Incorrect GDP Fools Investors

Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of

2019-04-26T15:19:59-07:00April 26th, 2019|mayflowercapital blog|Comments Off on Incorrect GDP Fools Investors

What Happened to The Tax Cut Stimulus?

   The 2017 tax law cut taxes a lot for corporations, with only minor cosmetic changes for most individuals. Where did the stimulus go? The top 100 giant multinationals may not have benefited from the new law as they lost their ability to have tax-free offshore transactions and must now pay a minimum of 12.5% tax if the move the new income to the U.S. or 14.5% if they insist on keeping income offshore. Income earned before the new tax law was enacted must be repatriated and a smaller tax rate is used. Thus the tax break went to medium and small companies. The tax law restricts the benefit for self-employed professionals in personal service companies, so the law is

2019-04-03T18:23:33-07:00April 3rd, 2019|mayflowercapital blog|Comments Off on What Happened to The Tax Cut Stimulus?

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

2019-02-20T19:26:13-07:00February 20th, 2019|mayflowercapital blog|Comments Off on QE And NIRP Monetary Policy is a Dangerous Trap

Employment Report Very Misleading

   The monthly employment report released today by the BLS said 304,000 new jobs were created and the rate of unemployment went up to 4.0%. The U-6 discouraged person’s rate went up 0.7% from the cycle low of July, 2018. Once unemployment reverses a downtrend and goes up by 0.4% or more that is a sign of new recession. If one respects the U-6 rate then that confirms a recession has already started.    The payroll-based BLS report uses a Birth-Death model of hypothetical jobs that added 122,000 jobs. But this is hypothetical. (This assumes business are so disorganized and slow that they need a long time to report new employment to the government – this is not correct, as

2019-02-01T17:38:53-07:00February 1st, 2019|mayflowercapital blog|Comments Off on Employment Report Very Misleading

Inverted Yield Curve Implies Recession Coming

     The yield curve has become inverted for the spread between the 2 year and 5 year Treasury. The entire yield curve has shifted to be close to being inverted. Traditionally it takes a long time, perhaps 1.75 years after yield curve inversion before a recession starts. However, since the 2008 GFC the extreme manipulation by central banks, such as the QE program, that have never before been experienced, means that things will not act as they typically do during a yield curve inversion. Assuming the short end of the yield curve (for maturities under two years) is heavily manipulated by central banks and less so the further out one goes from short term maturities, then the traditional metric that

2018-12-07T14:11:31-07:00December 7th, 2018|mayflowercapital blog|Comments Off on Inverted Yield Curve Implies Recession Coming

Comparing Today’s Yields to Previous Eras

                Adjusting interest rates for inflation to find real yields is vital to understanding bond markets. But what about taxation adjustments? If an investor during the 1951-1965 and 1990-2008 eras of “normal” inflation rates bought a ten year Treasury bond they might typically get a 5% yield when the CPI was 2.5% and they paid 35% to federal taxes, leaving them with a 0.75% after-tax and after-inflation yield. Today they might find a 3.06% 10 year Treasury yield, less 22% tax, provides 2.39% after-tax and if they subtract CPI of 2.1% then they make about 0.29% net yield.  The housing component of CPI is wrongly constructed and probably will go down when a surplus of newly constructed real estate

2018-11-19T14:06:37-07:00November 19th, 2018|mayflowercapital blog|Comments Off on Comparing Today’s Yields to Previous Eras

Low Inflation Rate May Go Even Lower

   Today the BLS released CPI data showing the core rate was 2.1% year over year and 1.6% for the quarter. If one accepts my theory that Owner’s Equivalent rent needs to adjust the CPI downward by 0.25% (or even more), then the 90 day core CPI would be 1.35%. With oil in the mid-50’s, its dramatic drop will surely put more downward pressure of CPI in the future. I remember when oil went up above $40 in 2004 and it seemed like a big deal, a high price at the time. Adjusting for inflation, a $40 price 14 years ago is like $53 this week (it’s now $56 for WTI oil) so we are almost equivalent now to the

2018-11-14T17:32:05-07:00November 14th, 2018|mayflowercapital blog|Comments Off on Low Inflation Rate May Go Even Lower

Elections’ Influence On Investments

    Yesterday’s elections imply the political situation is moving away from a pro-business tax cutting era to a more of a slow growth, centerist era. Over the next two years I expect the liberals and centerists to grow stronger, resulting in a less business friendly climate, including higher taxes. Perhaps political compromises will enable a hidden back door of tax increases. The situation is likely to lead to a lower degree of deficit supplied stimulus and thus the federal deficit may grow at a slightly slower pace. Rising taxes would act to dampen inflation and growth, making yields go down. Taxes could be increased by closing loopholes (like ending excessive depreciation deductions that only businesses would notice) or raising tariffs

2018-11-07T16:42:28-07:00November 7th, 2018|mayflowercapital blog|Comments Off on Elections’ Influence On Investments

Stock Market Crash: GDP Report Didn’t Help

    Stocks crashed today, with the SP down 1.73%. Yet the government released the GDP report this morning showing a 3.5% growth. However, buried in the details is the fact the increase was due to one-time figures such as inventory building, rushing to buy before tariffs are implemented, government spending and savings drawdown. If these factors were removed the GDP would have been negative 0.1%. Capital expenditures, vital to fixing the economy and achieving a proper labor market recovery, had been ranging from 10% to 4% in the past three previous quarters but this recent quarter ending 9-30-2018 had only a 0.4% annualized growth. The implication is that the economy has failed to break out of its long term trend

2018-10-26T14:19:10-07:00October 26th, 2018|mayflowercapital blog|Comments Off on Stock Market Crash: GDP Report Didn’t Help

Major Stock Crash; Bonds Improve

    Stocks crashed today, thus rescuing bonds, since yields dropped because of the stock crash. The 10 year Treasury yield dropped 1.6 basis points; in after-market trading the yield dropped even more (a total of 3.5 basis points), like a stone in water. The SP stock index dropped 3.3%; NASDAQ declined 4.08%. The VIX exploded up 44%, making it too hard for speculators to buy put options thus forcing sales of stock out of the hands of short term speculators. Much of the world’s stock indexes have been negative for the YTD. Looks like the U.S. market is moving towards a global stock bear market, as are bond yields. This morning the PPI inflation data was released showing inflation YoY

2018-10-10T14:00:35-07:00October 10th, 2018|mayflowercapital blog|Comments Off on Major Stock Crash; Bonds Improve