Quantitative Easing

Central Banks Ending QE: Will Rates Go Up?

               Global central banks are retreating from Quantitative Easing, creating a fear of rising rates. During the QE programs in the U.S. the extra money went into stocks but didn’t go into bonds so bond prices went down moderately, making yields go up 0.63% during the average of each of the QE’s. Then when QE’s ended stock gains slowed and the yield on the 10 year Treasury dropped 0.83% on average. Investors became afraid that a recession would occur if QE ended so that made interest rates go down when QE ended, just the opposite of what the Fed intended. Thus, the effect of a cycle of starting and then stopping QE was a net drop in yields of 0.20%

2017-07-06T13:53:38-07:00 July 6th, 2017|mayflowercapital blog|Comments Off on Central Banks Ending QE: Will Rates Go Up?

Will Central Banks Bailout Stocks During The Next Big Crash?

   Some people are saying that because the ECB and Japan’s central bank have bought so many local bonds that they will eventually have bought all of their countries’ bonds and will be forced to buy global stocks in an attempt to flood the world with Quantitative Easing (QE) stimulus. Does this mean that stocks will be purchased by central banks, leading to an even greater deviation (a bubble) from traditional fundamental analysis? The answer is that it depends on central banks’ desire to indefinitely pursue QE. I believe the U.S. Federal Reserve has already decided to repudiate QE and Zero Rate Policies (ZIRP) and back away from them very slowly so that no one realizes what is happening. Eventually

2017-05-24T13:56:08-07:00 May 24th, 2017|mayflowercapital blog|Comments Off on Will Central Banks Bailout Stocks During The Next Big Crash?

Failed Central Bank Policy Will Lead To Bear Market

Keynesian deficit based fiscal stimulus and extreme monetary policy such as Quantitative Easing and ZIRP are based on the assumption that wealthy people mistakenly hoard cash instead of spending and investing and if they can be tricked into spending then the economy will get out of stagnation or depression. The problem is that the object of the manipulation doesn’t want to be manipulated and is searching for evidence that such a policy might make him or her worse off. Thus these policies are less likely to work the more aggressive they become. During a time of runaway inflation accompanied by price controls consumers and merchants know they mast plan ahead for that. Merchants react during inflation by withholding artificially low

2016-05-11T14:31:56-07:00 May 11th, 2016|mayflowercapital blog|Comments Off on Failed Central Bank Policy Will Lead To Bear Market

QE and ZIRP Don’t Create a Wealth Effect

Central bank Quantitative Easing bubble making doesn’t really promote a wealth effect that stimulates consumption because the beneficiaries doubt the soundness of the stock rally caused by QE and thus refuse to spend their newly acquired wealth. Investors seem to be more alert to the possibility that stock market values are unreliable and thus they won’t allow rising stock prices to encourage excessive consumption. Stocks, except for the nine FANGS stocks, have been flat and in the case of the NY Composite stocks topped out on July 3, 2014 (on an inflation-adjusted basis) and are now down 5%. A consumer / investor who “benefits” from a rising stock market would say if he lost 5% over two years, excluding dividends,

2017-01-10T23:33:01-08:00 April 26th, 2016|mayflowercapital blog|Comments Off on QE and ZIRP Don’t Create a Wealth Effect

Will The Fed Start QE4 To Stop The Stock Market Crash?

Investors who distrusted Quantitative Easing (QE) would complain that Fed would constantly start a new program that would make the bubble even bigger. Thus one may ask is it too risky to become bearish because the Fed could start a new bubble? The answer is that for the Fed to truly ramp up a new QE4 program things would have to get much worse first. There are plenty of inflation hawks at the Fed who feel the hidden unemployed are not really in the labor market (sort of like Marie Antoinette telling the poor to eat cake). These hawks will dig in their heels and refuse to do any more stimulation since they have won a hard fought battle to

2016-01-15T15:46:53-08:00 January 15th, 2016|mayflowercapital blog|Comments Off on Will The Fed Start QE4 To Stop The Stock Market Crash?

