negative interest rate

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

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

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?

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

2019-03-06T17:44:43-07:00March 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

2019-02-27T15:39:09-07:00February 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

2019-02-20T19:26:13-07:00February 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

2017-05-08T10:29:22-07:00May 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

2016-10-21T11:20:39-07:00October 21st, 2016|mayflowercapital blog|Comments Off on Federal Reserve Unable To Bailout Investors In The Next Crash