Monthly Archives: June 2018

Inflation OK For Now But Prepare For Risk Of Higher Rates

The monthly PCE inflation figures were released today. Rents, as measured, act to exaggerate reported inflation. My opinion is that inflation is about 0.25% lower than the PCE because of a problem calculating inflation. The most recent Dallas Fed Trimmed Mean PCE, which is for May, was released today. For the Core Trimmed Mean PCE the 6 months data annualized figure is 2.0%; assuming an adjustment was made regarding the error in housing shelter costs then this would be 1.75%. During the last year of a business cycle inflation usually has a sudden spurt upwards which may provoke the Fed into tightening excessively, thus triggering a recession. Be prepared for the possibility of a spurt in inflation and interest rates

2018-06-29T12:24:52+00:00June 29th, 2018|mayflowercapital blog|Comments Off on Inflation OK For Now But Prepare For Risk Of Higher Rates

Fed Tightening Can Continue Longer Than Expected

    In yesterday’s blog I mentioned a scenario where the Fed would stop tightening in December, 2018. But that was based on logic with no allowance for how emotions hijack investments and economics. I suspect the emotions of the Fed members is such that they may seek to reach the traditional 2% real rate for bond yields and seek to pop the stock market bubble and also empty out their holdings of bonds bought during QE. Assuming they blindly persisted in this, then rates would go 1.2% higher than I forecast regarding the goal to get a 2% real rate, plus rates would go up an additional 0.5% for the effect of unwinding QE. This implies Fed funds rates go

2018-06-15T13:59:04+00:00June 15th, 2018|mayflowercapital blog|Comments Off on Fed Tightening Can Continue Longer Than Expected

Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable

    Yesterday the Fed raised the rate 0.25%. The Fed started its first rate hike of the cycle on 12-16-2015. I expect they will hike again every three months by 0.25% each time until December, 2018. That means we are 83% of the way through the three year hiking journey (based on time) that started in 2015. Since 83% of the hiking part of the current cycle has occurred it now becomes more clear in trying to estimate the outcome. Assuming that the most recent San Francisco Fed estimate of the natural real neutral rate of 0.5% is correct and then if one adds that to my own adjusted inflation rate of 1.95%* that implies a Fed Funds overnight rate

2018-06-14T10:51:14+00:00June 14th, 2018|mayflowercapital blog|Comments Off on Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable

The Fed Hiked Rates Today: Will Bonds Crash?

   Today the Federal Reserve raised the overnight Fed Funds rate 0.25%, as expected. Yesterday and today the CPI and PPI inflation indexes were released showing an increase in the rate of inflation, which implies that interest rates will rise. It used to be a paradigm before the great 2008 crash, that real yields were averaging 2%, yet now the ten year TIPS real yield is only 0.84%. It used to be in the 1980’s and 1990’s that nominal yields for investment grade bonds were often about 6%, versus today’s 3.35% for Barclays’ Aggregate index. Memories deeply embedded in people’s subconscious minds make people want to reflexively assume they are entitled to a yield like the 6% available in the

2018-06-13T15:09:47+00:00June 13th, 2018|mayflowercapital blog|Comments Off on The Fed Hiked Rates Today: Will Bonds Crash?

Repeating The Inflationary Labor Market of 1965-1979?

  The idea that today’s drastically low unemployment rate will cause inflation is ridiculous. To create inflation requires workers to get sustainable “real” pay raises. An analogy is to compare labor force participants to soldiers. The hot, inflationary labor market of the 1965-1979 era was like a well-trained, disciplined modern army with the best equipment. By contrast, today’s labor force would be like a ragtag, undisciplined, irregular army armed with flintlock rifles, etc. They are unable to get inflation-causing pay raises and unable to generate sustainable income that facilitates inflation-generating bank lending, thus no significant inflation is or will be created by today’s workers. During the 1960’s workers were unionized and employers found it way too inconvenient to move jobs,

2018-06-08T16:54:12+00:00June 8th, 2018|mayflowercapital blog|Comments Off on Repeating The Inflationary Labor Market of 1965-1979?

No Recession In A Long Time: When Will It Crash?

The economy hasn’t had a recession in 9 years and is the verge of a record long period of expansion. Some experts claim this trend could go on for another few years. However, in my opinion, stocks could still crash soon without a recession. During the post-2000 tech bubble, during the crash of 2001-02 the SP index dropped 50% and NASDAQ dropped 78% even though the economy went into a very short and almost imperceptibly shallow recession. It is possible that if an asset is grossly overpriced it can come down in price even without a recession. The economy today is much more fragile than during other expansions and is thus more vulnerable to a sudden mild recession.  Debt loads

2018-06-07T15:03:10+00:00June 7th, 2018|mayflowercapital blog|Comments Off on No Recession In A Long Time: When Will It Crash?

Low Unemployment Rate Very Misleading

   The unemployment rate was released today by the BLS showing a drop in the rate to 3.8%. But two-thirds of the improvement in May was due to labor force dropouts and on third due to actual growth. The crucial “prime” age cohort of age 16-54 had a reduction in their Labor Force Participation Rate (due to dropouts), while the age 55+ group had an increase in participation.   Employment had increased by 1.69% annually since 2012. The average job gains of 207,000 per month this year are far below the gains of 320,000 per month in the 1990’s. Since February, 2015 monthly payroll gains declined from 265k to 223k in a downward trendline. Labor Force Participation Rate was 67%

2018-06-01T18:04:16+00:00June 1st, 2018|mayflowercapital blog|Comments Off on Low Unemployment Rate Very Misleading