Quantitative Easing

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

QE And Monetary Policy is a Confidence Game And a Placebo

   Quantitative easing (QE) and monetary policy don’t truly work except in the limited context of a placebo effect. Sophisticated business managers and investors plan around avoiding being manipulated by these activities, thus these manipulations don’t work. The ones who are unaware of the manipulation are the naïve working people who leapt to the conclusion they should buy a car or a house using low rate loans. Now look what happened where it was reported that the number of people with a 90 day delinquency on their car credit loans is the highest ever. If the economy is so good then why such a high default rate? The asymmetric nature of QE is that it does worse damage to the

2019-02-14T14:30:38+00:00February 14th, 2019|mayflowercapital blog|Comments Off on QE And Monetary Policy is a Confidence Game And a Placebo

Zero Rate Central Bank Programs Weaken The Economy

The asymmetry of zero rate programs: when rates are cut that hurts retirees who get most of their income from bond yields. It also destroys the consumer confidence of retirees. When people close to retirement age feel they can’t earn enough yield to afford to retire then they will refuse to retire, thus hoarding jobs needed by young people, which increases the supply of labor, thus suppressing wage growth. This is deflationary. When rates are cut the nature of amortized debt means that the payment doesn’t decline as much as one would think because as rates decline the amortization of principal increases, so the total payment doesn’t go down as much as if it were an interest-only loan. Also, lower

2019-01-31T14:33:58+00:00January 31st, 2019|mayflowercapital blog|Comments Off on Zero Rate Central Bank Programs Weaken The Economy

How High Will Rates Go Because of Quantitative Tightening?

         Quantitative Tightening (QT) is a plan by the Fed to sell off its bond holdings to undo their acquisition of bonds during Quantitative Easing (QE) of 2009-2014. These sales or portfolio run off will be done gradually over several years and was started 13 months ago. The disposition is to be done by selling off or allowing portfolio “run off” of 15% a year of assets starting in 2020 and ending in December, 2025. The pace is scheduled to be increased next year to 15% of assets; the first year was at a smaller pace. Ben Bernanke said QE lowered rates 0.85%, other people have said it lowered rates 0.5%. Assuming we use Bernanke’s figure of 0.85% and the

2018-11-26T17:06:32+00:00November 26th, 2018|mayflowercapital blog|Comments Off on How High Will Rates Go Because of Quantitative Tightening?

What Is The Proper Level For Rates?

  Regarding the concern that interest rates will rise to dangerously high levels, I doubt this will occur. The fear that Quantitative Tightening, where the Fed sells its holdings of bonds to undo QE, will make rates go up a lot is incorrect. When QE was implemented from 2009-2014 it didn’t create inflation and probably only lowered interest rates by 0.5%. The reason yields went down was because of global fears of falling into a debt/deflation trap and because other Developed countries (the EU, Japan, Scandinavia, Switzerland) had negative rates. I don’t see things getting better in Europe; probably the economic problems have not been truly solved in Japan. Thus since the fundamental reason for low yields in the U.S.

2018-11-05T17:54:35+00:00November 5th, 2018|mayflowercapital blog|Comments Off on What Is The Proper Level For Rates?

Will Unwinding QE Blow Up The Bond Market?

    The Fed has scheduled gradual, measured sales of its inventory of bonds so as to unwind the Quantitative Easing (QE) programs of 2008-2014. This could increase the supply of bonds in the market 20% which would act to raise interest rates. The controlling factor in this will be the level of interest rates; if they rise too quickly the Fed will have absolutely no choice but to slow down their scheduled sale of bonds. There is no need for the Fed to sell their bonds and plenty of need to avoid harming the economy with sudden rate increases. Many of the Fed’s holdings will have a natural “runoff”, if the bonds are not sold, of roughly 12 years, assuming

2018-01-17T13:04:11+00:00January 17th, 2018|mayflowercapital blog|Comments Off on Will Unwinding QE Blow Up The Bond Market?

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+00:00July 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+00:00May 24th, 2017|mayflowercapital blog|Comments Off on Will Central Banks Bailout Stocks During The Next Big Crash?