interest rates

Dollar Flash Crash: What Next?

The dollar crashed last night against the Yen in a Flash Crash, dropping 3% (a very significant figure), before settling in to a 1% decline to 107.5 Yen to a dollar. This demonstrates a potential risk that the Yen could appreciate roughly 10% or even 20% to reach fair value. Its price is held down by Japan so that they can encourage exports through devaluation. If global investors get burned by a US stock crash they may decide to withdraw funds from the US, thus making the dollar go down and the Yen to go up. This would force Japan to have even deeper negative interest rates, thus pulling down global interest rates.    If Japan devalues that can cause

2019-01-03T13:54:46+00:00January 3rd, 2019|mayflowercapital blog|Comments Off on Dollar Flash Crash: What Next?

Fed Raises Rates, Market Cuts Them

         The Federal Reserve raised the short term fed funds rate by 0.25% today. The Fed funds rate of 2.5% is higher than the 3 month T-Bills rate of 2.35%, thus inverting part of the yield curve. The 2 year Treasury yield inverted, becoming higher than the 5 year Treasury yield. The difference between the 2 year and 10 year Treasury are only 11 basis points, so they entire yield curve is moving towards inverting. The 30 year Treasury bond’s yield dropped below 3.0%. Stocks crashed hard making new lows for the year. Many stock market charts show technical trading indicators, such as trendlines and momentum, that have been broken, thus leading to a full stock market correction. A plunge

2018-12-19T14:21:37+00:00December 19th, 2018|mayflowercapital blog|Comments Off on Fed Raises Rates, Market Cuts Them

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

Comparing Today’s Yields to Previous Eras

                Adjusting interest rates for inflation to find real yields is vital to understanding bond markets. But what about taxation adjustments? If an investor during the 1951-1965 and 1990-2008 eras of “normal” inflation rates bought a ten year Treasury bond they might typically get a 5% yield when the CPI was 2.5% and they paid 35% to federal taxes, leaving them with a 0.75% after-tax and after-inflation yield. Today they might find a 3.06% 10 year Treasury yield, less 22% tax, provides 2.39% after-tax and if they subtract CPI of 2.1% then they make about 0.29% net yield.  The housing component of CPI is wrongly constructed and probably will go down when a surplus of newly constructed real estate

2018-11-19T14:06:37+00:00November 19th, 2018|mayflowercapital blog|Comments Off on Comparing Today’s Yields to Previous Eras

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

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