bond forecast

Inflation Risk Greatly Reduced

   The recent inflation data included the first time a month’s core PPI was flat and core CPI was negative. Service industry inflation has peaked and the upward trend in rents has been broken. Core CPI for goods deflated YoY for each month over the past 12 months, which is unusual. It hit a peak at 2.3% and didn’t beat the previous cycle high of 2.5%. The core CPI (which excludes food and energy) is about 50% composed of rents. However, 65% of the population live in owner occupied homes, some with fixed rate loans or no loans. Those who rent often have a smaller residence as tenants, so the impact of rental inflation on them is not as big

April 20th, 2017|mayflowercapital blog|0 Comments

Growing Signs of Recession

The yield curve is flattening which implies a recession is coming, especially if it inverts and becomes negative. The difference between the 3 month Treasury versus the ten year Treasury ranged from 1.1% to 2.1% and is now 1.38%. If it drops another 0.18% the yield curve will be very close to its low point of the past year. After the market closed today IBM came out with a bad earnings report; its shares plunged 3.9% in after-hours trading. This could contribute to additional downward pressure on interest rates. China and Japan continue to look for ways to wiggle out from the pressure from Trump to open up their markets to American exports. One way for foreign nations to evade

April 18th, 2017|mayflowercapital blog|0 Comments

Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

The Trump administration continues to show that it is moving towards the center and towards a somewhat establishment or consensus type of policies. They are hemmed in by the moderate Republicans in Congress who won’t dare cut the existing welfare state benefits such as the ACA, etc. because they would lose their seats, and are also boxed in by the Freedom Coalition members who that hate growing deficits. Trump will not be able to engage in massive deficit fueled stimulus nor will he be able to cut costs and use the savings to finance a tax cut, thus depriving taxpayers of stimulus because they won’t get real net tax cuts. The administration seems to be moving towards recruiting more professional

April 10th, 2017|mayflowercapital blog|Comments Off on Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

Interest Rates Are Not Too Low

The history of interest rates shows that during the Great Depression when there was a 2% annual deflation and that real Treasury rates were about 4%. Real rates were about 2% before the GFC of 2008. Are rates too low, if one uses the 1930’s as a benchmark? Not necessarily. In the 1930’s the Federal Reserve was only 20 years old and had its credibility damaged by the great crash. The political risk was that Roosevelt, with an attempt by him to have a 100% income tax rate on high incomes, was moving the country to socialism with the risk that private property would be seized. Investors and economists may have felt that the government’s finances were not as strong

April 7th, 2017|mayflowercapital blog|Comments Off on Interest Rates Are Not Too Low

Inflation Alarm Bells Ringing: They Are Wrong

    The PCE inflation index was released by the BEA today showing a 2.1% increase in inflation. The 10 year Treasury bond yield dropped by 2 basis points. The PCE is more cautious and reliable than the CPI. At first glance it may be tempting to panic and fear that inflation is returning and that it will somehow morph into a 1970’s nightmare of high inflation. However, if one subtracts the effect of oil prices then the increase was not so threatening. Oil has increased 80% over the past year. Oil is about 4% of the economy. So the 80% oil price increase multiplied by 4% is 3.2% contribution to inflation which is slightly more than the 2.1% overall

March 31st, 2017|mayflowercapital blog|Comments Off on Inflation Alarm Bells Ringing: They Are Wrong

Will Tax Cuts Create Inflationary Stimulus?

    The Trump administration seeks massive tax cuts to stimulate the economy. The textbook economic response is that tax cuts stimulate the economy and cause inflation. However generic textbooks assume debt loads are much lower than today’s debts. High debts act to slow down consumption so the extra after-tax income from a tax cut may simply go to debt service instead of simulative consumption. The other problem is that the political will by Congress to cut taxes is lacking. When Reagan was elected in 1980 the tax code had no inflation indexing and thanks to the horrific inflation of the 1970s tax rates for moderate income workers were pushed into high brackets thus creating an unearned windfall for the IRS

March 28th, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Inflationary Stimulus?

Political Developments Imply Lack of Stimulus

    The defeat of the Republican’s anti-Obamacare bill today implies that the Republicans, including Trump, will be heading in the direction of a traditional Republican Establishment doing-nothing type of regime instead of a dynamic, aggressive libertarian agenda of deep budget cuts and deep tax cuts. It is far too dangerous for elected Republicans to remove traditional welfare state benefits such as Social Security, Medicare, food stamps, etc. The same applies to the ACA subsidy for health insurance. The rural, low paid, blue collar workers who voted for Trump may have no choice but to depend on Obamacare because health care at age 55-64 can cost $15,000 a year a person and lower-middle class people might only earn $30,000 thus making

March 24th, 2017|mayflowercapital blog|Comments Off on Political Developments Imply Lack of Stimulus

Rates Dropped Since Fed Increased Them Last Week

     Last week the Fed raised the Fed funds rate 0.25% when the ten year Treasury Note was 2.6%. Today stocks crashed down 1.2%. Now the ten year Note yields 2.44%, a drop of 16 basis points since the Fed‘s rate increase. The market has decided that the Fed’s tightening will be disinflationary so the market has cut the yield for long term bonds. The result is a flattened yield curve, which is a bearish sign for stocks. The House of Representatives Tea party members appear ready to block Trump’s healthcare legislation. The implication is that Trump will be unable to make substantial changes and thus he can’t implement inflationary stimulus infrastructure building programs or inflationary tax cuts. The structural

March 21st, 2017|mayflowercapital blog|Comments Off on Rates Dropped Since Fed Increased Them Last Week

Strategic Retreat By The Fed In Wednesday’s Rate Increase

     The Fed’s rate hike of Wednesday was a watershed event. They hiked even though they sluggish economy didn’t warrant a hike. They hiked in part because the free market already had the two year Treasury at 1.4% on March 15. The new fed funds rate is now about 0.875%, so the fed still needs to raise by 0.4% to 0.5% to reach the market’s estimate of interest rates. The Fed has decided to follow the market instead of lead it. The Fed has realized that QE was a mistake that made things worse. They realize that negative interest rates would vastly damage the economy and thus there is a zero bound line, even though it is possible to make

March 17th, 2017|mayflowercapital blog|Comments Off on Strategic Retreat By The Fed In Wednesday’s Rate Increase

Fed Raises Rates Yet Bond Yields Drop

Today the Fed raised their short term rate 0.25% to a range of about 0.875%. However, the free market has had the two year Treasury Note at 1.38% or near there for several weeks. Some people feel the free market short term rates are more reflective of the real world than the Fed’s artificial rate. If so, then the Invisible Hand of the market has already priced in the remaining 0.5% increase coming from the Fed later this year. The ten year bond yield dropped 9 basis points today as so as the Fed made their announcement. The market feels Fed tightening will fight inflation and thus increase the value of long term bonds. The comments that we are near

March 15th, 2017|mayflowercapital blog|Comments Off on Fed Raises Rates Yet Bond Yields Drop