Inflation May be Cooling Down

The expected inflation “breakeven rate” for 5 year TIPS Treasuries rose in a trend line from 1.5% in mid-2017 to 2.17% and then last month the trend line was broken, and now it is down to 1.98%. Residential construction spending decreased 4 of last 5 quarters; the last time it happened was at the bottom in the 2008-2010 period.  Read the article “Housing Sours Suddenly; It Won't Come Back Anytime Soon”. Much of the news about an inflationary shortage of workers concerns low payed semiskilled workers, but these types often earn so little that they can’t effectively use their paycheck to qualify for a big, attractive “A” paper loan that would increase the money supply and thus cause inflation. What

2018-08-09T11:57:35+00:00August 9th, 2018|mayflowercapital blog|Comments Off on Inflation May be Cooling Down

CPI Index Higher Today Yet Fundamentals Show Inflation Tame

   The yield curve flattened some more today, and at an accelerating pace. The 2 – 10 year Treasury spread closed the day at 0.23%, it was 0.28% a few days ago. It had been shrinking at a pace of 0.06% a month, but this week’s pace was almost a month’s worth of change in a few days. At this pace the curve will be flat at the end of August. The swaps (a non-cash market version of the spread) was 0.18% two days ago so it is even lower than the spread in the 2-10 Treasury cash market. Traditional economic theory says that an inverted yield curve is a sign of recession and these usually occur every 8 years;

2018-07-12T14:59:38+00:00July 12th, 2018|mayflowercapital blog|Comments Off on CPI Index Higher Today Yet Fundamentals Show Inflation Tame

Trade Conflicts Imply Global Growth to be Lower

     The trade conflicts that created rising tariff barriers will act predominantly to shake the confidence of the business community in regards to plans to expand their plant, equipment and hiring. Businesspeople are always on the lookout for the risk of being subject to unfair imposition of regulations or taxes that might damage their business. They will be reluctant to commit to expanding businesses if a multinational company suddenly is hampered in its process of manufacturing goods in various countries as a result of trade barriers.    The whole purpose of a Supply-side tax cut like the one enacted in 2017 is that it is supposed to encourage businesses to expand the economy. But a higher priority than pursuing income

2018-07-11T17:54:48+00:00July 11th, 2018|mayflowercapital blog|Comments Off on Trade Conflicts Imply Global Growth to be Lower

Trade Wars To Create Inflation Or Deflation?

A trade war with a 25% tariff might result in prices rising by a one-time increase of 15%. Consumers would react by reducing purchases of some goods until those less desired goods fell into their own little recession and cut prices. If, so then trade barriers might not be inflationary. However, the convulsions of businesses implementing new policies to cope with a trade war would mean that considerable frictional costs would be generated as businesses move plants and managers back into the U.S. and engage in a bidding war to hire domestic workers. If a business feels it is forced to move back into the U.S. it would have to pay relocation or recruitment costs to deal with moving employees

2018-07-05T15:16:25+00:00July 5th, 2018|mayflowercapital blog|Comments Off on Trade Wars To Create Inflation Or Deflation?

Inflation: Chances of It Increasing or Decreasing?

Reasons inflation may increase: Full employment economy of 4.1% unemployment Economy is strongest since the bottom in 2009 Tax cuts will stimulate the economy leading to excessive growth and inflation   Reasons inflation won’t increase: The dominant economic paradigm is that giant companies export good jobs in Developed countries to EM countries to cut costs and cut taxes. Corporations will seek to lower their taxes by moving more activities offshore where they can pay 12.5% instead of 21%. Continued hallowing out of mid-skill good jobs results in workers taking a demotion, pay cut, and shifting to unreliable gig economy work instead of a real job. This demotion results in workers qualifying for smaller loans and thus cuts their ability to

2018-03-02T17:55:49+00:00March 2nd, 2018|mayflowercapital blog|Comments Off on Inflation: Chances of It Increasing or Decreasing?

