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

Will Politicians Increase Inflation?

            Recently some comments from House of Representatives members of the House Freedom Caucus (somewhat similar to the Tea Party except the Freedom Caucus membership is limited to members of the House) implied they would tolerate an increased budget deficit to help some of Trump’s stimulus goals. Since this sector of House members usually are Hard Money types rather than the type that would advocate inflationary policies this is a shock.  If the defenders of a strong currency change policies 180 degrees towards an inflation causing increase in the federal deficit then this would lead to an increase in inflation. For this to happen spending plans need to be approved by both houses of Congress. The Senate has the filibuster

2017-06-07T16:32:21-07:00 June 7th, 2017|mayflowercapital blog|Comments Off on Will Politicians Increase Inflation?

Weak Jobs Report: Good News For Bonds

    The monthly employment payroll based report was released by the BLS today showing only a 138,000 jobs gain. When netted against the 125,000 monthly population increase this is almost no net gain at all. The labor force participation rate continues to be about 2% below normal which implies 2% of the population are the hidden unemployed and thus the real unemployment rate is about 6.3% instead of the official 4.3%. The normal trend for wages is for them to increase about 4.5% a year at the top of an economic cycle, yet now despite being near the top of a cycle the wages are only increasing 2.5% a year. This 2% shortfall below expected wage inflation is a sign

2017-06-02T13:20:24-07:00 June 2nd, 2017|mayflowercapital blog|Comments Off on Weak Jobs Report: Good News For Bonds

Inflation Risk May Not Be That Great

       According to a blog post, by an unknown source on Twitter, U.S. per capita health care costs, when measured as a percent of Actual Individual Consumption instead of GDP, are not that much different from other Developed countries. According to the blogger rising health care costs are a voluntary decision by increasingly affluent consumers to spend more, thus the richer the U.S. becomes, the worse per capita health care expenditures will appear to be, but according to the author things are not actually bad. My opinion about the essay is that, if true, then the macroeconomic concerns that the nation’s economy will be damaged by increasingly unaffordable health care are not a significant concern. Thus a good or at

2017-05-10T18:24:11-07:00 May 10th, 2017|mayflowercapital blog|Comments Off on Inflation Risk May Not Be That Great

Employment Report Doesn’t Show Inflation Returning

The Labor Force Participation Rate dropped from 66.2% in January, 2008 to 62.9% today. The 3.3% underperformance means that 3.3 percentage points of workers divided by 66.2% who were participating has declined by 5% since the economy topped out in 4Q2007. Today the unemployment rate was released showing it went down to 4.4%, yet PCE inflation is only 1.6%, workers are not getting real wage increases, and the ten year Treasury yield today was unchanged from yesterday at 2.35%. If those missing 3.3 percentage points of workers were willing to go back and search for work and insist on being counted as an unemployed person then the unemployment rate would be 3.3 plus 4.4% equals 7.7% unemployment rate. However, due

2017-05-05T13:35:45-07:00 May 5th, 2017|mayflowercapital blog|Comments Off on Employment Report Doesn’t Show Inflation Returning

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

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

Political Developments Imply Lack of Stimulus

    The defeat of the Republican’s anti-Obamacare bill today implies that the Republicans, including Trump, will be heading in the direction of a traditional Republican Establishment doing-nothing type of regime instead of a dynamic, aggressive libertarian agenda of deep budget cuts and deep tax cuts. It is far too dangerous for elected Republicans to remove traditional welfare state benefits such as Social Security, Medicare, food stamps, etc. The same applies to the ACA subsidy for health insurance. The rural, low paid, blue collar workers who voted for Trump may have no choice but to depend on Obamacare because health care at age 55-64 can cost $15,000 a year a person and lower-middle class people might only earn $30,000 thus making

2017-03-24T15:58:06-07:00 March 24th, 2017|mayflowercapital blog|Comments Off on Political Developments Imply Lack of Stimulus

Strategic Retreat By The Fed In Wednesday’s Rate Increase

     The Fed’s rate hike of Wednesday was a watershed event. They hiked even though they sluggish economy didn’t warrant a hike. They hiked in part because the free market already had the two year Treasury at 1.4% on March 15. The new fed funds rate is now about 0.875%, so the fed still needs to raise by 0.4% to 0.5% to reach the market’s estimate of interest rates. The Fed has decided to follow the market instead of lead it. The Fed has realized that QE was a mistake that made things worse. They realize that negative interest rates would vastly damage the economy and thus there is a zero bound line, even though it is possible to make

2017-03-17T14:14:50-07:00 March 17th, 2017|mayflowercapital blog|Comments Off on Strategic Retreat By The Fed In Wednesday’s Rate Increase