preparing for a crash

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

2017-02-14T13:36:23-08:00February 14th, 2017|mayflowercapital blog|Comments Off on Stocks Hit New High: Does That Mean Time To Buy Them?

Rising Tariff Taxes To Start Recession

If consumers have a choice between paying 22% more (because of new tariffs) for imported goods or paying far higher prices for domestic goods then they will continue to use imported goods. If workers in EM counties get $2 an hour versus $22 in the U.S. and labor is half the cost of domestic goods and services then EM labor has an unbeatable advantage over domestic labor, even with a 45% tariff. I doubt the new administration’s attempt to bring back the lost jobs will work. Instead, people will have to put up with higher costs and they will be forced to cut something else out of their budget, thus creating unemployment for the unlucky producer of goods and services

2017-01-12T12:45:28-08:00January 12th, 2017|mayflowercapital blog|Comments Off on Rising Tariff Taxes To Start Recession

Do Active Managers Fail To Beat Indexes?

        Imagine an index of single family rental homes. Suppose half of them were owned by landlords who refused to buy insurance. The profits earned by uninsured landlords would be higher than the average properties’ profits unless they had a fire. The half of the landlords who insisted on being insured would underperform the index, unless a major fire occurred. If you don’t want to or are unable to buy insurance then an alternative is to try to reduce risk which is what many active investment managers do. Reducing risk means buying lower risk companies, which may be seen by the general public as wimpy underperforming stocks. In securities investing managers try to avoid excessively risky stocks and may end

2017-01-10T23:32:51-08:00October 25th, 2016|mayflowercapital blog|Comments Off on Do Active Managers Fail To Beat Indexes?

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

Understanding The True Meaning of Bonds And Cash

Cash and investment grade bonds with modest duration are a form of self-insurance against risk of a crash in risk-on assets. They are like the ballast in a ship that seems to waste space, weight, and money with no visible benefit, yet it is needed. An analogy could that in examining an insurance company the central asset they own to be used to pay for claims are investment grade bonds and cash. If investors want to act like their own insurance company they will have to load up on these assets. The way to understand the true meaning of cash is to see it as a tool to get a job done. The job is to rescue someone from a

2017-01-10T23:32:52-08:00September 23rd, 2016|mayflowercapital blog|Comments Off on Understanding The True Meaning of Bonds And Cash

Central Banks Unable To Prevent Stock Crash

Tonight the central bank of Japan will release a plan about its monetary policy. The risk is they may shake up the fragile global bond markets with a surprise. The real surprise could come from the U.S. Federal Reserve, probably not at tomorrow’s meeting, but at the December meeting after the election. Many economists believe that the Fed should raise rates gradually until short term rates are 1.5% instead of 0.45% and long term rates are about 2.5% for the ten year Treasury instead of 1.68%. Since much of the world wants more stimulation through lower rates and lower currency values in their countries then when our central bank raises rates that will make the dollar go up in value

2016-09-20T11:24:05-07:00September 20th, 2016|mayflowercapital blog|Comments Off on Central Banks Unable To Prevent Stock Crash

Lehman Crash Anniversary: Inspiration To Be Vigilant

On 9-15-2008 Lehman filed for the world’s largest bankruptcy. They didn’t get a bailout and bondholders of the company (which was rated by ratings agencies as BBB investment grade) lost about 90% of their assets. Some people say it was an unpredictable Black Swan event, but there were reasons to anticipate that it could happen, especially after the instantaneous forced sale of Bear, Stearns at a 90% drop in price to Chase six months earlier. Some of the problems tied to the systemic crash have been fixed, but not enough. During the next crash many leveraged owners of real estate may be better capitalized than in 2008 and thus less likely to default, so the next crash probably won’t be

2017-01-10T23:32:53-08:00September 15th, 2016|mayflowercapital blog|Comments Off on Lehman Crash Anniversary: Inspiration To Be Vigilant

No Way To Refute Bearish Points

One of the most shocking economic statistics are the ones showing the difference between the claim that the economy is in full employment mode even though the hidden unemployed are several percentage points higher than the official U-3 unemployment rate of 4.9%. For a while I didn’t let that be a significant concern because I felt perhaps some of the hard core unemployed were so unskilled and deserving of only a minimum wage job that their absence from the economy wouldn’t have made that much of a difference. But reading David Rosenberg say that the Employment to Population ratio is at a level consistent with 8% jobless instead of 5% I felt perhaps this topic needed to more closely reviewed

2017-01-10T23:32:53-08:00August 29th, 2016|mayflowercapital blog|Comments Off on No Way To Refute Bearish Points

Economists Bad Advice About Saving Makes Things Worse

Economists typically believe that during a recession that affluent people save too much so they seek to pressure them to spend more to stimulate the economy. One way to attempt to do this is to make interest rates low so that savers will subsidize borrowers because borrowers want to spend instead of save. This is not a good way to run the economy because savings need to be firewalled off from spenders otherwise an accident could happen resulting in loss of savings. People need to understand that savings (including bonds) are vital towards building a form of self-insurance against financial risks. If people are pressured by low rates to give up saving this damages the ability to consume in the

2017-01-10T23:32:53-08:00August 12th, 2016|mayflowercapital blog|Comments Off on Economists Bad Advice About Saving Makes Things Worse