bonds

Employment Report Shows Weak Economy Justifies Low Yields

   Today the employment report was released by the government’s BLS showing unemployment dropped to 4.1%. This occurred only because of a massive number of discouraged jobseekers who dropped out of looking for work. The Labor Force Participation Rate dropped from 63.1% to 62.7%, which is more than the percentage improvement in unemployment. There is no wage inflation when compensation costs are covered by increasing productivity. Unit labor costs fell 0.1% YoY rate. Most of the loss of jobs to EM low wage countries is hurting the least skilled people who are inherently less productive than highly skilled people. If there is a predominance of highly skilled people remaining in the labor force and they are increasing their productivity then

2017-11-03T14:02:09-07:00 November 3rd, 2017|mayflowercapital blog|Comments Off on Employment Report Shows Weak Economy Justifies Low Yields

Political Events Imply Continuation of Status Quo of Low Yields

    The proposed tax cuts offered today in Congress are not a huge game changer that will stimulate the economy and trigger inflation. Regardless of which party is in power, the problem is a bipartisan problem, that the country’s excessive debt and government spending commitments mean the government is trapped and can’t afford a serious tax cut. When people or a government have too much debt then they become debt slaves and are unable to engage in increasing consumption and instead have to labor long hours just to keep their credit score from crashing. The appointment of Jerome Powell to be Federal Reserve chief is an affirmation of a continuation of traditional Federal Reserve moderate bubble making policies. He will

2017-11-02T13:29:16-07:00 November 2nd, 2017|mayflowercapital blog|Comments Off on Political Events Imply Continuation of Status Quo of Low Yields

Bond Yields Drop Despite Robust GDP and Rising Stocks

10 year Treasury Bond yields dropped more than usual, some 4.5 basis points today, even though the news that GDP for the 3rd quarter was 3% (released today), instead of the typical 2.3%. Traditionally the ten year might yield the sum of GDP growth and inflation, implying it should yield over 4%. Why did the yield actually go down today? Why is the yield at roughly half of what the traditional metric implies it should be?      I think people are deeply prejudiced to assume that past cyclical patterns will repeat and people are not open minded to looking creatively at new conditions. The era of 1945 post-war until the great crash of 2008 it was customary for nominal GDP

2017-10-27T13:48:10-07:00 October 27th, 2017|mayflowercapital blog|Comments Off on Bond Yields Drop Despite Robust GDP and Rising Stocks

Avoid Overpriced Stocks Even If Bond Yields Are Low

One of the most important things to do to make a good return in investing is to avoid overpaying for assets. Thus during a bubble top it is important to avoid overpriced assets. During the crash of 1929 it took 20 years for stock market, based on price return, not total return, to breakeven, but on an inflation adjusted basis it took 30 years for price return to breakeven. Since taxes are not adjusted for inflation’s effect on the basis (acquisition cost) of an asset then additional appreciation would be needed to offset the effect of both taxes (including the phantom income created by inflation) and inflation. That might require waiting until 37 years after 1929 until 1966 when the

2017-10-05T13:34:59-07:00 October 5th, 2017|mayflowercapital blog|Comments Off on Avoid Overpriced Stocks Even If Bond Yields Are Low

Is the 4% Rule Still Useful?

  The financial planning profession believes that a retired person ought to limit their retirement spending to 4% a year of their portfolio, assuming a 30 year retirement (called the “Safe Withdrawal Rule” but there is no guarantee it will work since past performance of the market shouldn’t be used to rely on for the future). Now more articles are being written by financial journalists suggesting that we are in a new era of low interest rates and low stock market returns and thus the 4% figure should be cut down to 3% to avoid running out of money. The 4% figure was designed to survive a repeat of a 1930’s depression. The idea is when markets make high returns

2017-09-29T11:43:18-07:00 September 29th, 2017|mayflowercapital blog|Comments Off on Is the 4% Rule Still Useful?

Market Won’t Be Stimulated By Tax Cut

  The administration’s proposed new tax law may not actually end taxation of offshore subsidiaries, according to an article in the FT. In my opinion the items that are likeliest to have the biggest tax cuts and biggest source of stimulus are these items, and the possibility of a special low rate for pass through entities. However, these would be seen by moderates as unfair (especially a lower rate for elitist privately held pass-through entities) and not helpful in terms of a goal of not increasing the budget deficit. Thus these items may be unlikely to pass Congress, based on the administration’s difficulty getting other bills passed. If Congress truly ends taxation of U.S. based companies’ foreign earnings that may

2017-09-28T14:17:26-07:00 September 28th, 2017|mayflowercapital blog|Comments Off on Market Won’t Be Stimulated By Tax Cut

Bonds To Be Damaged by New Tax Law?

    The administration proposed new tax laws today, which may increase deficit spending, thus leading to inflation and higher interest rates. The ten year Treasury bond yield went up 8 basis points from 2.23% to 2.31%, making the bond’s price drop 0.7%. The increased debt would mean 8% higher U.S. Treasury debt balances over ten years or an increase of 0.7% in debt balances a year, which is less than inflation. Thus in real terms the debt balances won’t increase.         There is only a modest chance that Congress will make any big changes to tax laws. If the law is passed it will not threaten tax-free Municipal bonds, but will end the deduction of state income tax from

2017-09-27T13:57:37-07:00 September 27th, 2017|mayflowercapital blog|Comments Off on Bonds To Be Damaged by New Tax Law?

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

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

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