labor market

Should Bond Investors Increase Portfolio Duration?

        Yesterday’s pseudo-capitulation by the Fed chief during a speech was interpreted by the market as a sign that the Fed is very close to ending its rate increasing campaign. More experts are tilting towards the possibility of recession next year. If recession comes then yields will drop, in which case investors who own money market funds would miss out on the chance to lock in intermediate term yields. When yields drop deeply then bond issuers refinance (they “call” the bond in) and investors are then forced to reinvest at lower yields. An exception to that is that Treasuries have lifetime restrictions and Munis usually have 10 year restrictions on calling in outstanding debt. Assuming that the paradigm that recessions

2018-11-29T12:12:45+00:00November 29th, 2018|mayflowercapital blog|Comments Off on Should Bond Investors Increase Portfolio Duration?

The Fed Can’t Afford to Raise Rates

      I calculate the appropriate interest rate by using the ten year Treasury Note’s real yield, now 1.09%, and subtract that from a historical average benchmark of 2.08%. The difference is 0.99%, which is the amount of real increase needed to return to “normal”. However, one “little” problem: we can’t return to what used to be normal because that would require returning to a pre-GFC 2008 crash era when the EU and Japan had far less debt and no zero rate or negative rate programs. A second “little” problem is the extremely weakened ability of workers to go on strike and demand wage increases means that employment (the alleged threat to bonds) is intrinsically weak compared to several decades ago.

2018-11-28T19:24:19+00:00November 28th, 2018|mayflowercapital blog|Comments Off on The Fed Can’t Afford to Raise Rates

Improving Labor Market Unlikely to Hurt Low Duration Bonds

    The BLS Employment report was released today showing 134,000 new jobs. Adjusting for 125,000 monthly population growth, of those likely to want to work, implies the net increase was only a few thousand jobs in a nation of 144million job holders and is thus a near zero growth rate. The unemployment rate decreased because less people attempted to participate in the workforce. When the unemployment rate is this high it is a sign of an overheated economy that will fall into recession in a year. Stocks may anticipate this a half year early so if recession come sin 12 months then stocks could crash in 6 months.    100% of the increase in employment went to those with no

2018-10-05T09:49:08+00:00October 5th, 2018|mayflowercapital blog|Comments Off on Improving Labor Market Unlikely to Hurt Low Duration Bonds

Bond Yields May Have Topped Out

    Yesterday’s dramatic bond market crash may make some people worry about rising rates, but I disagree. First, this year has seen an unusual degree of tax cut stimulus with huge federal deficits. This stimulus acted to make economic statistics including employment, hotter than normal, which resulted in rising interest rates. However, the typical scenario of a big stimulus package is a 5.5% GDP growth, not the 3.2% for the first half of 2018. The fact that the economy is growing 2% slower than it should (based on tax cuts) implies the stimulus may soon fade away and thus reduce the risk of inflation. During the two days before the monthly BLS Payroll Employment report bond yields tend to go

2018-10-04T12:56:32+00:00October 4th, 2018|mayflowercapital blog|Comments Off on Bond Yields May Have Topped Out

Interest Rates Up A Lot: Are Bonds Doomed?

  Today the yield on the ten year Treasury went up 0.12%, about three or four times the typical day’s movement. Reasons for yields to go up are that the economy is growing and experiencing rising wages and a shrinking jobless rate. Based on old cliché-like paradigms of the pre-2008 crash era the ten year bond yield should be the sum of inflation and GDP growth, about 4.5% total (today it's 3.18%). Also, the real yield should be about 2% (1% higher than today) which means, if inflation is 2.2%, then nominal yields should be 4.2%. So based on old-style fundamentals the ten year Treasury could go to a range of 4.2 to 4.5%. The effect of bond yields rising

2018-10-03T15:30:01+00:00October 3rd, 2018|mayflowercapital blog|Comments Off on Interest Rates Up A Lot: Are Bonds Doomed?

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

Repeating The Inflationary Labor Market of 1965-1979?

  The idea that today’s drastically low unemployment rate will cause inflation is ridiculous. To create inflation requires workers to get sustainable “real” pay raises. An analogy is to compare labor force participants to soldiers. The hot, inflationary labor market of the 1965-1979 era was like a well-trained, disciplined modern army with the best equipment. By contrast, today’s labor force would be like a ragtag, undisciplined, irregular army armed with flintlock rifles, etc. They are unable to get inflation-causing pay raises and unable to generate sustainable income that facilitates inflation-generating bank lending, thus no significant inflation is or will be created by today’s workers. During the 1960’s workers were unionized and employers found it way too inconvenient to move jobs,

2018-06-08T16:54:12+00:00June 8th, 2018|mayflowercapital blog|Comments Off on Repeating The Inflationary Labor Market of 1965-1979?

Wage Inflation Unlikely

    Is wage inflation (and thus general inflation) coming back? The best relevant era to compare to current era was 1951-1965 (when Fed regained its independence). In that era inflation was low, yields were low. But GDP was at least 1% higher than today. Thus a range from 1951-1965 of 4.7% to 2.3% for the nominal 10 year Treasury, if adjusted for today’s low GDP, implies a 2.5% yield for now is correct (plus or minus 0.7%). In 1956-59 inflation was 1.3%; from 1960-65 it was 1.67% to 1.07%, yet GDP was a percentage point higher. If 2.5% for the 10 year Treasury might be appropriate, then adjusting for the situation where so much of world’s wealth is from EM

2018-05-21T18:42:15+00:00May 21st, 2018|mayflowercapital blog|Comments Off on Wage Inflation Unlikely

Covert Tightening of The Economy: Are We in a Hard Money Regime?

   Economists like to claim they spotted some accidental covert tightening of the economy, for example, letting the dollar increase in value makes it harder to export goods and thus creates a move towards recession-like conditions that result in a “hard money” environment where savers are protected while debtors have a more difficult time paying debts. My opinion about covert or indirect tightening is that the non-professional work force has been subject to increasing volatility in their income flow thus disqualifying them from borrowing. This reduction in the ability to borrow means these workers borrow less and the money supply is thus expanded by a lesser degree than was desired or anticipated. Thus disinflationary or even deflationary pressure is exerted

2017-09-19T12:14:45+00:00September 19th, 2017|mayflowercapital blog|Comments Off on Covert Tightening of The Economy: Are We in a Hard Money Regime?

Could Republicans Become The Party of Inflation and Worker’s Rights?

The potential source of future large amounts of inflation would most likely come from a severe crash that caused workers to vote for a far left regime which would then impose labor laws and import barriers that would boost wages. But another way that inflation could occur is if rightists decided to preempt a depression before it happened by trying to help workers with aggressive stimulus programs financed by deficit spending which in turn was simply monetized debt (debt paid by printing money). Ideologically it seems unlikely that rural anti-debt conservatives who dominate the House of Representatives would go along with this. But perhaps they will if they are led by someone who inspires them to authorize this as their

2016-11-17T10:09:18+00:00November 17th, 2016|mayflowercapital blog|Comments Off on Could Republicans Become The Party of Inflation and Worker’s Rights?