Rates Already Too High?

   Estimating fair value for interest rates requires looking at the “real natural” rate which is the rate where the economy is in equilibrium in terms of supply and demand for loans. This rate is now just under 0%. Then add to that inflation. I like what Stanley Druckenmiller said last month on Bloomberg that a study showed that long term inflation averaged 1.1% a year. The PCE inflation index has been around 1.5%. The CPI, if adjusted for an erroneous calculation of “Owner’s Equivalent” rents, in my opinion, should be below 1%. Adding 1% inflation to a near zero real natural rate implies that fair value for the overnight risk free Fed Funds rate is 1.0%. Currently it is

2018-01-11T12:10:01+00:00 January 11th, 2018|mayflowercapital blog|0 Comments

Bond Bear Market To Start Now?

       Today the ten year Treasury bond yield rose 0%, despite news stories quoting a former Bond King who claimed the yield has broken through a trend line and started a bond bear market. I use fundamentals instead of trend lines on a chart. The fundamentals are that global labor markets influence inflation and for labor there is no foreseeable cure for their problem of jobs in Developed countries fleeing to low wage EM countries. Labor’s best hope was that Trump would start import barriers and make-work infrastructure projects. Yet today it was announced Carrier air conditioning is going ahead with domestic layoffs, even though a year ago it was in the news that Trump had persuaded them not to

2018-01-10T19:30:38+00:00 January 10th, 2018|mayflowercapital blog|0 Comments

Full Employment and Rising Rates: What Will Happen to Bonds?

Today the BLS issued the monthly nonfarm payroll report: 148k new jobs; less than the 200k expected. Assuming it is needed to have 125k a month to keep up with the population increase then the real increase was 52k, which if annualized, would be a 0.4% improvement in another 12 months, which is a rather weak number. Jeff Snider of Alhambra Partners showed there was a 1.3% labor market growth in 2017; as I see it, the results in 2017 were lowest of any year, from 1995 to 2017, for years that were not in or adjacent to a year of recession such as 2001 or 2007-2010. The chart of labor growth looks like a head and shoulders top based

2018-01-05T16:25:30+00:00 January 5th, 2018|mayflowercapital blog|0 Comments

Tech Meltdown: Will It Be The Needle That Bursts The Stock Market Bubble?

    Today’s news of the Meltdown and Spectre flaws in computer hardware and software are a stunning defeat for the tech industry in a way that reminds me of the Lehman crisis of 2008 that started the crash of 2008.   It may be that chip makers will need to rush production of millions of new chips, and then device manufacturers will have to retrofit devices, possibly creating a year-long backlog. If prominent tech companies (the FANGs companies) are the vanguard of the current stock boom then if they suffer a sharp drop in profits on top of a high PE ratio perhaps that will trigger a much needed stock market correction. The top 50 companies, (mostly tech or pharma),

2018-01-03T23:22:55+00:00 January 3rd, 2018|mayflowercapital blog|0 Comments

Inflation Surprise For The New Year?

   The New Year leads to advisors making annual predictions for the year. One famous advisor who I disagree with said wage inflation and Treasury bond yields will reach 4% in 2018. Currently the ten year Treasury is 2.46% and it would be dramatic if it went to 4%. Inflation, in my opinion, comes from wage increases and full employment which are then used to get loans which increase the money supply. The dominant economic paradigm is for the SP500 companies, that are 75% of the economy, to keep costs under control and cut costs and make profit increases by cutting costs instead of raising prices. It would a huge change for them to decide to start raising prices so

2018-01-02T13:59:27+00:00 January 2nd, 2018|mayflowercapital blog|Comments Off on Inflation Surprise For The New Year?

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+00:00 December 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+00:00 December 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+00:00 December 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+00:00 December 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+00:00 December 15th, 2017|mayflowercapital blog|Comments Off on New Tax Bill’s Affect On The Economy