interest rates

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|0 Comments

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

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

Declining Yield Curve Spread Hints at Recession

    The yield curve spread between 2 year Treasury bond and ten year is 21.5 basis points, it was about 25 a week ago, and is consistently dropping to new lows not seen since last economic top of 2007.  Economists say that a declining spread eventually moves the yield curve to inversion which is a symptom of recession, and partly a cause of it.     Global rates have already inverted as have some domestic esoteric short term bond swap contracts for 2 and 4 year maturities. The old paradigm that the ten year Treasury yield is the same as nominal GDP hasn’t worked since 2008 crash because a new world exists where major regions such as the EU and Japan

2018-08-23T15:11:59+00:00August 23rd, 2018|mayflowercapital blog|Comments Off on Declining Yield Curve Spread Hints at Recession

Inflation Data Implies Fed Almost Done Tightening

   Today the CPI data was released with the core rate for 12 months up 2.4%. Housing increased 3.5%; if housing is multiplied times its 40% weight that would be 1.4 percentage points of the 2.9% overall non-core CPI, so CPI ex-housing is 2.9% minus 1.4 = 1.5%, and would be even lower if the figure was ex- food and energy. The problem with housing CPI is the Owner’s Equivalent rent is miscalculated by non-landlords who are unfamiliar with rental rates and who let their emotions of pride about their house leap to conclusions about imputed rent they are not actually paying; further these people may own their house free of debt or they may have a fixed rate mortgage,

2018-08-10T15:58:23+00:00August 10th, 2018|mayflowercapital blog|Comments Off on Inflation Data Implies Fed Almost Done Tightening

Inflation OK For Now But Prepare For Risk Of Higher Rates

The monthly PCE inflation figures were released today. Rents, as measured, act to exaggerate reported inflation. My opinion is that inflation is about 0.25% lower than the PCE because of a problem calculating inflation. The most recent Dallas Fed Trimmed Mean PCE, which is for May, was released today. For the Core Trimmed Mean PCE the 6 months data annualized figure is 2.0%; assuming an adjustment was made regarding the error in housing shelter costs then this would be 1.75%. During the last year of a business cycle inflation usually has a sudden spurt upwards which may provoke the Fed into tightening excessively, thus triggering a recession. Be prepared for the possibility of a spurt in inflation and interest rates

2018-06-29T12:24:52+00:00June 29th, 2018|mayflowercapital blog|Comments Off on Inflation OK For Now But Prepare For Risk Of Higher Rates

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?

Low Unemployment Rate Very Misleading

   The unemployment rate was released today by the BLS showing a drop in the rate to 3.8%. But two-thirds of the improvement in May was due to labor force dropouts and on third due to actual growth. The crucial “prime” age cohort of age 16-54 had a reduction in their Labor Force Participation Rate (due to dropouts), while the age 55+ group had an increase in participation.   Employment had increased by 1.69% annually since 2012. The average job gains of 207,000 per month this year are far below the gains of 320,000 per month in the 1990’s. Since February, 2015 monthly payroll gains declined from 265k to 223k in a downward trendline. Labor Force Participation Rate was 67%

2018-06-01T18:04:16+00:00June 1st, 2018|mayflowercapital blog|Comments Off on Low Unemployment Rate Very Misleading