Why Recession Has Been Delayed

    Several years ago people worried that recession would soon come and make stock prices plummet. Instead the economy kept growing and is now the longest expansion in U.S. history.      Reasons why recession was delayed: 1. Aggressive use of junk bond investing (by yield-starved investors) has provided extra funds for poor quality business; in previous cycles these businesses would have failed sooner thus triggering a recession. 2. Migratory capital from the EU and Japan, where desperate savers hurt by negative interest rates, have sent capital to the U.S. junk finance markets. (Junk finance can be junk bonds, Bank Loan Funds, Peer-to-Peer loans, BDCs, put option writing, and some Venture Capital funds that foolishly invest in over-hyped non-technical so-called “tech”

2019-10-18T16:28:37-07:00October 18th, 2019|mayflowercapital blog|Comments Off on Why Recession Has Been Delayed

Inverted Yield Curve Implies Recession Coming

     The yield curve has become inverted for the spread between the 2 year and 5 year Treasury. The entire yield curve has shifted to be close to being inverted. Traditionally it takes a long time, perhaps 1.75 years after yield curve inversion before a recession starts. However, since the 2008 GFC the extreme manipulation by central banks, such as the QE program, that have never before been experienced, means that things will not act as they typically do during a yield curve inversion. Assuming the short end of the yield curve (for maturities under two years) is heavily manipulated by central banks and less so the further out one goes from short term maturities, then the traditional metric that

2018-12-07T14:11:31-08:00December 7th, 2018|mayflowercapital blog|Comments Off on Inverted Yield Curve Implies Recession Coming

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

2018-08-23T15:11:59-07:00August 23rd, 2018|mayflowercapital blog|Comments Off on Declining Yield Curve Spread Hints at Recession

Catalyst of the Next Recession

     The Covenant Lite nature of BBB corporate bonds may create the surprise that triggers the next recession. They won’t all fail, but if a significant number do and new borrowing applicants are turned away that can act to tip the low GDP growth economy into recession. The next stage is that the damage to that sector would then trigger a lightening fast shut down of the excessively permissive granting of credit to nonconforming (B paper) borrowers. This type of lending allows weak borrowers to get loans and to get even bigger debts from a new lender to pay off their old lender. It acts on the margin to provide the opportunity for GDP growth. But when this credit is

2018-05-02T12:03:03-07:00May 2nd, 2018|mayflowercapital blog|Comments Off on Catalyst of the Next Recession

Why has the Recession Been Delayed?

   The economic cycle bottomed in 2009 and should have had a recession in about seven or eight years (about now) but there are no signs of warning of an imminent recession. Why has the cycle lasted so long? One reason is that the dysfunctionality of Japan and the EU's economies allows the U.S. to prosper by default. Another reason is that the U.S. is more entrepreneurial and welcoming to skilled immigrants. Also there was enormous stimulus from Quantitative Easing, although that ended over two years ago. Monetary stimulus has a two year lag so perhaps so about now the benefit of QE will end. There is stimulus from the stock market going up so much. One key reason for

2017-06-01T12:02:52-07:00June 1st, 2017|mayflowercapital blog|Comments Off on Why has the Recession Been Delayed?

Low Growth Kept Afloat By Deflation

                   Regarding the recent GDP data issued 4-28-17, the Q1 oil drilling investment capital expenditures (some 0.4% of the economy) was up 450% annualized, which is why investment in non-residential assets went up 22% annualized in Q1. This would have been zero, except for the sudden burst of economic activity in drilling for oil. The other 99.6% share of economy that was not in oil drilling investment had no growth. The GDP for the quarter was only 0.7% annualized instead of the usual 2% range. Real GDP would have been flat if not for the recovery in the drilling sector. Recently more evidence has emerged of a lower breakeven cost level (possibly at the high 20’s a barrel instead of

2017-05-02T16:49:22-07:00May 2nd, 2017|mayflowercapital blog|Comments Off on Low Growth Kept Afloat By Deflation

Will Tax Cuts Create Growth?

              Tax cuts can stimulate the economy. However, many articles written about tax cuts don’t clarify some serious misunderstandings. The typical article criticizing tax cuts cites the 91% tax rate started in the New Deal that was from 1933 to 1963 and compares it to today’s lower rates. But these articles fail to mention that before the 1986 tax law changes investors could cavalierly buy a legal tax shelter using leverage at the end of the year and get tremendous savings. Someone could pay $100,000 to buy a limited partnership unit that provided an immediate $300,000 write off thus eliminating their tax bill. The best way to judge the economic impact of tax cuts is to step back and gain

2017-05-01T12:08:12-07:00May 1st, 2017|mayflowercapital blog|Comments Off on Will Tax Cuts Create Growth?

Anti-Import Laws May Result In Recession

The Trump administration and Congress are trying to restrict imports and reward exports through the proposed Border Tax Adjustment law with the goal of increasing domestic employment. One possible outcome is that domestic manufacturers will increase spending on domestic robotic manufacturing for expensive high value added products. This would increase the GDP but not increase employment. The people qualified to do sophisticated work are already employed and thus an employer would have a difficult time increasing the number of qualified employees on short notice. The very unskilled people who are the ones with the highest rate of unemployment would not be able to participate in this type of employment. Presumably some progress will be made in creating jobs for low

2017-01-23T15:59:15-08:00January 23rd, 2017|mayflowercapital blog|Comments Off on Anti-Import Laws May Result In Recession

Will Tariffs Be Free For Americans?

The proposed border tax adjustment will act like an import tariff tax and has an interesting anomaly that it may act to increase the value of the dollar (reducing the cost of the imported goods) thus negating the cost to consumers of the tax. This unverified anomaly reminds me of the “print and pay” anomaly where G7 countries can issue huge amounts of sovereign debt denominated in their own currency and simply print up more to make the minimum payment and thus never be at risk of defaulting. An additional twist on G7 debt or high quality G20 sovereign debt is that the worse the economy gets the greater the degree of “crowding in” (instead of “crowding out”) occurs where

2017-01-19T11:17:41-08:00January 19th, 2017|mayflowercapital blog|Comments Off on Will Tariffs Be Free For Americans?

Dramatic Increase in Tariffs Will Contribute To Causing Recession

Trump wants to have a 35% tariff on imports. This would reduce global trade, result in trade wars and thus reduce our exports. It would raise prices since domestic manufacturers would be able to get away with charging more. If half of all consumer expenses are tangibles and they experience either a 35% tariff multiplied by a 50% allocation to the wholesale cost of imported goods or a matching price increase by domestic vendors, then that could result in perhaps a one-time 17% increase to the CPI index for tangibles on top of the usual 1.5% CPI. I’m assuming no increase in inflation for services. Thus the total CPI would be about half of 17% or 8%.  Many things could

2017-01-17T12:59:12-08:00January 17th, 2017|mayflowercapital blog|Comments Off on Dramatic Increase in Tariffs Will Contribute To Causing Recession