Monthly Archives: March 2017

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

2017-03-31T18:01:13-07:00March 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

2017-03-28T13:34:01-07:00March 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

2017-03-24T15:58:06-07:00March 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

2017-03-21T15:04:17-07:00March 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

2017-03-17T14:14:50-07:00March 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

2017-03-15T18:21:07-07:00March 15th, 2017|mayflowercapital blog|Comments Off on Fed Raises Rates Yet Bond Yields Drop

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

2017-03-14T15:23:59-07:00March 14th, 2017|mayflowercapital blog|Comments Off on Inflation: Ready to Destroy Bonds?

Huge Jobs Increase. Result: Lower Interest Rates

   The monthly employment report was released by the BLS today showing a big increase in employment of 235,000. Yet bond yields dropped by two basis points today. The unemployment rate declined 0.1% to 4.7%. But if one adjusts for extremely warm weather, the second warmest February in 96 years, then there would have been 181,000 less jobs bringing the total increase of jobs to 55,000 which is less than the 120,000 monthly jobs increase needed to keep up with population growth. The weather adjusted and population growth adjusted number, in my opinion, would be 55,000 minus 125,000 equals negative 70,000 jobs created, implying that the unemployment rate actually rose on a path that will in a year result in

2017-03-10T13:40:46-08:00March 10th, 2017|mayflowercapital blog|Comments Off on Huge Jobs Increase. Result: Lower Interest Rates

Who is Correct: Gundlach or the Disinflationists?

    Recently bond guru Jeff Gundlach has warned about the possibility that the ten year Treasury could gradually go up to 6% over several years. However, economists Dave Rosenberg and Lacy Hunt have warned that disinflation is likely and thus bond yields will decline. I certainly agree with Gundlach that the risk-reward trade off is bad in terms of chasing after high duration risk in a long duration bond. Trying to buy a ten year Treasury in hopes the yield (now at 2.56%) will drop as deeply as Germany’s did when it went down to 0.1% last year is far too risky, since the possibility exists that the U.S. ten year Treasury could revert to its old pattern of yielding

2017-03-09T11:33:59-08:00March 9th, 2017|mayflowercapital blog|Comments Off on Who is Correct: Gundlach or the Disinflationists?

Rising Yields: Will Bonds Crash?

This week the Federal Reserve gave many hints that they will raise rates at their March 15 meeting. How much does the Fed need to raise rates to fight inflation and prevent inflation from getting out of control? The 10y10y forward rate (a derivative of what the market thinks rates will be for the ten year in ten years) is 3.6%, which implies it will increase 1.1% over the next ten years from the current spot 10 year Treasury yield of 2.49%. This is a 0.11% increase a year. The implication is that after subtracting inflation that implies the “real” neutral rate is 1.6%. Assuming that the slope of the yield curve remain in a traditional upward slope then this

2017-03-21T15:03:06-07:00March 3rd, 2017|mayflowercapital blog|Comments Off on Rising Yields: Will Bonds Crash?