inflation

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

Will Rising Federal Deficits Cause a Repeat of the 1970’s Big Inflation?

     The annual federal deficit budget is 5% of GDP, or 7% if count some one-time excluded items. The percentage has been growing. The government has relied upon foreign investors and central banks to buy U.S. Treasury’s. The Treasury Bills have been used as the world’s money, thus absorbing the funding needs of the U.S. If foreigners decide to stop this then the dollar would drop in value and the Federal Reserve would have to monetize the deficit, creating inflation. As long as the other major economies have so many significant contingent financial problems (the negative interest rates in the EU and Japan, the huge debts in China and Japan) then the world economy will continue operating the same way.

2019-03-08T15:33:04+00:00March 8th, 2019|mayflowercapital blog|0 Comments

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+00:00February 1st, 2019|mayflowercapital blog|Comments Off on Employment Report Very Misleading

Jobs Increase Not Inflationary

   Today the monthly Employment Situation report was released by the BLS showing a huge 312,000 increase in jobs in the payroll survey. The unemployment rate increased from 3.7% to 3.9% as more people decided to join the work force and seek employment. Fundamentally, because the unemployment rate increased, that is the bottom line: new entrants to the labor force acted to dampen inflation by increasing the supply of workers. The household survey said 419,000 jobs were added with 90% of the total job increase from unincorporated self-employed. That type of “employment” can be a zero income gig experiment rather than a traditional real job. Prime age employment shrank by 11,000, with a 48,000 decline the month before. 146,000 of

2019-01-04T13:20:48+00:00January 4th, 2019|mayflowercapital blog|Comments Off on Jobs Increase Not Inflationary

Inflation Still Modest

    Yesterday the bond market priced in a 3 year inflation expectation of 1.4%. Today the CPI data was released: My favorite measure, core inflation, ex-shelter rose to 1.53%, near the 2016 high of 1.6%. I maintain that shelter is measured incorrectly, forcing those who live debt free to calculate a hypothetical cost as if they were paying market rent for their residence – ridiculous! The Fed’s PCE inflation measure tends to reduce this problem which is why PCE is usually 0.25% lower, although it could be even lower. YoY the core rate was 2.1%. Shelter was 3.2% YoY. Core commodities were up 0.2% YoY. The dominant economic paradigm of the past 30 years has been globalization where capitalists constantly

2018-12-12T17:28:56+00:00December 12th, 2018|mayflowercapital blog|Comments Off on Inflation Still Modest

Should Bond Investors Increase Portfolio Duration?

        Yesterday’s pseudo-capitulation by the Fed chief during a speech was interpreted by the market as a sign that the Fed is very close to ending its rate increasing campaign. More experts are tilting towards the possibility of recession next year. If recession comes then yields will drop, in which case investors who own money market funds would miss out on the chance to lock in intermediate term yields. When yields drop deeply then bond issuers refinance (they “call” the bond in) and investors are then forced to reinvest at lower yields. An exception to that is that Treasuries have lifetime restrictions and Munis usually have 10 year restrictions on calling in outstanding debt. Assuming that the paradigm that recessions

2018-11-29T12:12:45+00:00November 29th, 2018|mayflowercapital blog|Comments Off on Should Bond Investors Increase Portfolio Duration?

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+00:00November 14th, 2018|mayflowercapital blog|Comments Off on Low Inflation Rate May Go Even Lower

Employment Growth Not Inflationary

Today the monthly employment data was released by the BLS showing good jobs and wage growth. Traditionally this is viewed as inflationary and thus damaging to bonds. However, at the top of an economic cycle is when inflation and employment data peak, followed by a crash caused by excessive Fed tightening and by a reduction in corporate earnings caused by higher wages and higher interest rates. This reminds me of 2008 when oil was ludicrously high at 144 (it went to 35 in 2009). The extreme rise in oil’s price helped to slow down the economy and tip it into recession. Inflation is not caused simply by workers getting a job, rather the real cause is when the money supply

2018-11-02T12:17:31+00:00November 2nd, 2018|mayflowercapital blog|Comments Off on Employment Growth Not Inflationary

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+00:00October 10th, 2018|mayflowercapital blog|Comments Off on Major Stock Crash; Bonds Improve

Improving Labor Market Unlikely to Hurt Low Duration Bonds

    The BLS Employment report was released today showing 134,000 new jobs. Adjusting for 125,000 monthly population growth, of those likely to want to work, implies the net increase was only a few thousand jobs in a nation of 144million job holders and is thus a near zero growth rate. The unemployment rate decreased because less people attempted to participate in the workforce. When the unemployment rate is this high it is a sign of an overheated economy that will fall into recession in a year. Stocks may anticipate this a half year early so if recession come sin 12 months then stocks could crash in 6 months.    100% of the increase in employment went to those with no

2018-10-05T09:49:08+00:00October 5th, 2018|mayflowercapital blog|Comments Off on Improving Labor Market Unlikely to Hurt Low Duration Bonds