Monthly Archives: May 2018

Wage Inflation Unlikely

    Is wage inflation (and thus general inflation) coming back? The best relevant era to compare to current era was 1951-1965 (when Fed regained its independence). In that era inflation was low, yields were low. But GDP was at least 1% higher than today. Thus a range from 1951-1965 of 4.7% to 2.3% for the nominal 10 year Treasury, if adjusted for today’s low GDP, implies a 2.5% yield for now is correct (plus or minus 0.7%). In 1956-59 inflation was 1.3%; from 1960-65 it was 1.67% to 1.07%, yet GDP was a percentage point higher. If 2.5% for the 10 year Treasury might be appropriate, then adjusting for the situation where so much of world’s wealth is from EM

2018-05-21T18:42:15-07:00May 21st, 2018|mayflowercapital blog|Comments Off on Wage Inflation Unlikely

Rising Rates: Markets Getting Nervous

    Fitch said EM debt up 4x in 10 years so they’re vulnerable to a rising dollar; Carmen Reinhart says the next EM crash will be worse than the previous cycle’s crash. Argentine Peso exchange rate to US dollar now 24:1, was 4:1 (an 85% drop in 8 years) in my 2010 trip; 6:1 on my 12-2012 trip. Horseman Capital said now in a peak spending era (where it will have to be reduced) as funding sources like subprime auto loans getting maxed out. David Rosenberg worried about inflationary stagflation, and rising yields. He said Fed said neutral rate is 2.875% (probably that was said by Dudley, but I think Bullard is satisfied with current level of 1.7%) but I

2018-05-17T14:31:29-07:00May 17th, 2018|mayflowercapital blog|Comments Off on Rising Rates: Markets Getting Nervous

Retail Sales Up: Will Inflation Explode?

   Retail sales data released today showed a 3.8% year over year increase in sales, implying too much inflation-causing spending has broken out. The bond market reacted with a big jump in yields to new 5 year high of 3.09% mid-day for the ten year Treasury. Perhaps the tax cut, which gave the average person a 3% boost in after-tax income, was responsible for this increase in spending. If so then remember that over time the tax cut benefits disappear through inflation (In only three years most of the cut for individual taxpayers will have been inflated out of existence) and additionally the cut will end because the Byrd anti-filibuster amendment requires a 10 year sunset on budget items. Thus

2018-05-15T14:51:57-07:00May 15th, 2018|mayflowercapital blog|Comments Off on Retail Sales Up: Will Inflation Explode?

VIX At Very Low Level: A Sign of Declining Inflation?

In February the VIX index exploded from 13 to 37.3 and gradually came down today to 12, which is just under its 200 Day Moving Average. When interest rates rise that acts to attract investors who seek to earn a so-called “yield” by writing naked put options. These options prices ultimately determine the VIX. If bond yields are attractive then option writers will insist on getting a higher reward for the issuance of put options, thus making the VIX go up. A drop in the VIX could be a signal that interest rates are low and will go lower. This could end up being a better signal than the inverted yield curve, since QE and QT may have distorted the

2018-05-11T17:11:45-07:00May 11th, 2018|mayflowercapital blog|Comments Off on VIX At Very Low Level: A Sign of Declining Inflation?

Rising Oil Prices: Should You Buy Oil Stocks?

Oil prices have risen above the crucial $60 a barrel level marking a return to profitability for the industry. The price briefing touched $70 for WTI oil. Does that mean you should expect a new oil industry boom? Oil reached $144 in 2008 and the inflation adjusted price in today’s dollars was $180 in 1979 thus some people claim oil may go back to its old highs. But the world has changed a lot in the past decade. Alternative energy such as solar and electric cars are much more of a credible mainstream competitor to oil. OPEC is no longer a cohesive group of loyal members. Fracking is a huge new change since 2012, including the fact that it has

2018-05-07T13:54:40-07:00May 7th, 2018|mayflowercapital blog|Comments Off on Rising Oil Prices: Should You Buy Oil Stocks?

Record Low Unemployment: Will Inflation Get Out of Control?

  The Employment Report released by BLS today said unemployment dropped to 3.9% and 164,000 new jobs were created. That seems like it is a full employment economy which threatens to increase inflation and cause rising interest rates. However, very little real wage growth has occurred. Wages have been rising 2.7% but CPI is 2.0%. The token 0.7% real increase in wages is nothing after workers spent the last ten years waiting for the economy to improve. Typically when full employment is reached it becomes a bidding war to hire workers and pay rates beat inflation by at least 2 or 3 percent. The current climate of very low real wage increases implies we are not in an inflationary true

2018-05-04T14:37:21-07:00May 4th, 2018|mayflowercapital blog|Comments Off on Record Low Unemployment: Will Inflation Get Out of Control?

Will The Tax Cut Create Stimulus?

    The tax cut enacted December, 2017 cut personal income taxes by a tiny amount and over the next nine years the personal cuts will net out to zero, with most of the benefits coming in the first two years. The real potential impact of the tax cut is the corporate part which is several times larger than the personal cut. The stimulus for corporations in the form of faster depreciation deductions may seem attractive but if a business decides they can’t actually use new capital equipment then they won’t be able to take advantage of the depreciation deduction.    The lower tax rate for corporations will probably persuade some business owners to feel more prosperous and spend and consume

2018-05-03T15:02:29-07:00May 3rd, 2018|mayflowercapital blog|Comments Off on Will The Tax Cut Create Stimulus?

Catalyst of the Next Recession

     The Covenant Lite nature of BBB corporate bonds may create the surprise that triggers the next recession. They won’t all fail, but if a significant number do and new borrowing applicants are turned away that can act to tip the low GDP growth economy into recession. The next stage is that the damage to that sector would then trigger a lightening fast shut down of the excessively permissive granting of credit to nonconforming (B paper) borrowers. This type of lending allows weak borrowers to get loans and to get even bigger debts from a new lender to pay off their old lender. It acts on the margin to provide the opportunity for GDP growth. But when this credit is

2018-05-02T12:03:03-07:00May 2nd, 2018|mayflowercapital blog|Comments Off on Catalyst of the Next Recession

Could Rising Yields Suddenly Reverse?

    Inflation is increasing according to the consensus of economists, which means bond yields will increase and reduce the value of bonds. In the final year, of a nine year long expansion, the economy overheats, causing an increase in inflation, to which the Federal Reserve responds by raising interest rates. The Dallas Fed trimmed mean inflation index was 1.77%. Headline PCE inflation is 2.0% year over year, its three month and six month core versions show rates of 2.6% and 2.3% so on a short term basis the rate is accelerating. Assuming the Fed’s own estimate of the natural real rate of interest should be near zero then short term yields should be roughly 2.5%. This is because one should

2018-05-01T15:01:55-07:00May 1st, 2018|mayflowercapital blog|Comments Off on Could Rising Yields Suddenly Reverse?