interest rates

Bond Yields Drop Despite Robust GDP and Rising Stocks

10 year Treasury Bond yields dropped more than usual, some 4.5 basis points today, even though the news that GDP for the 3rd quarter was 3% (released today), instead of the typical 2.3%. Traditionally the ten year might yield the sum of GDP growth and inflation, implying it should yield over 4%. Why did the yield actually go down today? Why is the yield at roughly half of what the traditional metric implies it should be?      I think people are deeply prejudiced to assume that past cyclical patterns will repeat and people are not open minded to looking creatively at new conditions. The era of 1945 post-war until the great crash of 2008 it was customary for nominal GDP

2017-10-27T13:48:10-07:00 October 27th, 2017|mayflowercapital blog|Comments Off on Bond Yields Drop Despite Robust GDP and Rising Stocks

Political Situation Reinforces Low Rates

   Recent political developments regarding Trump’s repositioning his policies away from Republicans and towards Democrats implies that the administration will end up being a meaningless one with minimal policy changes or new tax laws enacted, etc. over four years. It may end up being a ceremonial photo-op administration nominally leading the country that is actually run by a narrowly divided Congress. By that I mean that after adjusting for the independent nature of Senators and the filibuster that effectively it is impossible for Trump to get anything out of the Senate and thus Congress is pseudo-gridlocked. By repositioning himself Trump may incur the wrath of the House Freedom Caucus thus fracturing the Republican control over the House. It is truly

2017-09-14T15:08:19-07:00 September 14th, 2017|mayflowercapital blog|Comments Off on Political Situation Reinforces Low Rates

Tax Law Changes May Hurt Stocks

$1.3 Trillion annual interest expense deduction may be removed by Congress which would result in extra tax of $150 Billion a year for corporations. The tax would reduce corporate profits after-tax by 9% for the average corporation. Today corporate profit margins are at record highs, in part, because of more aggressive use of legal offshore subsidiaries that reduce taxes. The proposed new tax would reduce profits after tax by 9% which would act to cool off the overpriced stock market bubble. Stocks are (in theory) fundamentally valued based on long term after-tax profits, so a 9% decrease in profits implies a reason for stocks to go down. The bigger multinational companies often use borrowed money to avoid repatriating offshore profits.

2017-06-26T12:38:55-07:00 June 26th, 2017|mayflowercapital blog|Comments Off on Tax Law Changes May Hurt Stocks

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. AEI.org 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?