Fed tightening

Unaffordably High Rates To Create Recession

   Considering how fragile the economy is and how moderate income people are hurt when they try to buy things using a loan then soon the damage from rising rates will result in recession. Yes, it is fair for the Fed to try to return to “normal” where real rates are 2% and the QE purchases are sold off in a QT program, but that won’t happen because we are in a brave new world of excessive debt balances. This means people simply can’t afford to pay higher rates.    The debt / GDP ratio went from about 150% during much of the past century, before 1996, to 365% today, a huge change. If you earned $50,000 in 1990 and

2018-10-25T14:19:54+00:00October 25th, 2018|mayflowercapital blog|Comments Off on Unaffordably High Rates To Create Recession

The Fed Raised the Rate Today: What Happens to the Economy?

             The Fed will keep on raising rates until they reach a level that makes them feel they have returned to normal. This means that real rates for short term rates, in the opinion of the Fed, ought to be about 2%, and if inflation is 2.2% then the Fed Funds rate could reach 4.2%, some 2% higher than today’s new rate. However, in their journey to higher rates they will find the economy is addicted to low rates and the economy will respond by falling into recession. Thus they will have to reverse course before they reach their goal. There is no way to go back to the past. To successfully return to the past when the ten year

2018-09-26T13:20:26+00:00September 26th, 2018|mayflowercapital blog|Comments Off on The Fed Raised the Rate Today: What Happens to the Economy?

Fed Tightening Can Continue Longer Than Expected

    In yesterday’s blog I mentioned a scenario where the Fed would stop tightening in December, 2018. But that was based on logic with no allowance for how emotions hijack investments and economics. I suspect the emotions of the Fed members is such that they may seek to reach the traditional 2% real rate for bond yields and seek to pop the stock market bubble and also empty out their holdings of bonds bought during QE. Assuming they blindly persisted in this, then rates would go 1.2% higher than I forecast regarding the goal to get a 2% real rate, plus rates would go up an additional 0.5% for the effect of unwinding QE. This implies Fed funds rates go

2018-06-15T13:59:04+00:00June 15th, 2018|mayflowercapital blog|Comments Off on Fed Tightening Can Continue Longer Than Expected

Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable

    Yesterday the Fed raised the rate 0.25%. The Fed started its first rate hike of the cycle on 12-16-2015. I expect they will hike again every three months by 0.25% each time until December, 2018. That means we are 83% of the way through the three year hiking journey (based on time) that started in 2015. Since 83% of the hiking part of the current cycle has occurred it now becomes more clear in trying to estimate the outcome. Assuming that the most recent San Francisco Fed estimate of the natural real neutral rate of 0.5% is correct and then if one adds that to my own adjusted inflation rate of 1.95%* that implies a Fed Funds overnight rate

2018-06-14T10:51:14+00:00June 14th, 2018|mayflowercapital blog|Comments Off on Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable

The Fed Hiked Rates Today: Will Bonds Crash?

   Today the Federal Reserve raised the overnight Fed Funds rate 0.25%, as expected. Yesterday and today the CPI and PPI inflation indexes were released showing an increase in the rate of inflation, which implies that interest rates will rise. It used to be a paradigm before the great 2008 crash, that real yields were averaging 2%, yet now the ten year TIPS real yield is only 0.84%. It used to be in the 1980’s and 1990’s that nominal yields for investment grade bonds were often about 6%, versus today’s 3.35% for Barclays’ Aggregate index. Memories deeply embedded in people’s subconscious minds make people want to reflexively assume they are entitled to a yield like the 6% available in the

2018-06-13T15:09:47+00:00June 13th, 2018|mayflowercapital blog|Comments Off on The Fed Hiked Rates Today: Will Bonds Crash?

No Recession In A Long Time: When Will It Crash?

The economy hasn’t had a recession in 9 years and is the verge of a record long period of expansion. Some experts claim this trend could go on for another few years. However, in my opinion, stocks could still crash soon without a recession. During the post-2000 tech bubble, during the crash of 2001-02 the SP index dropped 50% and NASDAQ dropped 78% even though the economy went into a very short and almost imperceptibly shallow recession. It is possible that if an asset is grossly overpriced it can come down in price even without a recession. The economy today is much more fragile than during other expansions and is thus more vulnerable to a sudden mild recession.  Debt loads

2018-06-07T15:03:10+00:00June 7th, 2018|mayflowercapital blog|Comments Off on No Recession In A Long Time: When Will It Crash?

Could Rising Yields Suddenly Reverse?

    Inflation is increasing according to the consensus of economists, which means bond yields will increase and reduce the value of bonds. In the final year, of a nine year long expansion, the economy overheats, causing an increase in inflation, to which the Federal Reserve responds by raising interest rates. The Dallas Fed trimmed mean inflation index was 1.77%. Headline PCE inflation is 2.0% year over year, its three month and six month core versions show rates of 2.6% and 2.3% so on a short term basis the rate is accelerating. Assuming the Fed’s own estimate of the natural real rate of interest should be near zero then short term yields should be roughly 2.5%. This is because one should

2018-05-01T15:01:55+00:00May 1st, 2018|mayflowercapital blog|Comments Off on Could Rising Yields Suddenly Reverse?

Fed Raises The Rate: Nothing Happened To Bonds

   The Fed raised the Fed funds rate by 0.25% to a mid-level target of 1.625% today as expected. The 10 year Treasury Note ended the day unchanged at 2.88%. 3 month Libor floated up to 2.25%, implying that the marketplace, without Fed controls, wants rates to be at that level. I expect that the yield curve will stay roughly the same for rates between 2 years to 30 years maturity and the changes to take place will be that the short end of the yield curve between 1 day to 2 years maturities rises to about where the two year Treasury yield is now at 2.32%.   If you own a 90 day Treasury and short term rates rise

2018-03-21T15:20:52+00:00March 21st, 2018|mayflowercapital blog|Comments Off on Fed Raises The Rate: Nothing Happened To Bonds

Rising Deficits: Will Yields Explode?

       The uninhibited boost of the deficit by Trump and members of both parties in Congress on Feb. 9th may trigger fears of Banana Republic-style out of control deficits. The preponderance of evidence is that growing debt loads are not yet morphing into an inflationary Banana Republic. Some people are frustrated that Tea party Republicans were eager to oppose scary huge deficits during the crisis era in 2008 when TARP and the AIG bailout were needed to prevent a depression and now these same politicians appear to have abandoned their anti-deficit principles. However, it is a mistake to assume that, because of this change, to leap to the conclusion that Republicans have morphed into a party of Zimbabwe-style fiscal policy.

2018-02-14T13:38:17+00:00February 14th, 2018|mayflowercapital blog|Comments Off on Rising Deficits: Will Yields Explode?

Fed Raises The Rate Today – Bond Yield Drops Instead!

The Fed raised the short term Fed Funds rate 0.25% to 1.375% (in a range of 1.25 to 1.5%) today. The bond market reacted by lowering rates for the ten year Treasury Note by 0.05% to 2.35%; its price went up 0.75%. The bond market feels that Fed tightening will reduce inflation and reduce growth thus supporting the value of bonds. Experts forecast that the Fed will raise rates by 0.75% gradually over the next nine months next year, thus making short term rates about 2.125%. When this happens then a minor decline in ten year Note yields would result in an inverted yield curve which is a sign of a recession. A recession would result in dramatic rates cuts

2017-12-13T18:31:37+00:00December 13th, 2017|mayflowercapital blog|Comments Off on Fed Raises The Rate Today – Bond Yield Drops Instead!