Monthly Archives: December 2017

New Tax Law’s Stock Market Damaging Shock

          What is truly a huge item about the new tax law is something just the opposite of what the law’s authors intended. They sought to create a tax cut for corporations to make them globally competitive. Currently the SP500 companies are 75% of the U.S. economy. They are big enough they have been able to afford to set up offshore tax advantaged subsidiaries that benefited from the old law where they could get a zero tax rate in some cases. Now in 2018 they have to pay a minimum of 12.5% on offshore profits (actually a range of 10.75% to 15% depending on details). Thus for the SP500, which is 75% of the economy, they will

2017-12-29T15:24:02-08:00December 29th, 2017|mayflowercapital blog|Comments Off on New Tax Law’s Stock Market Damaging Shock

Low Inflation and Low Interest Rates

   The Core PCE deflator went up 0.078% last month (0.94% annualized) and Year over Year it was up 1.5%. If housing was subtracted the index would be even lower. The housing component of inflation is measured by "Owner's equivalent rent" and is thus higher than actual inflation. The personal savings rate dropped to 2.9% which is as low as the top of the cycle 10 years ago. The reduction in the savings rate implies the economy is acting more like a sub - 2% growth rate instead of the recent 3.1% GDP growth rate. If inflation becomes sub 1% and growth sub 2% then the ten year Treasury should yield no more than 2.5%, just about what it now

2017-12-22T13:09:26-08:00December 22nd, 2017|mayflowercapital blog|Comments Off on Low Inflation and Low Interest Rates

New Tax Law: Will It Stimulate The Economy?

   The stimulus effect for the tax cut for business owners with pass-thorough entities like an “S” corporation might amount to a $10,000 deduction if single, or $20,000, if married, for small service businesses. It could be a lot more for large non-service business like manufacturers. Suppose a self-employed single person makes a salary of $100,000 and a corporate profit of $50,000 and has no other income. Then the $50,000 corporate profit would be multiplied by 20% to get a $10,000 deduction; assuming the taxpayer was in the 24% bracket then he would save $2,400 in taxes a year.    Assuming a new Congress repeals this in three years then the taxpayer will save $7,200 cumulative over three years. That

2017-12-20T16:30:27-08:00December 20th, 2017|mayflowercapital blog|Comments Off on New Tax Law: Will It Stimulate The Economy?

Tax Cut Scaring Bond Market?

    The new tax cut bill will probably be approved very soon. This has made the bond market worry that stimulus will result in higher rates, thus hurting bonds. The ten year Treasury bond’s yield went up from 2.36% to 2.46% since yesterday, which is a significant move. The stimulus will come in the form of personal tax cuts averaging $17 a week ($884 a year) for the average person in 2025. The tax cut will result in a gain of 1.2% in after-tax income, less than the 1.7% inflation rate. If the average person makes about $55,000 a year from employment that implies a tax cut of $660 attributable to employment income. This is not enough to stimulate the

2017-12-19T12:32:36-08:00December 19th, 2017|mayflowercapital blog|Comments Off on Tax Cut Scaring Bond Market?

New Tax Bill’s Affect On The Economy

The new tax bill may make recessions deeper and sharper. When an affluent person making $300,000 maxes out their ability to buy a home with a mortgage and property tax and then suffers a deep cut in income during a recession then in the proposed new tax bill they get a smaller tax deduction for mortgage interest and property tax than under the current law. If a self-employed person benefits from this law using the pass through rate and then during a recession he has to close his business and get a job then he would be in a higher tax bracket! The new law waters down AMT tax so even if it takes away some mortgage and property tax

2017-12-15T19:10:59-08:00December 15th, 2017|mayflowercapital blog|Comments Off on New Tax Bill’s Affect On The Economy

Deflationary Aspects of the Proposed Tax Bill

The new tax bill won’t cut taxes (using a discounted model of future behavior by Congress). Currently the average corporation pays a 13% rate (another study claimed they pay 26%). The problem with the tax bill is that it permanently takes away a corporation’s ability to have a foreign subsidiary that is immune from U.S. tax law and instead imposes a modest tax rate of 12% on foreign subsidiaries (supposedly a one-time tax) on foreign earnings regardless of whether earnings are firewalled off and kept offshore or are imported to the parent company. The risk for corporations is that each year, assuming a change in Congress, tax rates can gradually be raised on this, thus whittling away any benefit. Discounting

2017-12-14T11:52:23-08:00December 14th, 2017|mayflowercapital blog|Comments Off on Deflationary Aspects of the Proposed Tax Bill

Fed Raises The Rate Today – Bond Yield Drops Instead!

The Fed raised the short term Fed Funds rate 0.25% to 1.375% (in a range of 1.25 to 1.5%) today. The bond market reacted by lowering rates for the ten year Treasury Note by 0.05% to 2.35%; its price went up 0.75%. The bond market feels that Fed tightening will reduce inflation and reduce growth thus supporting the value of bonds. Experts forecast that the Fed will raise rates by 0.75% gradually over the next nine months next year, thus making short term rates about 2.125%. When this happens then a minor decline in ten year Note yields would result in an inverted yield curve which is a sign of a recession. A recession would result in dramatic rates cuts

2017-12-13T18:31:37-08:00December 13th, 2017|mayflowercapital blog|Comments Off on Fed Raises The Rate Today – Bond Yield Drops Instead!

Employment Report: No Threat To Bonds

The monthly employment report was released by BLS today showing the rate unchanged at 4.1%. At first glance the rate seems low and thus investors may be tempted to leap to the conclusion that wage inflation and CPI will increase, threatening bond values. But the bond market barely budged today with the ten year Treasury yield up 0.01% to 2.38%.   The Wall Street Journal ran an article by Ed Lazear “The Incredible Shrinking Workforce” showing how the labor market has 2,000,000 missing jobs which means the true unemployment rate is 1.4% higher, so the economy is really in a 5.5% rate situation. The lack of significant wage growth, with wage growth stuck at 2.3% a year, is not typical

2017-12-08T13:48:33-08:00December 8th, 2017|mayflowercapital blog|Comments Off on Employment Report: No Threat To Bonds

Will Tech Companies Create Inflation That Damages Stocks and Bonds?

     Recently the biggest and best of the tech industry (powerful oligopolistic companies) have had some spectacular security breaches that are of truly gigantic proportions, potentially affecting almost every consumer of tech. I feel these must have happened because tech companies are trying to move too fast without spending resources to ensure software security. It may be that the red hot nature of the industry means it can’t hire enough people at this rather late stage of the economic cycle. Typically at the end of a cycle the economy expands too fast, creating expensive labor shortages which employers may respond to by engaging in a bidding war for talent. The resulting inflation acts to raise interest rates, thus bursting the

2017-12-06T15:17:40-08:00December 6th, 2017|mayflowercapital blog|Comments Off on Will Tech Companies Create Inflation That Damages Stocks and Bonds?

How Tax Bill Will Effect Bonds

The new tax bill will make it possible for U.S. multinational corporations to repatriate their liquid assets stored overseas. In theory this would simply be a wash since they currently hold the cash in the form of investments in bonds, so the repatriation could be as simple as telling a bond broker who is their Custodian to simply move the assets to another account based in the U.S. in which case the broker simply makes an accounting entry. However, the move will mean a lesser need for gross borrowing, even if the move doesn’t change the amount of net borrowing. (By net borrowing, I mean the amount borrowed net of the trapped offshore cash). Currently a multinational starves its headquarters

2017-12-05T12:15:11-08:00December 5th, 2017|mayflowercapital blog|Comments Off on How Tax Bill Will Effect Bonds