bond forecast

Debt Crisis: Will High Interest Rates Occur?

   Yesterday bond guru Jeff Gundlach gave a scary lecture, warning about the danger of rising federal deficits which in turn could trigger a decline in the value of the dollar and a significant rise in interest rates. I disagree. I lived through the scary inflationary 1970’s when some yields hit 21% in 1981 and inflation hit 14%. Many frightening things happened in the 1970’s where it was common for people to worry that we were doomed, but eventually inflation was brought under control and the economy grew out of its problems. First, the recent contribution to the rising deficit is the Trump tax cut signed on 12-22-2017. But this is a temporary law constrained by the ten year time

2019-03-13T14:24:55+00:00March 13th, 2019|mayflowercapital blog|0 Comments

Will Rising Federal Deficits Cause a Repeat of the 1970’s Big Inflation?

     The annual federal deficit budget is 5% of GDP, or 7% if count some one-time excluded items. The percentage has been growing. The government has relied upon foreign investors and central banks to buy U.S. Treasury’s. The Treasury Bills have been used as the world’s money, thus absorbing the funding needs of the U.S. If foreigners decide to stop this then the dollar would drop in value and the Federal Reserve would have to monetize the deficit, creating inflation. As long as the other major economies have so many significant contingent financial problems (the negative interest rates in the EU and Japan, the huge debts in China and Japan) then the world economy will continue operating the same way.

2019-03-08T15:33:04+00:00March 8th, 2019|mayflowercapital blog|0 Comments

Will The Dollar Become A Worthless Currency?

      People worry the rising deficit will make the dollar drop in value. The annual federal deficit is 5% of GDP, about $1Trillion a year. The long run average federal tax revenue is 18% of GDP. Assuming a 2% CPI adjustment is applied to the deficit then the deficit is growing by 3% of GDP a year in real terms. For example, a debt of $21Trillion if it increases by 2% a year when inflation is also 2% is basically not an increase in real terms. Eliminating the Federal Budget Deficit Could Help Raising taxes by 3% from 18% of GDP to 21% would be enough to fix the problem. A compromise is to raise taxes by 1.5% of GDP

2019-01-11T17:33:10+00:00January 11th, 2019|mayflowercapital blog|Comments Off on Will The Dollar Become A Worthless Currency?

Debt Hysteria Confuses Investors

      The US dollar is best, cleanest dirty shirt in the world’s dirty clothes hamper. Our capitalism makes the tax base stronger than that of other countries and this taxable income can be used to service government debt. If domestic debt increases too much, possibly the outcome of excessive debt will be a situation where the government gets all of its needs met first, crowding out most of the private sector, so excess debt might not be a problem for government which pays interest-only. The risk is that private sector would undergo a wave of bankruptcies that would clear out debt and ironically induce more desire to own safe government debt, resulting in a further increase in spread between government

2019-01-10T12:45:13+00:00January 10th, 2019|mayflowercapital blog|Comments Off on Debt Hysteria Confuses Investors

Jobs Increase Not Inflationary

   Today the monthly Employment Situation report was released by the BLS showing a huge 312,000 increase in jobs in the payroll survey. The unemployment rate increased from 3.7% to 3.9% as more people decided to join the work force and seek employment. Fundamentally, because the unemployment rate increased, that is the bottom line: new entrants to the labor force acted to dampen inflation by increasing the supply of workers. The household survey said 419,000 jobs were added with 90% of the total job increase from unincorporated self-employed. That type of “employment” can be a zero income gig experiment rather than a traditional real job. Prime age employment shrank by 11,000, with a 48,000 decline the month before. 146,000 of

2019-01-04T13:20:48+00:00January 4th, 2019|mayflowercapital blog|Comments Off on Jobs Increase Not Inflationary

Dollar Flash Crash: What Next?

The dollar crashed last night against the Yen in a Flash Crash, dropping 3% (a very significant figure), before settling in to a 1% decline to 107.5 Yen to a dollar. This demonstrates a potential risk that the Yen could appreciate roughly 10% or even 20% to reach fair value. Its price is held down by Japan so that they can encourage exports through devaluation. If global investors get burned by a US stock crash they may decide to withdraw funds from the US, thus making the dollar go down and the Yen to go up. This would force Japan to have even deeper negative interest rates, thus pulling down global interest rates.    If Japan devalues that can cause

2019-01-03T13:54:46+00:00January 3rd, 2019|mayflowercapital blog|Comments Off on Dollar Flash Crash: What Next?

Fed Raises Rates, Market Cuts Them

         The Federal Reserve raised the short term fed funds rate by 0.25% today. The Fed funds rate of 2.5% is higher than the 3 month T-Bills rate of 2.35%, thus inverting part of the yield curve. The 2 year Treasury yield inverted, becoming higher than the 5 year Treasury yield. The difference between the 2 year and 10 year Treasury are only 11 basis points, so they entire yield curve is moving towards inverting. The 30 year Treasury bond’s yield dropped below 3.0%. Stocks crashed hard making new lows for the year. Many stock market charts show technical trading indicators, such as trendlines and momentum, that have been broken, thus leading to a full stock market correction. A plunge

2018-12-19T14:21:37+00:00December 19th, 2018|mayflowercapital blog|Comments Off on Fed Raises Rates, Market Cuts Them

Inverted Yield Curve Implies Recession Coming

     The yield curve has become inverted for the spread between the 2 year and 5 year Treasury. The entire yield curve has shifted to be close to being inverted. Traditionally it takes a long time, perhaps 1.75 years after yield curve inversion before a recession starts. However, since the 2008 GFC the extreme manipulation by central banks, such as the QE program, that have never before been experienced, means that things will not act as they typically do during a yield curve inversion. Assuming the short end of the yield curve (for maturities under two years) is heavily manipulated by central banks and less so the further out one goes from short term maturities, then the traditional metric that

2018-12-07T14:11:31+00:00December 7th, 2018|mayflowercapital blog|Comments Off on Inverted Yield Curve Implies Recession Coming

Stocks Crash: What Next?

    Stocks crashed hard today. The Russell Small cap index was down 4.43%, the SP down 3.24%. The ten year Treasury yield dropped to 2.91%, far below the recent high of 3.23%. The 10 - 2 Treasury spread narrowed to 10 bps, it had been in a range of 22 to 32 bps for the past year. At this pace the Treasury 10 – 2 spread will be inverted, a classic sign of a recession. Investing in stocks in the past decade has been dominated by the psychological aspects of technical trading, including “momentum”. But now momentum is broken, or soon will be. Many bullish investors may secretly feel stocks are overpriced and once the momentum trading turns against the

2018-12-04T13:20:31+00:00December 4th, 2018|mayflowercapital blog|Comments Off on Stocks Crash: What Next?

Should Bond Investors Increase Portfolio Duration?

        Yesterday’s pseudo-capitulation by the Fed chief during a speech was interpreted by the market as a sign that the Fed is very close to ending its rate increasing campaign. More experts are tilting towards the possibility of recession next year. If recession comes then yields will drop, in which case investors who own money market funds would miss out on the chance to lock in intermediate term yields. When yields drop deeply then bond issuers refinance (they “call” the bond in) and investors are then forced to reinvest at lower yields. An exception to that is that Treasuries have lifetime restrictions and Munis usually have 10 year restrictions on calling in outstanding debt. Assuming that the paradigm that recessions

2018-11-29T12:12:45+00:00November 29th, 2018|mayflowercapital blog|Comments Off on Should Bond Investors Increase Portfolio Duration?