Rapid Money Growth IsA Misleading Symptom That Won’t Help The Economy

   In The Telegraph newspaper, Ambrose Evans-Pritchard wrote that global M3 money supply is growing at fastest rate in 25 years (except for a brief moment in 2008) and that it is a sign of economic expansion. I disagree. The money supply can grow because of Quantitative Easing and the proceeds of QE may simply be parked in a vault and not used so this statistic is misleading. If the only way that money supply could grow is through a new commercial bank loan issued by a bank that uses traditional underwriting then that would correlate with growth because in order to get the loan the borrower has to have a credible, documented plan to expand their company.    However,

2015-11-05T09:12:00-08:00 November 5th, 2015|mayflowercapital blog|Comments Off on Rapid Money Growth IsA Misleading Symptom That Won’t Help The Economy

Does Behavioral Economics Justify the Fed’s QE program?

   The Fed’s lowering of rates assumes people either will be fooled in a non-emotional way or they will get emotional and make a leap of faith and over-consume because of the perceived value of low rates.  In economics and investing there is growing acceptance that emotions influence investors and consumers to act irrationally. However the degree to which emotions influence decision makers depends on the gravity of the situation. If the decision maker is trying to make a corporate growth decision like build a factory then most of the decision will be based on logic. If the decision maker is a retail investor with a busy career in a different field who spends an hour a day reading a

2015-10-23T16:49:00-07:00 October 23rd, 2015|mayflowercapital blog|Comments Off on Does Behavioral Economics Justify the Fed’s QE program?

QE Can’t Lower Rates Enough To Stimulate the Economy

Quantitative Easing (QE) allegedly acts to lower interest rates. It does this in a rather indirect way by depriving bond investors and savers of yield so they may seek to invest in yield bearing high risk things like junk bonds possibly blending them with low yield investment grade bonds. The big misunderstanding about how QE lowers rates is that it doesn’t lower rates for investment grade borrowers or at least not enough to induce them to engage in demand creating massive purchase of plant, equipment and the hiring of employees. Instead these investment grade borrowers retrench and refuse to use low rates to expand because they know that the risk of not being able to repay principal is more important

2015-10-22T13:40:00-07:00 October 22nd, 2015|mayflowercapital blog|Comments Off on QE Can’t Lower Rates Enough To Stimulate the Economy

Japan’s Economy Not Responding To Stimulus

The extreme use of Quantitative Easing (QE) by Japan to stimulate its economy in the past two and a half years has resulted in more government debt but hasn’t increased growth. See this article in the FT. Basically the intent of QE, in any country, is to create the equivalent of negative interest rates which are like a passive wealth tax on idle cash so that businesses will be motivated to invest in capital goods and expand the economy. However people will decide it is more efficient and secure to just pay the “tax” than it is to build a factory from scratch only to find out in a deflationary world that there was insufficient demand for the factory’s output

2017-01-10T23:33:13-08:00 October 1st, 2015|mayflowercapital blog|Comments Off on Japan’s Economy Not Responding To Stimulus

Will Central Banks Keep Pushing Rates Even Into Negative Amounts?

   What happens during the next huge crash when the Federal Reserve tries to bail out investors? If rates remain low then they can’t cut rates significantly. If they try to engineer deeply negative rates that could trigger a drop in consumer confidence as people would worry that something strange and unknown is happening. If they tried to implement deeply negative rates it would undermine the confidence of the business community to expand plant, equipment and employment and be seen as the equivalent of a tax increase in a recession which will make things worse. Lowering rates won’t necessarily make stocks go up after a crash.    Perhaps the Federal Reserve will decide the only solution is for each individual

2017-01-10T23:33:15-08:00 August 12th, 2015|mayflowercapital blog|Comments Off on Will Central Banks Keep Pushing Rates Even Into Negative Amounts?