bond forecast

Will Bonds Perform the Same as in the 1970’s Inflation Era?

   During the 1970’s there was a significant increase in inflation in the US and the UK which made interest rates rise, thus damaging long term bonds. Gold’s price rose during the 1970’s and was the best asset during that era. Stocks spent the inflationary era of 1966 to 1982 going down 50% and then their prices returned to their starting points after a 16 year bear market, so on a nominal price return basis investors made no gains, however they did get dividends. Could this time be different where yields are repressed by central banks and not allowed to rise in tandem with inflation? There was a precedent for that in the UK in the 1970’s the real rate

2019-07-12T16:11:06-07:00July 12th, 2019|mayflowercapital blog|0 Comments

Negativity About the U.S. Dollar Is Wrong

    It seems a many financial advisors and financial commentators are making an increasing amount of negative comments about the U.S. dollar and U.S. Treasuries. I disagree with them. I remember the 1970’s when there were many scary headlines about the end of Bretton Woods monetary agreement, Watergate, Nixon’s resignation, the U.S. defeat in Vietnam, the two OPEC oil shortages of 1973 and 1979 that severely damaged the economy, and the US embassy hostage situation in 1979 in Iran, etc. The dollar went down in value and the economy performed poorly while inflation increased dramatically in the 1970’s. Gold went up from $43 in August, 1971 to a peak of $880 in January, 1980. The inflation-adjusted price return of the

2019-06-14T17:25:55-07:00June 14th, 2019|mayflowercapital blog|Comments Off on Negativity About the U.S. Dollar Is Wrong

Will Inflation Return?

     Economist Mohamed El Erian wrote that inflation may increase once cost cuts from the gig economy (Uber, Amazon, etc.) have been maxed out and the supply of unemployed people dries up, and corporations get more oligopolistic. I disagree, I believe: The dominant paradigm of the era is cheap EM labor undermining Developed countries resulting in unemployment, foreclosures, low growth in Developed countries. This force is far more powerful than the inflationary force suggested by Mohamed El-Erian. The fundamentals of EM countries are export subsidies, and excess production funded by local banks under political orders to loan money to companies that are not financially sound, so as to create make-work jobs, etc. Ironically as the trade dispute with China acts

2019-05-22T17:25:26-07:00May 22nd, 2019|mayflowercapital blog|Comments Off on Will Inflation Return?

Will China Tariffs Be Inflationary?

     The 25% tariff against imports from China won’t be inflationary. Consumers in the U.S. will simply buy less goods because they have a limited budget. Thus if they chose to buy imported goods from China, that suddenly cost 25% more because of the tariff, they will simply buy less of other items. The higher cost will inspire domestic competition and more likely inspire additional competition from other EM countries that have lower wage costs than China. Based on the fact that China devalued by 50% in 1994 a 25% devaluation by China, in response to the tariffs, will occur. This would trigger a retaliatory devaluation by Japan which has used devaluation to compete and stimulate its economy. This would

2019-05-14T15:06:33-07:00May 14th, 2019|mayflowercapital blog|Comments Off on Will China Tariffs Be Inflationary?

Low Unemployment Yet Declining Interest Rates: Why?

     The Employment report was released today by the BLS. The unemployment rate dropped to a very low percentage of 3.6%, the lowest in 50 years. But factory jobs growth stalled this year. Manufacturing and mining produced the growth of GDP in 2017 and 2018 and now that has stalled. Factory jobs in April declined by 4,000. These good paying jobs are worth more in terms of stimulation and growth than a low wage, entry-level fast food job. The Labor Force Participation Rate has been stuck near 63%, but in 2007 before the crash, it was 66%, which is 4.8% (as a percent of a percent) less than in 2007. If these missing workers reported to the government that they

2019-05-03T15:40:47-07:00May 3rd, 2019|mayflowercapital blog|Comments Off on Low Unemployment Yet Declining Interest Rates: Why?

Incorrect GDP Fools Investors

Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of

2019-04-26T15:19:59-07:00April 26th, 2019|mayflowercapital blog|Comments Off on Incorrect GDP Fools Investors

Will 2020 Be The Year of Investing During Negative Interest Rates?

   Assuming the Fed is going into a major easing cycle and will come close to the rates in the EU and Japan then what should U.S. investors do? Increase bond portfolio duration but only with bonds that offer significant call protection and only with investment grade bonds. Avoid BBB rated corporate or BBB rated Muni bonds. If you own bonds subject to a call provision (mortgage backed bonds, typically) be sure not to own them if they trade over par as they may be called and paid off at par thus depriving you of the bond premium. Be careful not to have too much duration as no one knows what the future will be like; there is no guarantee

2019-03-25T17:19:06-07:00March 25th, 2019|mayflowercapital blog|Comments Off on Will 2020 Be The Year of Investing During Negative Interest Rates?

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

2019-03-13T14:24:55-07:00March 13th, 2019|mayflowercapital blog|Comments Off on Debt Crisis: Will High Interest Rates Occur?

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.

2019-03-08T15:33:04-07:00March 8th, 2019|mayflowercapital blog|Comments Off on Will Rising Federal Deficits Cause a Repeat of the 1970’s Big Inflation?

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

2019-01-11T17:33:10-07:00January 11th, 2019|mayflowercapital blog|Comments Off on Will The Dollar Become A Worthless Currency?