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Employment Report Doesn’t Show Inflation Returning

The Labor Force Participation Rate dropped from 66.2% in January, 2008 to 62.9% today. The 3.3% underperformance means that 3.3 percentage points of workers divided by 66.2% who were participating has declined by 5% since the economy topped out in 4Q2007. Today the unemployment rate was released showing it went down to 4.4%, yet PCE inflation is only 1.6%, workers are not getting real wage increases, and the ten year Treasury yield today was unchanged from yesterday at 2.35%. If those missing 3.3 percentage points of workers were willing to go back and search for work and insist on being counted as an unemployed person then the unemployment rate would be 3.3 plus 4.4% equals 7.7% unemployment rate. However, due

2017-05-05T13:35:45-07:00 May 5th, 2017|mayflowercapital blog|Comments Off on Employment Report Doesn’t Show Inflation Returning

Low Growth Kept Afloat By Deflation

                   Regarding the recent GDP data issued 4-28-17, the Q1 oil drilling investment capital expenditures (some 0.4% of the economy) was up 450% annualized, which is why investment in non-residential assets went up 22% annualized in Q1. This would have been zero, except for the sudden burst of economic activity in drilling for oil. The other 99.6% share of economy that was not in oil drilling investment had no growth. The GDP for the quarter was only 0.7% annualized instead of the usual 2% range. Real GDP would have been flat if not for the recovery in the drilling sector. Recently more evidence has emerged of a lower breakeven cost level (possibly at the high 20’s a barrel instead of

2017-05-02T16:49:22-07:00 May 2nd, 2017|mayflowercapital blog|Comments Off on Low Growth Kept Afloat By Deflation

Will Tax Cuts Create Growth?

              Tax cuts can stimulate the economy. However, many articles written about tax cuts don’t clarify some serious misunderstandings. The typical article criticizing tax cuts cites the 91% tax rate started in the New Deal that was from 1933 to 1963 and compares it to today’s lower rates. But these articles fail to mention that before the 1986 tax law changes investors could cavalierly buy a legal tax shelter using leverage at the end of the year and get tremendous savings. Someone could pay $100,000 to buy a limited partnership unit that provided an immediate $300,000 write off thus eliminating their tax bill. The best way to judge the economic impact of tax cuts is to step back and gain

2017-05-01T12:08:12-07:00 May 1st, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Growth?

Lower Interest Rates Don’t Justify High Stock Prices

Formerly bearish advisor Jeremy Grantham made a huge change and is no longer bearish. He did an interview recently and said the old Ben Graham Value investing is not applicable, that we really are in a new era of lower discount rates that justify high stock prices. I disagree. Bullish advisors promote the theory that risk has steadily declined over centuries thus the cost of capital discount rate has declined thus justifying higher stock prices. (If so it would have made a huge stair step decline in past decade). Bearish advisors feel the growth rate of global GDP since 2007 top is very poor except for China which is probably a bubble with “misinterpreted” growth rates. There is a huge

2017-04-27T12:46:33-07:00 April 27th, 2017|mayflowercapital blog|Comments Off on Lower Interest Rates Don’t Justify High Stock Prices

Inflation Risk Greatly Reduced

   The recent inflation data included the first time a month’s core PPI was flat and core CPI was negative. Service industry inflation has peaked and the upward trend in rents has been broken. Core CPI for goods deflated YoY for each month over the past 12 months, which is unusual. It hit a peak at 2.3% and didn’t beat the previous cycle high of 2.5%. The core CPI (which excludes food and energy) is about 50% composed of rents. However, 65% of the population live in owner occupied homes, some with fixed rate loans or no loans. Those who rent often have a smaller residence as tenants, so the impact of rental inflation on them is not as big

2017-04-20T14:28:53-07:00 April 20th, 2017|mayflowercapital blog|Comments Off on Inflation Risk Greatly Reduced

Growing Signs of Recession

The yield curve is flattening which implies a recession is coming, especially if it inverts and becomes negative. The difference between the 3 month Treasury versus the ten year Treasury ranged from 1.1% to 2.1% and is now 1.38%. If it drops another 0.18% the yield curve will be very close to its low point of the past year. After the market closed today IBM came out with a bad earnings report; its shares plunged 3.9% in after-hours trading. This could contribute to additional downward pressure on interest rates. China and Japan continue to look for ways to wiggle out from the pressure from Trump to open up their markets to American exports. One way for foreign nations to evade

2017-04-18T14:31:23-07:00 April 18th, 2017|mayflowercapital blog|Comments Off on Growing Signs of Recession

Giant Corporations Use Legislative Exemptions That Damage Customers

     The horrific incident on a major airline on 4-9-17 where a passenger was evicted by being violently dragged off an airplane to make room for others even though he did nothing illegal are a reason to think about our legal system and how corporations have gotten special laws that exempt them from fair practices. The airline industry apparently has special laws that exempt them from contract rights thus enabling airlines to cavalierly break a contract with a customer at their whim. For another industry example, the Broker-Dealer securities industry usually makes customers go through mandatory arbitration if they have a dispute. The arbitrators until recently were industry insiders, so it was a rigged game with petty settlements paid out

2017-04-13T22:05:17-07:00 April 13th, 2017|mayflowercapital blog|Comments Off on Giant Corporations Use Legislative Exemptions That Damage Customers

A Permanently High Plateau For Stocks?

    Since 1996 the central banks have been increasing the money supply and the amount of debt to GDP by a factor of two. In the last century debt/GDP ratio was around 125% to 75% except for WWII.  Now it is double the 20th century average at 345%. This is why stocks are so seriously overpriced even without the mania symptoms of 1999 which Jeremy Grantham says are proof that it is not a bubble. I disagree with Grantham. A bubble can still happen without an explicit mania because the circumstances of the low growth very weak recovery have acted to camouflage the enthusiasm for stocks that are evidenced by those who enjoy participating in momentum style short term trading.

2017-04-11T13:20:26-07:00 April 11th, 2017|mayflowercapital blog|Comments Off on A Permanently High Plateau For Stocks?

Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

The Trump administration continues to show that it is moving towards the center and towards a somewhat establishment or consensus type of policies. They are hemmed in by the moderate Republicans in Congress who won’t dare cut the existing welfare state benefits such as the ACA, etc. because they would lose their seats, and are also boxed in by the Freedom Coalition members who that hate growing deficits. Trump will not be able to engage in massive deficit fueled stimulus nor will he be able to cut costs and use the savings to finance a tax cut, thus depriving taxpayers of stimulus because they won’t get real net tax cuts. The administration seems to be moving towards recruiting more professional

2017-04-10T12:27:41-07:00 April 10th, 2017|mayflowercapital blog|Comments Off on Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

Interest Rates Are Not Too Low

The history of interest rates shows that during the Great Depression when there was a 2% annual deflation and that real Treasury rates were about 4%. Real rates were about 2% before the GFC of 2008. Are rates too low, if one uses the 1930’s as a benchmark? Not necessarily. In the 1930’s the Federal Reserve was only 20 years old and had its credibility damaged by the great crash. The political risk was that Roosevelt, with an attempt by him to have a 100% income tax rate on high incomes, was moving the country to socialism with the risk that private property would be seized. Investors and economists may have felt that the government’s finances were not as strong

2017-04-07T15:41:58-07:00 April 7th, 2017|mayflowercapital blog|Comments Off on Interest Rates Are Not Too Low