bond forecast

Weak Jobs Report: Good News For Bonds

    The monthly employment payroll based report was released by the BLS today showing only a 138,000 jobs gain. When netted against the 125,000 monthly population increase this is almost no net gain at all. The labor force participation rate continues to be about 2% below normal which implies 2% of the population are the hidden unemployed and thus the real unemployment rate is about 6.3% instead of the official 4.3%. The normal trend for wages is for them to increase about 4.5% a year at the top of an economic cycle, yet now despite being near the top of a cycle the wages are only increasing 2.5% a year. This 2% shortfall below expected wage inflation is a sign

2017-06-02T13:20:24-07:00 June 2nd, 2017|mayflowercapital blog|Comments Off on Weak Jobs Report: Good News For Bonds

Bonds With The Least Influence From Central Banks And Flight Capital

    Central banks and foreign flight capital investors have taken actions that warped the U.S. bond market. However, one possible uncontaminated (or less contaminated) segment of the bond market are Muni bonds. Since they are tax free they are usually not purchased by foreign investors who are exempt from tax on passive income. Central banks have never bought any U.S. Muni bonds.    Currently investment grade Muni bonds held in some of the lowest cost mutual funds with a portfolio of bonds rated as “A” quality, are yielding about 2.58%, after netting out the mutual fund’s fee, using the SEC 30 day yield method, which adjusts for bond premiums and discounts. Using a 2.58% federally tax free rate implies roughly

2017-05-16T13:11:08-07:00 May 16th, 2017|mayflowercapital blog|Comments Off on Bonds With The Least Influence From Central Banks And Flight Capital

A New Era For Investors

             Stock market investors often discuss the topic that there is a “new era” where the old economics rules allegedly don’t apply. This concept usually happens when bullish people try to justify the high price of stocks after a huge runup. The stereotype is that a wise person says there is no new era, so avoid bubbles, etc. But there could be a new era. The new era maybe one where the Federal Reserve ceases their 30 years of massive rate cuts and bailouts that started in the crash of 1987. The Federal Reserve needs to raise rates to a “normal” level of rates. Based on that fact that the U-3 unemployment rate is very low, at 4.4%, the appropriate

2017-05-08T10:29:22-07:00 May 8th, 2017|mayflowercapital blog|Comments Off on A New Era For Investors

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

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

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

Inflation Alarm Bells Ringing: They Are Wrong

    The PCE inflation index was released by the BEA today showing a 2.1% increase in inflation. The 10 year Treasury bond yield dropped by 2 basis points. The PCE is more cautious and reliable than the CPI. At first glance it may be tempting to panic and fear that inflation is returning and that it will somehow morph into a 1970’s nightmare of high inflation. However, if one subtracts the effect of oil prices then the increase was not so threatening. Oil has increased 80% over the past year. Oil is about 4% of the economy. So the 80% oil price increase multiplied by 4% is 3.2% contribution to inflation which is slightly more than the 2.1% overall

2017-03-31T18:01:13-07:00 March 31st, 2017|mayflowercapital blog|Comments Off on Inflation Alarm Bells Ringing: They Are Wrong