates. The old rule of thumb that the Fed has to cut rates 4% to stimulate would imply that the economy needs negative rates but this is not feasible because of behavioral economics consumers won’t tolerate this in terms of how it would affect insurance, bank accounts as well as pensions. Ultra-low rates can provoke naïve investors into foolishly lending to junk bond type of borrowers such as undocumented P2P loans, BDC’s, etc., but on a risk-adjusted basis these are bad for investors who were planning

2016-10-18T14:43:41+00:00October 18th, 2016|mayflowercapital blog|Comments Off on Rates Likely To Stay At Current Levels For A Year or Two

Are Negative Rates Ending?

In recent days more experts have spoken about the dangers of negative interest rates and how these risks will hurt the banking system leading to political pressure on central banks to stop their manipulation that created negative rates. I have been saying this for several months that negative rates will hit a dead end and central banks will be forced to back off. Bill Gross, a bond expert, said that the Fed’s actions of continuing to double down its bet on ever-increasing Quantitative Easing and a movement towards zero rates are not limitless because if investors lose faith in the monetary system and flee it by moving into gold or Bitcoin then the Fed will have lost its bet. His

2017-01-10T23:32:52+00:00October 4th, 2016|mayflowercapital blog|Comments Off on Are Negative Rates Ending?

Real Rates Negative For 26 Years

The cliché “There’s never been negative rates in 5,000 years” is wrong. The act of making a deposit in a bank only to see an uninsured bank fail and experience a huge loss of your account is like a form of negative total return for a bank account, which is like a negative rate of yield. This happened many times for 150 years before the 1934 FDIC legislation. When there were no banks people incurred many costs, including theft, to store their gold, so that was a form of negative “interest” on money. I saw an offer from a Custodian to hold physical gold for clients but at cost of 0.75% a year, so if one views gold as money

2017-01-10T23:32:52+00:00September 19th, 2016|mayflowercapital blog|Comments Off on Real Rates Negative For 26 Years

Reduction In Central Bank Credibility Coming Soon

The key error of economists is assuming all that matters in order to stimulate the economy is to lower interest rates; they ignore that this is deflationary and seriously damages consumer confidence for those who are savers or who lack desire to plunge into over priced stocks. Also economists fail to realize how consumer psychology can’t handle negative rates if implemented by any type of insurance company, especially ones offering Cash Value life insurance policies or annuities and those companies can’t survive either. Economists fail to realize that the entrepreneurial spirt of entrepreneurs is a key reason why mangers go ahead with new business projects that create growth and this decision is hardly influenced by low rates. If jet fuel

2017-01-10T23:32:53+00:00September 12th, 2016|mayflowercapital blog|Comments Off on Reduction In Central Bank Credibility Coming Soon

Japan Bond Market Rejects Negative Rates: Global Low Rates To End?

Japan’s government bond yields have been rising from negative rates up towards zero in the past six months. They have risen in a dramatic reversal of their downtrend. Japan is uniquely in a long term soft depression so it is difficult to compare to other countries. However, the recent repudiation by the market, of negative rates, is very interesting and hints that the Invisible Hand of the global market won’t tolerate them. I think ultimately throughout the world investors will rebel against negative interest rates. It may be partly by using paper money cash in a vault to avoid being charged a negative interest rate for a deposit. And it may be most likely in the form of severe problems

2016-09-06T16:11:23+00:00September 6th, 2016|mayflowercapital blog|Comments Off on Japan Bond Market Rejects Negative Rates: Global Low Rates To End?