preparing for a crash

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

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

Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

   Stock buybacks remind me of the mortgage backed securities bubble of 2008 where banks sold packages of loans to other banks, creating a debt and real estate bubble. One bank would create poor quality loans, get an inflated rating from a ratings agency, package the loans into securities and then sell them to another bank, where the seller alleged they were investment grade bonds. The new owner of the loans could then tell regulators that the bank owned securities were rated “AAA” by ratings agencies, thus passing a bank regulator exam when instead they should not have passed the exam. This fueled the 1997-2007 housing bubble, and created the illusion of economic growth and stability when instead it was

2018-12-28T17:13:57-07:00December 28th, 2018|mayflowercapital blog|Comments Off on Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

Hedge Funds Are Failing: Regime Change

    A webinar by a prominent hedge-like mutual fund offered no good reason for their underperformance. I suspect they incorrectly assumed they were diversified, but they failed to realize that during a bubble, most assets have their correlation rise to be nearly fully correlated. The only quality diversification tools (especially during bubbles) are low duration Investment Grade bonds, or buying puts, etc. and thus they weren’t as diversified as they thought. They say their losses are in middle of the pack of peer group competitors but since they greatly underperformed a short term bond index (like the bond ETF AGG which lost 1.31% in 12 months, versus the 9.85% loss of a hedge-like fund in 12 months thru 9-30-2018) and

2018-10-19T17:29:14-07:00October 19th, 2018|mayflowercapital blog|Comments Off on Hedge Funds Are Failing: Regime Change

Bond Ratings Wrong Again

   Investment Grade bond prices haven’t been doing very well in the first half of the year. One reason is because rates went up, lowering the value of bonds. Another reason is that the Investment Grade (IG) sector is now 50% in BBB rated, the lowest rating for IG and thus only a tiny step above falling into junk category during a recession. The ratings agencies, once again, are not doing the right thing in rating bonds. The problem is that corporate bonds rated BBB may have a true value of one notch lower (the truth to be exposed during the coming recession). The bond market experts sense this and have begun to sell off this niche, making the price

2018-07-03T15:18:23-07:00July 3rd, 2018|mayflowercapital blog|Comments Off on Bond Ratings Wrong Again

Yield Curve Inversion Coming Soon

    Increasingly more articles have been written by various people saying that the bond market’s yield curve (where yields are placed on a chart in a curved pattern) is the best predictor of recessions when it inverts and that it is getting close to inverting. It may be as little as a 0.50% rate increase could tip it over into an inversion where short term rates are higher than long term rates. The difference (spread) between the 2 year and 10 year Treasury Note is 0.44%.     The next Fed meeting is May 1 – 2, followed by June 12 – 13. So Wednesday, June 13 the yield curve could be inverted, tipping over the economy into recession, assuming they

2018-04-17T16:08:25-07:00April 17th, 2018|mayflowercapital blog|Comments Off on Yield Curve Inversion Coming Soon

Dow Has Worst Point Loss Ever

   Today’s stock crash made the Dow drop 1,175 points today. The Dow is almost down 10% intraday (8.6% at the close) from the high point of a week ago. The VIX volatility gauge closed at 38, it was at 12 last week, and in early January was as low as 9.2. The fact that VIX went up 3x in a few days is impressive. I believe in fundamental analysis. Based on fundamentals like PE10, Price to Sales, Price to GDP, stocks are roughly worth about half of their recent highs of last week. I expect to see the SP index trade at 1,400. It can drop an extra 20% due to a panic, so it could briefly hit 1,100

2018-02-05T15:30:42-07:00February 5th, 2018|mayflowercapital blog|Comments Off on Dow Has Worst Point Loss Ever

Tech Meltdown: Will It Be The Needle That Bursts The Stock Market Bubble?

    Today’s news of the Meltdown and Spectre flaws in computer hardware and software are a stunning defeat for the tech industry in a way that reminds me of the Lehman crisis of 2008 that started the crash of 2008.   It may be that chip makers will need to rush production of millions of new chips, and then device manufacturers will have to retrofit devices, possibly creating a year-long backlog. If prominent tech companies (the FANGs companies) are the vanguard of the current stock boom then if they suffer a sharp drop in profits on top of a high PE ratio perhaps that will trigger a much needed stock market correction. The top 50 companies, (mostly tech or pharma),

2018-01-03T23:22:55-07:00January 3rd, 2018|mayflowercapital blog|Comments Off on Tech Meltdown: Will It Be The Needle That Bursts The Stock Market Bubble?

Are Modern Stock Markets Safe Enough To Justify High Prices?

   The Great Depression was worse than the crash of 1981 or 2008 because there were no stabilizing institutions or programs like Social Security, welfare, FDIC, SEC, TARP, QE, etc. so the all-in impact meant that people in distress were in deeper trouble compared to victims of modern day crashes. However, there was one bright, risk reducing spot in the 1930’s: dividends were very high, around 6%. The big yields acted to lower duration of stocks and thus reduce risk. Also in those days people were used to the idea they had to be responsible and take care of themselves. So prudent investors would have parked cash in the least risky banks and in Treasuries before the crash; prudent people

2017-04-03T14:27:34-07:00April 3rd, 2017|mayflowercapital blog|Comments Off on Are Modern Stock Markets Safe Enough To Justify High Prices?

Stocks Hit New High: Does That Mean Time To Buy Them?

Stocks continue to rise. The SP index reached 2,337. The ten year Treasury yield is 2.47%. As stocks rise to excessive heights that induces some bond investors to sell bonds and buy stocks. This makes bond prices go down and stock prices go up. However, since stocks are very high priced, it is wrong to chase after a bubble and buy stocks. Instead, people should avoid the bubble in stocks and seek refuge in short term duration bonds, preferably in investment grade quality bonds. The current rally reminds me of the feverish pace of the stock bubble of 1998-2000 when it kept going higher even as a growing number of experts were forecasting a crash. The experts looked bad because

2017-02-14T13:36:23-07:00February 14th, 2017|mayflowercapital blog|Comments Off on Stocks Hit New High: Does That Mean Time To Buy Them?