interest rates

Lower Interest Rates Don’t Justify High Stock Prices

Formerly bearish advisor Jeremy Grantham made a huge change and is no longer bearish. He did an interview recently and said the old Ben Graham Value investing is not applicable, that we really are in a new era of lower discount rates that justify high stock prices. I disagree. Bullish advisors promote the theory that risk has steadily declined over centuries thus the cost of capital discount rate has declined thus justifying higher stock prices. (If so it would have made a huge stair step decline in past decade). Bearish advisors feel the growth rate of global GDP since 2007 top is very poor except for China which is probably a bubble with “misinterpreted” growth rates. There is a huge

2017-04-27T12:46:33-07:00 April 27th, 2017|mayflowercapital blog|Comments Off on Lower Interest Rates Don’t Justify High Stock Prices

Interest Rates Are Not Too Low

The history of interest rates shows that during the Great Depression when there was a 2% annual deflation and that real Treasury rates were about 4%. Real rates were about 2% before the GFC of 2008. Are rates too low, if one uses the 1930’s as a benchmark? Not necessarily. In the 1930’s the Federal Reserve was only 20 years old and had its credibility damaged by the great crash. The political risk was that Roosevelt, with an attempt by him to have a 100% income tax rate on high incomes, was moving the country to socialism with the risk that private property would be seized. Investors and economists may have felt that the government’s finances were not as strong

2017-04-07T15:41:58-07:00 April 7th, 2017|mayflowercapital blog|Comments Off on Interest Rates Are Not Too Low

New Border Tax Law’s Effect On The Economy

The proposed new tax law called the Border tax adjustment will tax goods imported by businesses and not tax goods that are exported. What is unknown is will services also be taxed. ran an excellent article and here warning that taxing services would cause a problem because when foreigners come here to pay for a university or a vacation this is a form of exporting of services yet it wouldn’t get tax benefits the way that tangible exports would. Thus if foreigners suffered from a rapidly rising dollar they would reduce purchases of U.S. based services and thus the economy would lose business in some areas. Thus the Border tax might not increase economic growth and employment. There is

2017-01-11T14:36:59-08:00 January 11th, 2017|mayflowercapital blog|Comments Off on New Border Tax Law’s Effect On The Economy

Labor Markets and Inflation: What Next?

The decision by Ford Motor to cancel their construction of their Focus factory in Mexico and instead build other things in the U.S. thus creating 700 jobs in the U.S. seems like it will stop jobs from going to Mexico. But Ford instead decided they could get by with using an existing factory in Mexico to produce Focus cars there. And in Michigan they will produce high tech products which won't solve employment needs for low skill workers. What is important about this situation is that pressure from the Trump administration to stop jobs from leaving the country may be responded to by corporations in a way that actually makes things worse for U.S. workers because it will discourage domestic

2017-01-04T18:03:58-08:00 January 4th, 2017|mayflowercapital blog|Comments Off on Labor Markets and Inflation: What Next?

New Tax Laws Effect On Interest Rates

It is rumored the new administration might seek tax laws that outlaw the deduction of interest by businesses. This would create less demand for loans which would lower interest rates. The other rumor is that they would end Municipal bond tax-free interest income. This would make city and state governments pay more for interest since those bonds would no longer be tax-free. This would discourage the issuance of investment grade debt thus making the severe shortage of investment grade debt even worse, which would raise bond prices and lower yields. If interest expense is not allowed as a tax deduction for business then corporations might issue more stock and pay off loans. This would absorb capital that otherwise could go

2016-12-28T14:40:11-08:00 December 28th, 2016|mayflowercapital blog|Comments Off on New Tax Laws Effect On Interest Rates

Will Trump Create a Boom, Making Interest Rates Rise?

Interest rates are influenced by inflation and by growth rates. When economic activity increases that increases the demand for funds, which makes the “natural real” rate of interest rise. If Trump can make the economy grow at 3.5% instead of 2.0% the extra 1.5% growth could translate into a similar increase in interest rates even if the growth were non-inflationary. A rough estimate is that rates in the pre-2008 era were the sum of inflation and real GDP growth, so a 1.5% surprise increase in growth implies a 1.5% surprise increase in interest rates. This could make the ten year Treasury bond drop 13% in value. Bond investors should not obsess with only watching inflation because there are other reasons

2016-12-21T11:17:13-08:00 December 21st, 2016|mayflowercapital blog|Comments Off on Will Trump Create a Boom, Making Interest Rates Rise?

Is Global Inflation Increasing?

The ten year U.S. Treasury today reached 2.59% this morning. It has been in a range from 1.38% to 3.0% over the past four years. It usually trades in a range of 2.0% to 2.5% although this year it briefly went to 1.38%. Before the great crash of 2008 it traded close to nominal GDP, typically about 4 to 5%. There have been rumors that the global economy is becoming hotter and that inflation is rising. I disagree. Typically several years after a recession the labor market is the last component of the economy to heal and when it heals that may trigger inflation. Yes, it is improving but it could very well be a blow off top, which is

2017-01-10T23:32:49-08:00 December 16th, 2016|mayflowercapital blog|Comments Off on Is Global Inflation Increasing?

Why Have Rates Been Rising?

China is tightening its rules on withdrawing the Yuan currency from the country. This means less flight capital will go from China into global real estate and bond markets, which means less demand for U.S. Treasuries, making our Treasury yields go higher. Additionally China needs to sell off their holdings of U.S. Treasuries to pay for their budget needs. Their sales could depress U.S. bond prices, making U.S. yields go up. Assuming they have $3Trillion of foreign reserves and that a third are in U.S. Treasuries and another third in U.S. mortgage backed bonds then a $Trillion of Treasuries could be sold. This is 5% of the issued Treasuries. Presumably, a slow gradual sale of 5% of the supply of

2017-01-10T23:32:50-08:00 December 12th, 2016|mayflowercapital blog|Comments Off on Why Have Rates Been Rising?

Fiscal Stimulus Programs To Backfire, Leading To Recession

Don’t expect Trump to significantly increase economic growth or inflation. The shock of governing that Obama experienced when he was inaugurated with minimal experience made him seek out advisors who were more moderate than him and inspired him move towards the center. I expect the same thing will happen with Trump. No one wants to fail and the pressure to succeed drives inexperienced new presidents to slash their ambitions and move towards more practical centrist programs. Trump will be different from a mainstream Republican because he intends to retaliate against businesses that export jobs overseas. But that is something which will be negotiated and there may be room for compromises. It is entirely possible that when a giant company wants

2016-12-07T14:45:24-08:00 December 7th, 2016|mayflowercapital blog|Comments Off on Fiscal Stimulus Programs To Backfire, Leading To Recession

Fixing the Economy: What Needs to be Done?

The global economy needs to be fixed and the best way is to slowly muddle through with incremental improvements. It may be tempting to think that a massive infrastructure program, massive debt forgiveness, or tax cuts are needed, but those would create a new set of problems. Things are not so bad that radical program of massive debt forgiveness or extreme infrastructure projects is needed. The unemployment rate is 4.6%.  The average worker’s income is $55,000, far higher than any other country with a population over 6million. Trump may have gotten elected because of economic distress but he also was 2million votes behind Hillary who lost because she had a spectacular amount of scandals that made it irrational for her

2017-01-10T23:32:50-08:00 December 6th, 2016|mayflowercapital blog|Comments Off on Fixing the Economy: What Needs to be Done?