CPI Index Higher Today Yet Fundamentals Show Inflation Tame

   The yield curve flattened some more today, and at an accelerating pace. The 2 – 10 year Treasury spread closed the day at 0.23%, it was 0.28% a few days ago. It had been shrinking at a pace of 0.06% a month, but this week’s pace was almost a month’s worth of change in a few days. At this pace the curve will be flat at the end of August. The swaps (a non-cash market version of the spread) was 0.18% two days ago so it is even lower than the spread in the 2-10 Treasury cash market. Traditional economic theory says that an inverted yield curve is a sign of recession and these usually occur every 8 years;

2018-07-12T14:59:38+00:00July 12th, 2018|mayflowercapital blog|0 Comments

Trade Conflicts Imply Global Growth to be Lower

     The trade conflicts that created rising tariff barriers will act predominantly to shake the confidence of the business community in regards to plans to expand their plant, equipment and hiring. Businesspeople are always on the lookout for the risk of being subject to unfair imposition of regulations or taxes that might damage their business. They will be reluctant to commit to expanding businesses if a multinational company suddenly is hampered in its process of manufacturing goods in various countries as a result of trade barriers.    The whole purpose of a Supply-side tax cut like the one enacted in 2017 is that it is supposed to encourage businesses to expand the economy. But a higher priority than pursuing income

2018-07-11T17:54:48+00:00July 11th, 2018|mayflowercapital blog|0 Comments

Inflation Threat: Is It Real?

      Employment growth is the key to inflation. Today the employment report was released by the BLS. A reasonable 213,000 net new jobs were created yet unemployment rose from 3.76% to 4.05%, which was rounded off to a 0.2% increase. This is because when the economy improves the discouraged hidden unemployed come out of hiding and seek employment. Based on the fact that the prime age group aged 25-55 used to have an 83% participation rate and this is now about 1.3% lower, then that may signal that there are at least 1.3% hidden unemployed, although this needs to be calibrated with the total work force and not merely prime age group.     People worry about rising wage inflation but

2018-07-06T10:03:05+00:00July 6th, 2018|mayflowercapital blog|Comments Off on Inflation Threat: Is It Real?

Trade Wars To Create Inflation Or Deflation?

A trade war with a 25% tariff might result in prices rising by a one-time increase of 15%. Consumers would react by reducing purchases of some goods until those less desired goods fell into their own little recession and cut prices. If, so then trade barriers might not be inflationary. However, the convulsions of businesses implementing new policies to cope with a trade war would mean that considerable frictional costs would be generated as businesses move plants and managers back into the U.S. and engage in a bidding war to hire domestic workers. If a business feels it is forced to move back into the U.S. it would have to pay relocation or recruitment costs to deal with moving employees

2018-07-05T15:16:25+00:00July 5th, 2018|mayflowercapital blog|Comments Off on Trade Wars To Create Inflation Or Deflation?

Bond Ratings Wrong Again

   Investment Grade bond prices haven’t been doing very well in the first half of the year. One reason is because rates went up, lowering the value of bonds. Another reason is that the Investment Grade (IG) sector is now 50% in BBB rated, the lowest rating for IG and thus only a tiny step above falling into junk category during a recession. The ratings agencies, once again, are not doing the right thing in rating bonds. The problem is that corporate bonds rated BBB may have a true value of one notch lower (the truth to be exposed during the coming recession). The bond market experts sense this and have begun to sell off this niche, making the price

2018-07-03T15:18:23+00:00July 3rd, 2018|mayflowercapital blog|Comments Off on Bond Ratings Wrong Again

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?