deflation

A Sudden Drop In Inflation To Occur?

A key component of CPI inflation is rent. 62% of “rent” comes from owner-occupied homes that the BLS uses to calculate a theoretical “owner’s equivalent rent” and is not actual rent. This figure comes from estimates offered by naïve homeowners who get surveyed by the BLS. These homeowners look to actually rented comparable buildings to estimate what their hypothetical rent should be. The fair market value of rent on owner occupied homes should be higher than that of a generic apartment house since they are better quality properties. If the affluent upper-end rental properties suddenly experience a sharp drop in rents then this change will influence owner-occupied hypothetical rent. In recent years much of the new construction of homes and

2017-06-21T14:06:59-07:00 June 21st, 2017|mayflowercapital blog|0 Comments

Low Growth Kept Afloat By Deflation

                   Regarding the recent GDP data issued 4-28-17, the Q1 oil drilling investment capital expenditures (some 0.4% of the economy) was up 450% annualized, which is why investment in non-residential assets went up 22% annualized in Q1. This would have been zero, except for the sudden burst of economic activity in drilling for oil. The other 99.6% share of economy that was not in oil drilling investment had no growth. The GDP for the quarter was only 0.7% annualized instead of the usual 2% range. Real GDP would have been flat if not for the recovery in the drilling sector. Recently more evidence has emerged of a lower breakeven cost level (possibly at the high 20’s a barrel instead of

2017-05-02T16:49:22-07:00 May 2nd, 2017|mayflowercapital blog|Comments Off on Low Growth Kept Afloat By Deflation

Inflation Risk Greatly Reduced

   The recent inflation data included the first time a month’s core PPI was flat and core CPI was negative. Service industry inflation has peaked and the upward trend in rents has been broken. Core CPI for goods deflated YoY for each month over the past 12 months, which is unusual. It hit a peak at 2.3% and didn’t beat the previous cycle high of 2.5%. The core CPI (which excludes food and energy) is about 50% composed of rents. However, 65% of the population live in owner occupied homes, some with fixed rate loans or no loans. Those who rent often have a smaller residence as tenants, so the impact of rental inflation on them is not as big

2017-04-20T14:28:53-07:00 April 20th, 2017|mayflowercapital blog|Comments Off on Inflation Risk Greatly Reduced

Growing Signs of Recession

The yield curve is flattening which implies a recession is coming, especially if it inverts and becomes negative. The difference between the 3 month Treasury versus the ten year Treasury ranged from 1.1% to 2.1% and is now 1.38%. If it drops another 0.18% the yield curve will be very close to its low point of the past year. After the market closed today IBM came out with a bad earnings report; its shares plunged 3.9% in after-hours trading. This could contribute to additional downward pressure on interest rates. China and Japan continue to look for ways to wiggle out from the pressure from Trump to open up their markets to American exports. One way for foreign nations to evade

2017-04-18T14:31:23-07:00 April 18th, 2017|mayflowercapital blog|Comments Off on Growing Signs of Recession

Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

The Trump administration continues to show that it is moving towards the center and towards a somewhat establishment or consensus type of policies. They are hemmed in by the moderate Republicans in Congress who won’t dare cut the existing welfare state benefits such as the ACA, etc. because they would lose their seats, and are also boxed in by the Freedom Coalition members who that hate growing deficits. Trump will not be able to engage in massive deficit fueled stimulus nor will he be able to cut costs and use the savings to finance a tax cut, thus depriving taxpayers of stimulus because they won’t get real net tax cuts. The administration seems to be moving towards recruiting more professional

2017-04-10T12:27:41-07:00 April 10th, 2017|mayflowercapital blog|Comments Off on Trump Move Towards Establishment: Reduced Risk of Triggering Inflation

Inflation Alarm Bells Ringing: They Are Wrong

    The PCE inflation index was released by the BEA today showing a 2.1% increase in inflation. The 10 year Treasury bond yield dropped by 2 basis points. The PCE is more cautious and reliable than the CPI. At first glance it may be tempting to panic and fear that inflation is returning and that it will somehow morph into a 1970’s nightmare of high inflation. However, if one subtracts the effect of oil prices then the increase was not so threatening. Oil has increased 80% over the past year. Oil is about 4% of the economy. So the 80% oil price increase multiplied by 4% is 3.2% contribution to inflation which is slightly more than the 2.1% overall

2017-03-31T18:01:13-07:00 March 31st, 2017|mayflowercapital blog|Comments Off on Inflation Alarm Bells Ringing: They Are Wrong

Who is Correct: Gundlach or the Disinflationists?

    Recently bond guru Jeff Gundlach has warned about the possibility that the ten year Treasury could gradually go up to 6% over several years. However, economists Dave Rosenberg and Lacy Hunt have warned that disinflation is likely and thus bond yields will decline. I certainly agree with Gundlach that the risk-reward trade off is bad in terms of chasing after high duration risk in a long duration bond. Trying to buy a ten year Treasury in hopes the yield (now at 2.56%) will drop as deeply as Germany’s did when it went down to 0.1% last year is far too risky, since the possibility exists that the U.S. ten year Treasury could revert to its old pattern of yielding

2017-03-09T11:33:59-08:00 March 9th, 2017|mayflowercapital blog|Comments Off on Who is Correct: Gundlach or the Disinflationists?

New Year’s Message: Invest In Risk-Off Assets

The New Year will have increased volatility and surprises. This will reward patient risk adverse investors who operate in the area of risk-off assets such as investment grade bonds. The risks to bonds are a rising level of economic growth and rising inflation. I doubt that the global economy will increase its rate of growth in 2017. The problems of Japan, China, the EU, UK outweigh any hope of growth from the US. The rising dollar hurts the finances of EM countries and hurts the ability of U.S. manufacturers to export which could contribute towards creating a recession. If Trump succeeds in helping workers to get higher pay and restricting imports this would reduce corporate profits. The key paradigm of

2017-01-03T13:32:21-08:00 January 3rd, 2017|mayflowercapital blog|Comments Off on New Year’s Message: Invest In Risk-Off Assets

Managed Trade: Is It Inflationary or Deflationary?

Restrictions on imports that compel the transfer of jobs into a trading partner’s country are called “Managed Trade”. If China agrees to move jobs to the U.S. that make the products that are half of its exports to U.S. then this should solve a potential trade war, making it a non-issue. Assuming the U.S. imports 2 widgets a year from China at $10 each and needs to have one built domestically to fix the trade imbalance then the domestic widget would cost an extra $30 to make, however, some savings from avoiding international travel might reduce that. The result could be $(30 + 10)/2=$20 a widget. A 100% price increase might be a one-time thing. Also a Yuan devaluation of

2016-12-23T15:29:46-08:00 December 23rd, 2016|mayflowercapital blog|Comments Off on Managed Trade: Is It Inflationary or Deflationary?

Trade Wars: What Will Be The Outcome?

If the new administration gets assertive with foreign countries’ exports to the U.S. this may start a trade war. The EM countries are addicted to a model of an export driven economy, and they have a lot of commodity producing industries. Commodities are notorious for a deep boom and bust cycle and a 200 year trend for commodity prices to go down on a CPI adjusted basis. EM countries are disproportionately dependent on loans from Developed countries, particularly the U.S., since EU and Japanese banks may be somewhat weak and less able to lend. Additionally international loans are often dollar denominated and the dollar is expected to go even higher to 120 for the DXY despite having risen from 70

2016-12-22T11:44:21-08:00 December 22nd, 2016|mayflowercapital blog|Comments Off on Trade Wars: What Will Be The Outcome?