Monthly Archives: December 2016

New Tax Laws Effect On Interest Rates

It is rumored the new administration might seek tax laws that outlaw the deduction of interest by businesses. This would create less demand for loans which would lower interest rates. The other rumor is that they would end Municipal bond tax-free interest income. This would make city and state governments pay more for interest since those bonds would no longer be tax-free. This would discourage the issuance of investment grade debt thus making the severe shortage of investment grade debt even worse, which would raise bond prices and lower yields. If interest expense is not allowed as a tax deduction for business then corporations might issue more stock and pay off loans. This would absorb capital that otherwise could go

2016-12-28T14:40:11-08:00December 28th, 2016|mayflowercapital blog|Comments Off on New Tax Laws Effect On Interest Rates

Managed Trade: Is It Inflationary or Deflationary?

Restrictions on imports that compel the transfer of jobs into a trading partner’s country are called “Managed Trade”. If China agrees to move jobs to the U.S. that make the products that are half of its exports to U.S. then this should solve a potential trade war, making it a non-issue. Assuming the U.S. imports 2 widgets a year from China at $10 each and needs to have one built domestically to fix the trade imbalance then the domestic widget would cost an extra $30 to make, however, some savings from avoiding international travel might reduce that. The result could be $(30 + 10)/2=$20 a widget. A 100% price increase might be a one-time thing. Also a Yuan devaluation of

2016-12-23T15:29:46-08:00December 23rd, 2016|mayflowercapital blog|Comments Off on Managed Trade: Is It Inflationary or Deflationary?

Trade Wars: What Will Be The Outcome?

If the new administration gets assertive with foreign countries’ exports to the U.S. this may start a trade war. The EM countries are addicted to a model of an export driven economy, and they have a lot of commodity producing industries. Commodities are notorious for a deep boom and bust cycle and a 200 year trend for commodity prices to go down on a CPI adjusted basis. EM countries are disproportionately dependent on loans from Developed countries, particularly the U.S., since EU and Japanese banks may be somewhat weak and less able to lend. Additionally international loans are often dollar denominated and the dollar is expected to go even higher to 120 for the DXY despite having risen from 70

2016-12-22T11:44:21-08:00December 22nd, 2016|mayflowercapital blog|Comments Off on Trade Wars: What Will Be The Outcome?

Will Trump Create a Boom, Making Interest Rates Rise?

Interest rates are influenced by inflation and by growth rates. When economic activity increases that increases the demand for funds, which makes the “natural real” rate of interest rise. If Trump can make the economy grow at 3.5% instead of 2.0% the extra 1.5% growth could translate into a similar increase in interest rates even if the growth were non-inflationary. A rough estimate is that rates in the pre-2008 era were the sum of inflation and real GDP growth, so a 1.5% surprise increase in growth implies a 1.5% surprise increase in interest rates. This could make the ten year Treasury bond drop 13% in value. Bond investors should not obsess with only watching inflation because there are other reasons

2016-12-21T11:17:13-08:00December 21st, 2016|mayflowercapital blog|Comments Off on Will Trump Create a Boom, Making Interest Rates Rise?

Will Inflation Beat Disinflation During The New Administration?

One expert claimed the proposed 20% import tax collected through corporations would increase PPI inflation by 5%. In my opinion this would only be a one-time bump up in the price index rather than making the annual inflation rate 5%. If a bond with a ten year life is analyzed by discounted cash flow method where nine years have inflation at 2% and one year at 5% then the ten year average inflation would be 2.3% instead of 2.0%. The extra 0.3% inflation, if applied to an interest rate used to discount and calculate value would make a ten year bond with an 8.8 duration drop in value by 2.6%. A 3 year duration bond might be discounted downwards by

2016-12-20T11:51:06-08:00December 20th, 2016|mayflowercapital blog|Comments Off on Will Inflation Beat Disinflation During The New Administration?

Inflation Risk For Bonds Outweighed By Crash Risk For Economy

In 2017 inflation may increase because of a bottoming of oil prices. The economic climate of fiscal stimulation and deficit spending along with import restrictions may also raise prices. This will hurt bonds. However, the strategic global picture is that EM countries, the EU, and Japan all have serious unresolved structural problems resulting in too much output and inadequate demand and too much debt. The global economy has bottomed out almost eight years ago. Typically recessions occur every seven to nine years so 2017 ought to be time for a recession. Perhaps Trump will accidentally touch off a deflationary global trade war, which will reduce demand and push the already weak foreign economies into recession. The U.S. exports a lot

2016-12-19T13:09:21-08:00December 19th, 2016|mayflowercapital blog|Comments Off on Inflation Risk For Bonds Outweighed By Crash Risk For Economy

Is Global Inflation Increasing?

The ten year U.S. Treasury today reached 2.59% this morning. It has been in a range from 1.38% to 3.0% over the past four years. It usually trades in a range of 2.0% to 2.5% although this year it briefly went to 1.38%. Before the great crash of 2008 it traded close to nominal GDP, typically about 4 to 5%. There have been rumors that the global economy is becoming hotter and that inflation is rising. I disagree. Typically several years after a recession the labor market is the last component of the economy to heal and when it heals that may trigger inflation. Yes, it is improving but it could very well be a blow off top, which is

2017-01-10T23:32:49-08:00December 16th, 2016|mayflowercapital blog|Comments Off on Is Global Inflation Increasing?

Risk Of Crashes In China and The EU: Is It Possible They Never Occur?

A significant reason for expecting U.S. rates to stay low or temporarily go even lower is because of the contingent risk of a depression in China or the EU. But is it possible that they can avoid a crash by magically printing (with central bank money supply increases) their way out of trouble? The bond bull’s theory is that excessive, non-underwritten policy loans in China and the EU created an unsustainable debt bubble, which can’t last forever, and when it ends it will be deflationary. Is it possible that if China and the EU endlessly repeat the equivalent of the U.S. Federal Reserve bailout of AIG with printed money that somehow a miraculous result of a crash-free utopia will occur?

2017-01-10T23:32:49-08:00December 15th, 2016|mayflowercapital blog|Comments Off on Risk Of Crashes In China and The EU: Is It Possible They Never Occur?

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

2017-01-10T23:32:49-08:00December 14th, 2016|mayflowercapital blog|Comments Off on Fed Raises Rates, Stocks Crash

Rising Interest Rates, Rising Dollar Leads To Global Monetary Tightening In A World With Excessive Debt

The central banks of the world are quietly tiptoeing away from their mistaken belief in Quantitative Easing and zero rate policy and are glad that Trump’s fiscal stimulus gives them cover to back away from QE and ZIRP. If the U.S. assertively institutes a robust increase in interest rates while Japan and the EU have near zero rates that will make the dollar go way up and this will create a global tightening of the economy because many foreigners borrow in dollars and will be ruined if they have to pay much higher loan payments. Remember the chaos in EM countries caused by the June, 2013 Taper Tantrum? (And it didn’t even happen, it was merely a contingent risk). Now

2017-01-10T23:32:49-08:00December 13th, 2016|mayflowercapital blog|Comments Off on Rising Interest Rates, Rising Dollar Leads To Global Monetary Tightening In A World With Excessive Debt