Fed tightening

Gridlock May Be Disinflationary

    The future of politics is that Congressional Republican leaders don’t want Trump to boss them around or gain control so these leaders will maintain the status quo of the Senate filibuster and thus allow it to help the Democrats to block legislation, thus creating gridlock that is coming from inside of the Republican party but which can be blamed on Democrats.  Then Trump will be unable to create dramatic fiscal stimulus and will end up being a do-nothing president. House Speaker Paul Ryan doesn’t want to unite with Democrats to create a majority voting block that can bypass the Freedom Caucus. By announcing that policy he is basically refusing to play politics with Trump and is allowing the Freedom

April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

Inflation: Ready to Destroy Bonds?

   The Fed meets tomorrow where they will raise rates by 0.75% over the next nine months. Based on rate increases in proportion to inflation and GDP this would be like rising rates at roughly double that pace in the old days. And if one adjusts for the huge balances of debts compared to several decades ago then the effect of the coming rate increases would be even more dramatic. This would be like taxing the economy to cool down inflation. The financial press seems to feel that the economy has fully recovered and that the labor market is tight and that inflation is ready to accelerate. I disagree. Bond prices may have been pushed up by flight capital fleeing

March 14th, 2017|mayflowercapital blog|Comments Off on Inflation: Ready to Destroy Bonds?

Fed Raises Rates, Stocks Crash

Fed chair Yellen raised the Fed’s rate today, as expected, by 0.25%. The Russell 2000 went down 1.25%. The yield on the ten year Treasury went up 0.05%. As short term rates rise this discourages inflation which makes long term bonds more attractive. Currently the dollar based bonds yield much more than bonds of other Developed countries such as Germany or Japan where long term rates are close to zero. The Fed will gradually raise rates in quarter point increments in 2017 by a cumulative 0.75% until the Fed funds rate is in a range of about 1.25% to 1.45%. It is possible that the yield curve could go flat and that long term Treasuries could actually drop to come

December 14th, 2016|mayflowercapital blog|Comments Off on Fed Raises Rates, Stocks Crash

Rates Went Up When Yellen Spoke: What Will Happen To Rates?

The ten year Treasury yield went up from 1.57% to 1.63% today because of Yellen’s speech at the Fed’s annual meeting at Jackson Hole, Wyoming. Assuming that the U.S. economy was (hypothetically) firewalled from foreign influence then perhaps short term Fed funds rates should be at 1.5%, assuming the price of money should mostly reflect compensation for inflation. People have gotten used to high rates as the correct standard after living through the high inflation era of the 1970’s, followed by high rates for another decade in the 1980’s to wring out inflation, (even in the 1990’s rates were often over 5% for the Lehman Agg index). Thus it is logical that people’s emotions should cause them to feel that

August 26th, 2016|mayflowercapital blog|Comments Off on Rates Went Up When Yellen Spoke: What Will Happen To Rates?

Rising Rates: Is This The Start of a Secular Rate Hike Cycle?

Today the ten year Treasury yield jumped from 1.76% to 1.88%, a significant jump. Rumor is that the Federal Reserve will raise short term rates in June. My opinion is that if they do then it will act to encourage bond investors to believe that the Fed is fighting inflation and this will act to support bond prices for long maturity bonds, and suppress interest rate increases of the ten year bond. Thus the possible Fed rate increase may not hurt long term bonds. The big picture is that in the past 25 years the world’s economy has become highly integrated and interdependent. Thus if China, Japan, and the EU all experience a deep recession next year then the massive

May 18th, 2016|mayflowercapital blog|Comments Off on Rising Rates: Is This The Start of a Secular Rate Hike Cycle?

Globally Integrated Economy Means U.S. Rates Already Peaked

    The said IMF global growth is estimated to be 3.3%; my guess if China’s rate is exaggerated and subject to a dropping to a much lower rate then perhaps global growth will fall to the mid-2% range like in the U.S.; if most Developed countries are like the EU, Japan and the EM engine of growth suddenly declines to 2.5% then I would expect global real GDP to be close to going below the stall speed of 2%.    If the global financial economy is integrated then global conditions contribute heavily to domestic inflation or disinflation. The U.S. is only 20% of the world’s economy so we should respect the possibility that conditions in the rest of the world

December 17th, 2015|mayflowercapital blog|Comments Off on Globally Integrated Economy Means U.S. Rates Already Peaked

Will Fed’s Rate Rise Damage Bonds?

How will bonds be affected by the Fed’s plan to raise rates 1% over the next 12 months? A portfolio with a duration of 4 would lose roughly 4% of value. A portfolio of 30 year bonds would have a duration of 22 and would lose 22% of value. However if the economy is soft and inflation stays low then higher short term rates may persuade some leveraged owners of long term bonds to sell their bonds. On the other hand if short term rates weaken the economy then it would be bullish for long term bonds and they would go up in value.    When an investor uses short term loans at institutional rates to buy long term bonds

December 16th, 2015|mayflowercapital blog|Comments Off on Will Fed’s Rate Rise Damage Bonds?

Fed: That’s The Rule, No Exceptions Allowed!

   The Fed raised the rate today. It reminds me of when a low income person owed 57 cents in city income tax, so they called the city and was told they didn’t have to pay since it was under a dollar. Later they were arrested and jailed by the police for delinquent taxes because of an outstanding lien for 57 cents. The policeman said I’m simply following the rules, I have to do it.     The Fed is simply following the “rules” which are that after the economy gets close to (alleged) full employment then real interest rates shall be 2% instead of the current near zero rate. That’s the textbook rule and it must be followed no matter

December 16th, 2015|mayflowercapital blog|Comments Off on Fed: That’s The Rule, No Exceptions Allowed!

Tightening Financial Conditions Explain Why Stocks Are Declining

   Financial conditions have tightened significantly since stocks (in the NYA index) reached an inflation adjusted peak in July, 2014. Goldman Sachs developed a Financial Conditions FCI index that went from 99.5 in July, 2014 to 106 recently. The increase in the index measures the impact of tightening financial conditions on the economy and includes the effect from foreign currency, and credit quality spread costs, etc. As the EM countries and the commodity export countries got weaker in November, 2014 there has developed a dichotomy between well run highly developed countries versus underdeveloped EM countries that have excessive growth that was fueled by a temporary and phony commodities boom which was greatly aided by the excessive use of debt.   

September 24th, 2015|mayflowercapital blog|Comments Off on Tightening Financial Conditions Explain Why Stocks Are Declining

Should The Federal Reserve Raise Rates Tomorrow?

   Rates have been absurdly low for a very long time. One author wrote that rates are the lowest in 5,000 years, another said they are the lowest in the 300 years of the history of the Bank of England, another said rates are the lowest in 800 years of European history.    Lower rates don’t fool business managers into adding on unneeded jobs, plant and equipment. By contrast, during an era of ultra-high rates when Volcker ran the Fed there were times when high rates created situation where the only projects that could pass a high hurdle rate of about 15% were approved by corporations. This resulted in a much stronger economy because only very profitable projects could get

September 16th, 2015|mayflowercapital blog|Comments Off on Should The Federal Reserve Raise Rates Tomorrow?