Yields Already Reached Equilibrium

       Economists may focus on the short term overnight Fed Funds rate, now roughly 1.4% but the free market short term rate is the 90 day T-Bill yield, now at 1.64%. An even more objective, less manipulated rate is the two year Treasury Note, now at 2.26%. Adjusted for the fact it is free of state tax means its taxable equivalent yield is 2.48% for residents of CA, NY, etc. Assuming PCE inflation is 1.5% and that Owner’s Equivalent Rent component of inflation needs to be adjusted downwards shaving off at least 15% of this then the PCE should be 0.22% lower or about 1.28%. The difference between 2.48% and 1.28% is a short term risk free real yield of

2018-02-21T11:34:14+00:00February 21st, 2018|mayflowercapital blog|Comments Off on Yields Already Reached Equilibrium

Huge Federal Deficit To Unleash Inflation?

The federal budget signed on 2-9-18 will have annual $1Tril deficit in a 2 year average of FY 2018 & 2019. Of this $150B per year is from a tax cut passed 12-22-17 and $150B extra per year approved Feb. 9th, and $700B per year from previous administrations. So under Trump the annual deficit increased $300B a year or 1.5% of the $20T outstanding federal debt balance, or about same rate as PCE inflation, which implies on an inflation-adjusted “real” basis Trump didn’t increase the annual deficit, using a long term averaging of his tax cut program. (However, the initial years are front loaded with the biggest benefits). Of course, it would be better if no increase in debt occurred.

2018-02-12T14:34:41+00:00February 12th, 2018|mayflowercapital blog|Comments Off on Huge Federal Deficit To Unleash Inflation?

Will Exploding Deficits Destroy Bond Market?

  The fears that rising U.S. government’s deficits will morph into an inflationary Banana Republic are wrong. The rising deficit only increased by 0.75% a year as a result of Trump’s tax cuts. Since that’s less than the 1.5% PCE inflation rate then the inflation-adjusted deficit increase caused by Trump is actually a negative figure. John Williams of San Francisco Federal Reserve said the Trump stimulus program will only stimulate the economy by 0.1% a year. Thus I don’t expect it trigger an increase in inflation. A declining stock market and the recent increase in interest rates (short term rates may continue to rise this year) will act to cool down the economy and dampen inflation. The reason the deficit

2018-02-09T14:19:12+00:00February 9th, 2018|mayflowercapital blog|Comments Off on Will Exploding Deficits Destroy Bond Market?

Repeating The Taper Tantrum of 2013

     In 2013 the ten year Treasury bond yield was around 2% in the first half of the year but after the Taper Tantrum incident (the Fed hinted they would raise rates then they chickened out and didn’t) it traded in a range of 2.5% to 3.0%. Then in 2014 it came down to the mid and lower 2’s range. Using the 2nd half of 2013 as an example of how interest rates can rise implies that rates could go to 2.75% with a plus or minus 0.25% range. That’s only 0.09% higher rate than today’s 2.66% yield. If rates rise by 0.09% on a bond portfolio with a duration of 4 then the bond portfolio would drop in value

2018-01-26T14:35:57+00:00January 26th, 2018|mayflowercapital blog|Comments Off on Repeating The Taper Tantrum of 2013

Why Rates Are Low

Did U.S. interest rates drop because of low rates in Japan and the EU? At first glance it might seem intuitive that money, being fungible, flows across international borders until interest rates around the Developed world are equalized (after adjusting for local inflation risks). However, many bond investors seek safety to the point that they insist on or strongly prefer to hedge their foreign investments against the risk of devaluation. Thus foreign investors seeking to buy U.S. based debt often insist on using a currency hedge such as options or futures contracts which might cost 1% or 2% a year. If a bond investor can earn 0.5% in the EU and has to pay 2% for a currency hedge to

2018-01-22T15:51:26+00:00January 22nd, 2018|mayflowercapital blog|Comments Off on Why Rates Are Low