Huge Jobs Increase. Result: Lower Interest Rates

   The monthly employment report was released by the BLS today showing a big increase in employment of 235,000. Yet bond yields dropped by two basis points today. The unemployment rate declined 0.1% to 4.7%. But if one adjusts for extremely warm weather, the second warmest February in 96 years, then there would have been 181,000 less jobs bringing the total increase of jobs to 55,000 which is less than the 120,000 monthly jobs increase needed to keep up with population growth. The weather adjusted and population growth adjusted number, in my opinion, would be 55,000 minus 125,000 equals negative 70,000 jobs created, implying that the unemployment rate actually rose on a path that will in a year result in

2017-03-10T13:40:46-08:00 March 10th, 2017|mayflowercapital blog|Comments Off on Huge Jobs Increase. Result: Lower Interest Rates

Labor Markets and Inflation: What Next?

The decision by Ford Motor to cancel their construction of their Focus factory in Mexico and instead build other things in the U.S. thus creating 700 jobs in the U.S. seems like it will stop jobs from going to Mexico. But Ford instead decided they could get by with using an existing factory in Mexico to produce Focus cars there. And in Michigan they will produce high tech products which won't solve employment needs for low skill workers. What is important about this situation is that pressure from the Trump administration to stop jobs from leaving the country may be responded to by corporations in a way that actually makes things worse for U.S. workers because it will discourage domestic

2017-01-04T18:03:58-08:00 January 4th, 2017|mayflowercapital blog|Comments Off on Labor Markets and Inflation: What Next?

Today’s Low Yields: Are They Actually Normal?

Some people say that we are in a new era of ultra-low rates for the next 30 years. For example, fund manager Hugh Hendry said that rates in the old days were too high and that today’s rates are fair. But if one looks at corporate bonds instead of sovereign debt then rates are not that low. Corporate bonds with a long term duration (and with a “Make Whole Clause” to reduce the problem of premium priced bonds being called) are yielding 4.17% (using the SEC 30 day yield method) for BBB quality investment grade bonds. Some investment grade Muni bond mutual funds yield 3.3% (using the SEC 30 day yield method), which is a taxable equivalent yield of 5%

2016-11-03T12:15:41-07:00 November 3rd, 2016|mayflowercapital blog|Comments Off on Today’s Low Yields: Are They Actually Normal?

Understanding The True Meaning of Bonds And Cash

Cash and investment grade bonds with modest duration are a form of self-insurance against risk of a crash in risk-on assets. They are like the ballast in a ship that seems to waste space, weight, and money with no visible benefit, yet it is needed. An analogy could that in examining an insurance company the central asset they own to be used to pay for claims are investment grade bonds and cash. If investors want to act like their own insurance company they will have to load up on these assets. The way to understand the true meaning of cash is to see it as a tool to get a job done. The job is to rescue someone from a

2017-01-10T23:32:52-08:00 September 23rd, 2016|mayflowercapital blog|Comments Off on Understanding The True Meaning of Bonds And Cash

CPI Way Up: Are Bonds Doomed?

The CPI data was released today showing a 3% annualized rate for the core rate for the last month only. It showed a 1.1% annual YoY increase for the overall non-Core rate. The rent component went up 3.3% YoY. Since rents are a third of the index, then subtracting rent would mean a zero percent CPI YoY. Measuring rents fairly is a problem because 66% of consumers own homes, many with fixed costs, or no mortgage. Their housing costs are assuming to hypothetically go up along with rent increases for tenants, however, this is fiction for those who have bought in previous years. There is a growing surplus of new construction of apartments that will become available next year (nationally,

2017-01-10T23:32:53-08:00 September 16th, 2016|mayflowercapital blog|Comments Off on CPI Way Up: Are Bonds Doomed?

Bond Yields Are Fairly Valued

A simple way to estimate a fair yield for the ten year Treasury is real GDP plus CPI. If real per capita GDP is 0.5% and CPI is 1%, then the total, which is 1.5%, implies that 1.5% is a fair rate based solely on domestic factors. GDP has been declining from 2.3% to 0.8% over the past 18 months. Today the current yield on the ten year Treasury is 1.55%. A better way to look at it is per capita real GDP, which was in a range of 2.0% to 2.5% from 1976 to 2007, except for the deep recession of 1980-82 when interest rates hit 15%. Since the 2009 crash this figure has ranged from 1% to a

2016-09-07T15:42:44-07:00 September 7th, 2016|mayflowercapital blog|Comments Off on Bond Yields Are Fairly Valued

Japan Bond Market Rejects Negative Rates: Global Low Rates To End?

Japan’s government bond yields have been rising from negative rates up towards zero in the past six months. They have risen in a dramatic reversal of their downtrend. Japan is uniquely in a long term soft depression so it is difficult to compare to other countries. However, the recent repudiation by the market, of negative rates, is very interesting and hints that the Invisible Hand of the global market won’t tolerate them. I think ultimately throughout the world investors will rebel against negative interest rates. It may be partly by using paper money cash in a vault to avoid being charged a negative interest rate for a deposit. And it may be most likely in the form of severe problems

2016-09-06T16:11:23-07:00 September 6th, 2016|mayflowercapital blog|Comments Off on Japan Bond Market Rejects Negative Rates: Global Low Rates To End?

Bond Investing: Solving Two Problems During The Next Big Crash

Bond investors want to know when will the great 35 year bond bull market end. People who use traditional economic metrics to estimate this may find their instruments need recalibrating because the massive overhang of excessive global debt since 1997 is unprecedented. Thus traditional metrics before 20 years ago may make the economy to seem more likely it actually is to trigger inflation and growth. Because consumers and governments all over the world have too much debt they are constrained from spending or borrowing more and thus are stuck in a debt/deflation trap with no known solution. Also, people are used to being inspired by claims that debt fueled stimulus in China, Japan, and the EU will somehow make the

2016-08-30T15:16:04-07:00 August 30th, 2016|mayflowercapital blog|Comments Off on Bond Investing: Solving Two Problems During The Next Big Crash

Economists Bad Advice About Saving Makes Things Worse

Economists typically believe that during a recession that affluent people save too much so they seek to pressure them to spend more to stimulate the economy. One way to attempt to do this is to make interest rates low so that savers will subsidize borrowers because borrowers want to spend instead of save. This is not a good way to run the economy because savings need to be firewalled off from spenders otherwise an accident could happen resulting in loss of savings. People need to understand that savings (including bonds) are vital towards building a form of self-insurance against financial risks. If people are pressured by low rates to give up saving this damages the ability to consume in the

2017-01-10T23:32:53-08:00 August 12th, 2016|mayflowercapital blog|Comments Off on Economists Bad Advice About Saving Makes Things Worse

Monetarism Is Dead: Will There Be Inflationary Fiscal Stimulus?

As negative interest rates go deeper in Japan this is making things more difficult for Japanese banks and insurance companies. The result is the central bank is unwilling to make rates go lower. Also the central bank has bought two thirds of the Japan government debt and thus can’t really do much more to stimulate to make rates go down.  I wrote an article “When will negative rates end?” In theory if rates need to be negative 4% and a bank needed a 2% gross margin then a bank could tell depositors they must accept a negative rate of 6% (2% margin and 4% cost of funds). But banks would lose customers even if all banks had similar costs so

2017-01-10T23:32:54-08:00 August 4th, 2016|mayflowercapital blog|Comments Off on Monetarism Is Dead: Will There Be Inflationary Fiscal Stimulus?