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Employment Report Supports Bonds

     Today the BLS issued the monthly employment report showing only 156,000 new jobs were added but the unemployment rate increased by 0.1% to 4.4% as more people entered the labor force. Since the population increase of 100,000 new workers a month means that the jobs increase was really only 56,000 ahead of the population increase, that means on an annualized rate, unemployment will be reduced by only 0.46% in a year, before counting the actions of discouraged job seekers trying to reenter the market. An unemployment rate this low is close to full employment but some economists feel that there are roughly 1.5 percentage points of hidden, discouraged unemployed people, who if counted, would make the true unemployment rate

2017-09-01T15:34:17-07:00 September 1st, 2017|mayflowercapital blog|Comments Off on Employment Report Supports Bonds

Will the Treasury Default and Ruin Bonds?

   On Friday, September 29 it is the deadline to raise the federal budget deficit before a crisis starts on October 1. Trump threatens to not to cooperate unless a border wall is built. To get the budget done Congress would have to authorize paying $30 billion to $60 billion for the wall. But this is a capital expenditure, so the amortized cost might be 3% of the capital cost a year. That’s only $3 to $6 per person a year, plus interest. Trump may find that the senators who can protect him from impeachment are a valuable resource of contacts to build alliances with, rather than to antagonize, so there will be room for compromise. The idea that U.S.

2017-08-23T14:55:37-07:00 August 23rd, 2017|mayflowercapital blog|Comments Off on Will the Treasury Default and Ruin Bonds?

Cash On The Sidelines: Does It Justify High PE Ratios?

Fundamental analysis may look at PE ratios to define bubbles. But what should one do if the money supply has been drastically increased thus providing more funds for investors to engage in a bidding war to buy stocks? Does that mean that PE ratio guidelines should be expanded to accommodate the increased supply of money? Some fundamentalist advisors refer to the phrase “cash on the sidelines” as a false concept that can’t happen.  They assume that there is a finite amount of cash available to be traded between investors for shares of stock held by other investors and that on the aggregate that no new cash can appear on the sidelines and then be deployed into buying stocks. This would

2017-08-14T14:01:11-07:00 August 14th, 2017|mayflowercapital blog|Comments Off on Cash On The Sidelines: Does It Justify High PE Ratios?

Greenspan Says Bonds Are A Bubble

          Alan Greenspan was quoted today saying that stocks are not a bubble yet he said bonds are. I strongly disagree. The traditional metric was that the ten year Treasury yield equals nominal GDP. Using PCE inflation around 1.6% and real GDP of 2.5% implies a 4.1% yield is needed. (But this metric was developed during the old days before the labor market became weak and before EM countries had huge Savings Gluts.) Contrast this with the current yield of 2.25%; the difference between 2.25 and 4.1% is 1.875%. Assuming the 1.875% difference is multiplied by the duration of 8.8 then the 10 year bond price needs to drop 16.5% to reach fair value. That is hardly a sign of

2017-08-01T14:32:46-07:00 August 1st, 2017|mayflowercapital blog|Comments Off on Greenspan Says Bonds Are A Bubble

Not A Bond Bubble

    An article in FT.com “Bond bubble brews as central banks retreat from QE” today expressed worry that global central banks will end Quantitative Easing thus triggering a rise in rates. I disagree. Ultimately central banks will act to avoid triggering a crisis and will let any tapering plans be controlled by a need to taper gradually so as to avoid a crisis. What is more powerful than central banks and their ownership of bonds is the marketplace. By “marketplace” I mean the global market for all types of goods and services. I expect global GDP to continue to have a weak growth rate with minimal chances of it suddenly improving. Unemployment will also have minimal chances of suddenly improving,

2017-07-24T16:37:45-07:00 July 24th, 2017|mayflowercapital blog|Comments Off on Not A Bond Bubble

CAPE PE10 Still Valid

   The Vanguard research paper “Improving U.S. stock return forecasts: A “fair-value” CAPE approach” on CAPE PE10 valuation method suggested that it could be improved by using real interest rates instead of nominal rates. The paper was well intentioned and very professional. It may appear to be correct but the real reason why this appears to work is different from what the Vanguard paper says. The intuitive opinion is that lower real rates act as a lever to lift stock and bond prices and thus in the post 2008 era low rates have acted to make stocks go higher than forecast by the PE10. However, for several decades experts have researched and written about the phenomenon of low and declining

2017-07-20T13:41:09-07:00 July 20th, 2017|mayflowercapital blog|Comments Off on CAPE PE10 Still Valid

Feedback Loop Fools Stock Investors

    The availability of put options has reduced risk for owners of stocks who own puts, thus inducing more people to buy stock. As low interest rates make more people seek to earn a fake “yield” from selling naked put options this has created a vicious cycle or feedback loop where the flow of money into put writing makes stocks less risky and thus makes writers of puts feel there is not much risk in writing a put. This is like in the pre-2008 era when AIG offered a huge amount of cheap insurance against the risk of a crash in mortgage backed securities which helped contribute to the creation of more risky mortgages that in turn allowed more people

2017-07-19T18:16:37-07:00 July 19th, 2017|mayflowercapital blog|Comments Off on Feedback Loop Fools Stock Investors

Low Retail Sales Indicates Disinflationary Economy

   Today’s retail sales report by the Commerce Department’s Census Bureau showed sales were down 0.2% from the previous month. The best indicator for consumer spending is restaurants and that dropped 0.6% and has not been positive in four of the past five months. Core inflation, ex-rents or owner’s hypothetical rent, is 0.6%. Since many homeowners have fixed costs or no mortgage then they would be experiencing an inflation rate of 0.6%. Based on an old rule of thumb that the ten year Treasury yield should be equal to nominal GDP then, assuming inflation drops to 0.6%, and GDP comes in at 1.3% then nominal GDP would be 1.9%, thus justifying a sub 2% yield. The yield is 2.32% today.

2017-07-14T13:49:03-07:00 July 14th, 2017|mayflowercapital blog|Comments Off on Low Retail Sales Indicates Disinflationary Economy

Fed Tightening Not Related To Inflation

   On Friday the employment report was issued by the BLS showing 222,000 new jobs. But bond yields remained almost unchanged compared to the day before the report. The Fed is on a rate hiking campaign designed to pop the global stock market bubble. This is something the market is addicted to assuming the Fed will never do. But it is happening. I think the affluent people who own most of the stocks also experience a higher rate of inflation since they buy more handcrafted luxuries which have higher inflation than generics purchased at Costco. Thus affluent people who are handling investments are likely to believe the (incorrect) headline story that inflation is rising because the economic expansion has been

2017-07-10T15:00:56-07:00 July 10th, 2017|mayflowercapital blog|Comments Off on Fed Tightening Not Related To Inflation

Employment Report Casts Doubt On Inflation

    Today the monthly employment report was released showing job gains of 222,000, which is typical. Beneath the surface the data shows that in the private sector job losses were 43,000. In the Prime age group of people aged 20 to 55 employment declined 135,000. Perhaps the net gain in jobs came from senior citizens who got a civil servant job and who are desperate to work to make up for low returns on their bank accounts? The real measure of job growth is wage growth but that only grew at 2.5% YoY, not much over inflation. Typically this late in the cycle job growth should be manifested in a bidding war for workers resulting in significant wage growth. The

2017-07-07T14:56:21-07:00 July 7th, 2017|mayflowercapital blog|Comments Off on Employment Report Casts Doubt On Inflation