Fed tightening

Fed’s Quantitative Tightening Effect On Bond Investing

   The Federal Reserve today announced it would slowly sell off its holdings of bonds over many years. Selling bonds raises interest rates. Does this mean the Fed will accidentally start a significant movement towards much higher rates? I doubt it. The Fed is extremely sensitive to that risk and will let their fear of accidentally triggering recession act to inhibit them from selling too many bonds too quickly. The movement of rates is what will control the quantity of sales of the Fed’s bond holdings. If rates explode upwards the Fed would immediately stop the asset sales. There is no need for them to sell their bond holdings, it simply is a matter of wanting to feel they are

2017-09-20T14:06:43-07:00 September 20th, 2017|mayflowercapital blog|Comments Off on Fed’s Quantitative Tightening Effect On Bond Investing

Covert Tightening of The Economy: Are We in a Hard Money Regime?

   Economists like to claim they spotted some accidental covert tightening of the economy, for example, letting the dollar increase in value makes it harder to export goods and thus creates a move towards recession-like conditions that result in a “hard money” environment where savers are protected while debtors have a more difficult time paying debts. My opinion about covert or indirect tightening is that the non-professional work force has been subject to increasing volatility in their income flow thus disqualifying them from borrowing. This reduction in the ability to borrow means these workers borrow less and the money supply is thus expanded by a lesser degree than was desired or anticipated. Thus disinflationary or even deflationary pressure is exerted

2017-09-19T12:14:45-07:00 September 19th, 2017|mayflowercapital blog|Comments Off on Covert Tightening of The Economy: Are We in a Hard Money Regime?

Central Banks Ending QE: Will Rates Go Up?

               Global central banks are retreating from Quantitative Easing, creating a fear of rising rates. During the QE programs in the U.S. the extra money went into stocks but didn’t go into bonds so bond prices went down moderately, making yields go up 0.63% during the average of each of the QE’s. Then when QE’s ended stock gains slowed and the yield on the 10 year Treasury dropped 0.83% on average. Investors became afraid that a recession would occur if QE ended so that made interest rates go down when QE ended, just the opposite of what the Fed intended. Thus, the effect of a cycle of starting and then stopping QE was a net drop in yields of 0.20%

2017-07-06T13:53:38-07:00 July 6th, 2017|mayflowercapital blog|Comments Off on Central Banks Ending QE: Will Rates Go Up?

Why The Fed Tightens In A Weak Economy

      Clearly the Fed is tightening, raising short term rates, to fight the stock market bubble and not because of inflation. It is inevitable that it will end in a recession as did other acts of Fed tightening. The Conference Board’s labor conditions index “jobs harder to fill” will provoke the Fed to raise rates when data released is released next month. Rates went up today because of a slight upward revision of GDP. This is normal for GDP to get revised several times. I think the new paradigm is that real reference rates (Treasuries and Fed funds) return to more normal levels, because it was a dangerous deflationary mistake for central banks to make real rates so low, and

2017-06-29T13:42:13-07:00 June 29th, 2017|mayflowercapital blog|Comments Off on Why The Fed Tightens In A Weak Economy

The Fed Raised Rates: Are They Too High?

The Federal Reserve raised the Fed funds rate by 0.25% today, making it float in a range of 1.0% to 1.25%. This is close to what the two year Treasury Note has yielded (its yield is 1.33%) so the marketplace already anticipated and adjusted for this. Long term Treasuries bond yield dropped from 2.2 to 2.13% today’s a result. The Fed’s rate increase means they are fighting inflation which makes long term bonds more desirable, which explains why they went up in price even though normally bonds go down in price when rates go up. In theory the Fed funds rate should be at least as high as inflation so using a PCE estimate of 1.7% inflation then the Fed

2017-06-14T14:49:45-07:00 June 14th, 2017|mayflowercapital blog|Comments Off on The Fed Raised Rates: Are They Too High?

A New Era For Investors

             Stock market investors often discuss the topic that there is a “new era” where the old economics rules allegedly don’t apply. This concept usually happens when bullish people try to justify the high price of stocks after a huge runup. The stereotype is that a wise person says there is no new era, so avoid bubbles, etc. But there could be a new era. The new era maybe one where the Federal Reserve ceases their 30 years of massive rate cuts and bailouts that started in the crash of 1987. The Federal Reserve needs to raise rates to a “normal” level of rates. Based on that fact that the U-3 unemployment rate is very low, at 4.4%, the appropriate

2017-05-08T10:29:22-07:00 May 8th, 2017|mayflowercapital blog|Comments Off on A New Era For Investors

Gridlock May Be Disinflationary

    The future of politics is that Congressional Republican leaders don’t want Trump to boss them around or gain control so these leaders will maintain the status quo of the Senate filibuster and thus allow it to help the Democrats to block legislation, thus creating gridlock that is coming from inside of the Republican party but which can be blamed on Democrats.  Then Trump will be unable to create dramatic fiscal stimulus and will end up being a do-nothing president. House Speaker Paul Ryan doesn’t want to unite with Democrats to create a majority voting block that can bypass the Freedom Caucus. By announcing that policy he is basically refusing to play politics with Trump and is allowing the Freedom

2017-04-04T15:16:08-07:00 April 4th, 2017|mayflowercapital blog|Comments Off on Gridlock May Be Disinflationary

Inflation: Ready to Destroy Bonds?

   The Fed meets tomorrow where they will raise rates by 0.75% over the next nine months. Based on rate increases in proportion to inflation and GDP this would be like rising rates at roughly double that pace in the old days. And if one adjusts for the huge balances of debts compared to several decades ago then the effect of the coming rate increases would be even more dramatic. This would be like taxing the economy to cool down inflation. The financial press seems to feel that the economy has fully recovered and that the labor market is tight and that inflation is ready to accelerate. I disagree. Bond prices may have been pushed up by flight capital fleeing

2017-03-14T15:23:59-07:00 March 14th, 2017|mayflowercapital blog|Comments Off on Inflation: Ready to Destroy Bonds?

Fed Raises Rates, Stocks Crash

Fed chair Yellen raised the Fed’s rate today, as expected, by 0.25%. The Russell 2000 went down 1.25%. The yield on the ten year Treasury went up 0.05%. As short term rates rise this discourages inflation which makes long term bonds more attractive. Currently the dollar based bonds yield much more than bonds of other Developed countries such as Germany or Japan where long term rates are close to zero. The Fed will gradually raise rates in quarter point increments in 2017 by a cumulative 0.75% until the Fed funds rate is in a range of about 1.25% to 1.45%. It is possible that the yield curve could go flat and that long term Treasuries could actually drop to come

2017-01-10T23:32:49-08:00 December 14th, 2016|mayflowercapital blog|Comments Off on Fed Raises Rates, Stocks Crash

Rates Went Up When Yellen Spoke: What Will Happen To Rates?

The ten year Treasury yield went up from 1.57% to 1.63% today because of Yellen’s speech at the Fed’s annual meeting at Jackson Hole, Wyoming. Assuming that the U.S. economy was (hypothetically) firewalled from foreign influence then perhaps short term Fed funds rates should be at 1.5%, assuming the price of money should mostly reflect compensation for inflation. People have gotten used to high rates as the correct standard after living through the high inflation era of the 1970’s, followed by high rates for another decade in the 1980’s to wring out inflation, (even in the 1990’s rates were often over 5% for the Lehman Agg index). Thus it is logical that people’s emotions should cause them to feel that

2017-01-10T23:32:53-08:00 August 26th, 2016|mayflowercapital blog|Comments Off on Rates Went Up When Yellen Spoke: What Will Happen To Rates?