deflation

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+00:00March 13th, 2019|mayflowercapital blog|0 Comments

Central Bank Bubble Making: A Misleading Activity Worsening The Economy

   Don’t be fooled by the central bank’s ability to reflate the intangible financial economy and recover from a crash. If a crash occurs in financial assets then rhetorically speaking one can allege that prices are somehow unknowable or shrouded in an undiscoverable mystery so it’s somehow OK for central banks and governments to manipulate markets and artificially prop up asset prices. When stocks, bonds, real estate, and banks collapse, the central bank can print money and buy these assets at artificially high prices while the government and legislature can decree that “mark to market” accounting is suspended and that people must use the high water mark for valuation purposes.  This ability to create a miraculous “recovery” has fooled investors

2019-03-06T17:44:43+00:00March 6th, 2019|mayflowercapital blog|Comments Off on Central Bank Bubble Making: A Misleading Activity Worsening The Economy

QE And NIRP Monetary Policy is a Dangerous Trap

My concerns about QE: 1. It was a placebo that won’t work next time thus creating a surprise, not yet fully discounted by the stock market. 2. QE and associated polices of NIRP and bailouts, including the Japanese and Swiss central bank’s purchase of equities have created moral hazard that encourages speculators to operate in a riskier manner thus building up a higher degree of hidden risk that eventually will bubble to the surface and disrupt the economy. Imagine investors seeking to make income from writing naked put options. If they were lured into a false sense of security that they are entitled to a perma-bull fantasy of central banks bailout of markets then they may act recklessly and take

2019-02-20T19:26:13+00:00February 20th, 2019|mayflowercapital blog|Comments Off on QE And NIRP Monetary Policy is a Dangerous Trap

Zero Rate Central Bank Programs Weaken The Economy

The asymmetry of zero rate programs: when rates are cut that hurts retirees who get most of their income from bond yields. It also destroys the consumer confidence of retirees. When people close to retirement age feel they can’t earn enough yield to afford to retire then they will refuse to retire, thus hoarding jobs needed by young people, which increases the supply of labor, thus suppressing wage growth. This is deflationary. When rates are cut the nature of amortized debt means that the payment doesn’t decline as much as one would think because as rates decline the amortization of principal increases, so the total payment doesn’t go down as much as if it were an interest-only loan. Also, lower

2019-01-31T14:33:58+00:00January 31st, 2019|mayflowercapital blog|Comments Off on Zero Rate Central Bank Programs Weaken The Economy

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