Monthly Archives: July 2017

Not A Bond Bubble

    An article in FT.com “Bond bubble brews as central banks retreat from QE” today expressed worry that global central banks will end Quantitative Easing thus triggering a rise in rates. I disagree. Ultimately central banks will act to avoid triggering a crisis and will let any tapering plans be controlled by a need to taper gradually so as to avoid a crisis. What is more powerful than central banks and their ownership of bonds is the marketplace. By “marketplace” I mean the global market for all types of goods and services. I expect global GDP to continue to have a weak growth rate with minimal chances of it suddenly improving. Unemployment will also have minimal chances of suddenly improving,

2017-07-24T16:37:45+00:00July 24th, 2017|mayflowercapital blog|Comments Off on Not A Bond Bubble

CAPE PE10 Still Valid

   The Vanguard research paper “Improving U.S. stock return forecasts: A “fair-value” CAPE approach” on CAPE PE10 valuation method suggested that it could be improved by using real interest rates instead of nominal rates. The paper was well intentioned and very professional. It may appear to be correct but the real reason why this appears to work is different from what the Vanguard paper says. The intuitive opinion is that lower real rates act as a lever to lift stock and bond prices and thus in the post 2008 era low rates have acted to make stocks go higher than forecast by the PE10. However, for several decades experts have researched and written about the phenomenon of low and declining

2017-07-20T13:41:09+00:00July 20th, 2017|mayflowercapital blog|Comments Off on CAPE PE10 Still Valid

Feedback Loop Fools Stock Investors

    The availability of put options has reduced risk for owners of stocks who own puts, thus inducing more people to buy stock. As low interest rates make more people seek to earn a fake “yield” from selling naked put options this has created a vicious cycle or feedback loop where the flow of money into put writing makes stocks less risky and thus makes writers of puts feel there is not much risk in writing a put. This is like in the pre-2008 era when AIG offered a huge amount of cheap insurance against the risk of a crash in mortgage backed securities which helped contribute to the creation of more risky mortgages that in turn allowed more people

2017-07-19T18:16:37+00:00July 19th, 2017|mayflowercapital blog|Comments Off on Feedback Loop Fools Stock Investors

Low Retail Sales Indicates Disinflationary Economy

   Today’s retail sales report by the Commerce Department’s Census Bureau showed sales were down 0.2% from the previous month. The best indicator for consumer spending is restaurants and that dropped 0.6% and has not been positive in four of the past five months. Core inflation, ex-rents or owner’s hypothetical rent, is 0.6%. Since many homeowners have fixed costs or no mortgage then they would be experiencing an inflation rate of 0.6%. Based on an old rule of thumb that the ten year Treasury yield should be equal to nominal GDP then, assuming inflation drops to 0.6%, and GDP comes in at 1.3% then nominal GDP would be 1.9%, thus justifying a sub 2% yield. The yield is 2.32% today.

2017-07-14T13:49:03+00:00July 14th, 2017|mayflowercapital blog|Comments Off on Low Retail Sales Indicates Disinflationary Economy

Fed Tightening Not Related To Inflation

   On Friday the employment report was issued by the BLS showing 222,000 new jobs. But bond yields remained almost unchanged compared to the day before the report. The Fed is on a rate hiking campaign designed to pop the global stock market bubble. This is something the market is addicted to assuming the Fed will never do. But it is happening. I think the affluent people who own most of the stocks also experience a higher rate of inflation since they buy more handcrafted luxuries which have higher inflation than generics purchased at Costco. Thus affluent people who are handling investments are likely to believe the (incorrect) headline story that inflation is rising because the economic expansion has been

2017-07-10T15:00:56+00:00July 10th, 2017|mayflowercapital blog|Comments Off on Fed Tightening Not Related To Inflation

Employment Report Casts Doubt On Inflation

    Today the monthly employment report was released showing job gains of 222,000, which is typical. Beneath the surface the data shows that in the private sector job losses were 43,000. In the Prime age group of people aged 20 to 55 employment declined 135,000. Perhaps the net gain in jobs came from senior citizens who got a civil servant job and who are desperate to work to make up for low returns on their bank accounts? The real measure of job growth is wage growth but that only grew at 2.5% YoY, not much over inflation. Typically this late in the cycle job growth should be manifested in a bidding war for workers resulting in significant wage growth. The

2017-07-07T14:56:21+00:00July 7th, 2017|mayflowercapital blog|Comments Off on Employment Report Casts Doubt On Inflation

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?

4th of July: Reasons To Be Patriotic

    For July 4th in contemplating reasons to be patriotic, I feel that my studies of global economics have led me to believe that much of the less developed world lacks stable, democratic institutions which result in making it too difficult for business and skilled professionals to operate to their full potential. Thus residents of the U.S. have a huge, wonderful advantage over the rest of the world. Similar Developed countries like the UK, Canada, Germany, France may also have good opportunities but the best opportunities are in the U.S. A study showed that the UK per capita income is lower than that of all the individual U.S. states except Mississippi. The respect for property and civil rights creates a

2017-07-03T13:22:11+00:00July 4th, 2017|mayflowercapital blog|Comments Off on 4th of July: Reasons To Be Patriotic

20th Anniversary Of Asian Currency Crash

Yesterday was the 20th anniversary of the great East Asian financial crash. It started in Thailand then spread to much of Asia over several months. The crash resulted in a huge drop in U.S. interest rates because of the potential disinflation caused by the deep global crash. In the U.S. the economy was running at a very hot pace which implies a significant increase in inflation and interest rates would occur. Yet inflation remained at low levels and interest rates declined. The lesson to learn was that massive money printing in Asia created a fake economic boom there that was killed off by excessive debt. The excess money was related to a significant increase in dollar denominated debt owed to

2017-07-03T10:22:06+00:00July 3rd, 2017|mayflowercapital blog|Comments Off on 20th Anniversary Of Asian Currency Crash