Below zero or near zero real interest rates are precisely what should be expected w/ inflation, i.e., too much money.
Interest rates are the price of money. Too much money and the (real) price goes down. As these are TIPs, the real price is fairly close to the nominal price.
Real interest rates on Treasuries have been close to zero or negative for some time now. No surprise.
The spread is what matters for inflation expectations, and the Bloomberg piece does not mention whether that has changed (or how much).
The chart at the Cleveland Fed site shows an uptick in the "adjusted TIPS-derived expected inflation" but not the raw spread. (Also, it uses the 10-year, not the 5-year.) In any event, 2.35% is not much of a spread.
CR, I think you need to crunch more data to justify "the anchor is slipping a bit".
it wouldn't surprise me if a lot of hedgies are heavy into gold, but now are getting margin calls. thus, they must liquidate gold to meet margin calls.
Mish a while back (a year?) did some good posts showing that gold is not great in deflation, and also not great in inflation either. But that it was best in times of uncertainty.
then again, if the hedgies are liquidating, and stocks falling, and home values falling, perhaps that would be a good indicator of deflation, huh?
It's really quite simple, people. When the current formulation of "core CPI" starts to rise above the Fed's "comfort zone", they just hedonically adjust it by dropping a rapidly inflating commodity or two (housing, energy, food, education, etc.) and/or adjust for new "quality improvements" in the existing basket of goods.
The core CPI will always hover around a constant 2%, no matter what it takes. If that means only measuring big-screen TVs and Chinese lawn furniture, so be it.
I track every expense. My personal inflation rate has been well above CPI for years. It's all coming from items I have no control over too. Real estate taxes, medical insurance, gas, auto insurance, home owner's insurance, tuition, food, monthly utilities (excluding telephone) have all increased significantly for me.
Our situation today is so much more dire than the 1970s. Most have no savings and a crushing debt load. Any increase in "actual" cost of living will really be felt by the majority that are living beyond their means.
Is this really an indication that the markets expect inflation? Isn't the decline TIPS yields resulting more from a massive rally in treasuries than anything else? The decline in treasury yields inevitably pushes TIPS rates down, doesn't it?
It would definitely be an indication that the markets expected inflation if TIPS yields were falling at the same time that treasuries were rising.
If the TIPS yields are droppingg due to the fact that treasuries are rallying, then this could actually indicate that investors are much more worred about asset price deflation than anything else, and are running to the safest asset class they can think of that will keep it's value as the value of everything else crashes.
it wouldn't surprise me if a lot of hedgies are heavy into gold, but now are getting margin calls. thus, they must liquidate gold to meet margin calls."
Well, if gold is a store of value, then it holds that people will cash in that store in time of need. Especially if their other, leveraged investments are in trouble.
I don't think gold's upward run is finished again, but I do expect more sudden downward movements like this after new highs as big investor take the money and run -- or use it to maintain troubled positions in other investments.
Mish has some good insights, but his views on deflation are meaningless for the majority.
For the lower five quintiles of wage earners, CPI is a much more meaningful measure than credit creation. Does a family of four making 50K/yr really care if Blackstone and banks successfully create credit to re-value an asset?
House prices are going to fall, PERIOD. Adding an inflation burden will really hurt the middle and lower classes. The feds goal should ALWAYS be zero inflation.
We are so much richer than we were in 1971 that relative declines are not useful comparisons. We won't be looking at horse meat versus home heating choices.
The TIPS behaviors are perfectly logical. Investors are betting that CPI incl/food+energy will be 3.25% or greater. Talk about a safe bet. Food & energy are leveraged in the CPI with a time delay. Look at the last three years of food & energy and know what the CPI has to eventually acknowledge. Good thing the US CPI is not obligated to track the price of corn tortillas in Mexico as a market basket component.
Sorry, but I have not understood the post. Could someone explain to me it again ? Thank you. What about an uber-nerd post about TIPS ? Maybe a short one... thank you.
p.s.: I am italian. Here in Italy we have too treasury bonds tied to inflation and similar bonds: "buoni postali fruttiferi indicizzati"
2:33
Citigroup Inc. executives are confident with the company's capital levels and aren't looking to raise additional funds from outside investors, according to people familiar with the matter.
The New York bank's confidence that it sufficiently strong is at odds with heightened speculation that the New York-based banking giant will be forced to seek another infusion of capital from sovereign-wealth funds or other investors
[close quote]
Plenty of reasons for gold to go down now (profit-taking/overall market adjustment/liquidity issues for big holders). Then there will be plenty of reason for it to push back up through $1,000 (currencies crashing/credit locked up/ripples of distrust due to fraudulent activities).
I'll worry when gold goes to $700.
There's been recent talk of the IMF liquidating gold. They're nuts if they do it. What are they going to do - print and trade more "money by proclamation"?
At this point, the most optimistic outcome of our current economic situation - within the bounds of reason - would be that we don't end up in a real war. There will be plenty of pain to go around, as there are no "good" solutions (as is evident by the comments by very intelligent and informed people on this and similar blogs). War will be increasingly viewed as a political and economic option - by other nations if not by us. It'll most likely be us, however, 'cause that's where our capital is invested, and that's where we'll get the best bang for the buck.
I think I hear our social fabric tearing. Wonder what the next version of The USA will look like.
That's funny because the TIP spread is well below what it was in the fall. ECRI's leading indicator for inflation is falling quite strongly. And today -finally- (drumroll please) the metals got the news and broke down. I expect this to continue for at least two weeks, maybe the (by me expected) longer term top is in, although that's hard to say. Really longer term metals are still a good place to be.
We seem to be getting the retest of the Jan. 22 lows in the stock market this week. A test the market will stand and then push ahead.
I'm only waiting for CR to post stock future indexes again, that would be a sure sign the low was in (just kidding).
There's way too much pessimism in this board to really get a recession. Even the most absurd bear fantasies are being believed. The kind of stuff a super-bull market develops from.
Ordinary Treasuries pay a fixed nominal rate of interest on a fixed principal. TIPS pay a variable rate of interest adjusted for inflation (specifically, CPI). Put another way, ordinary Treasuries pay a fixed nominal rate of interest, while TIPS pay a fixed real rate of interest.
Therefore, if you compare the prices people are willing to pay for 5-year TIPS versus what they are willing to pay for 5-year ordinary Treasuries, you obtain insight into what the market expects for inflation over the next five years.
The Cleveland Fed has an excellent set of pages about the 10-year TIPS spread, as well as the pitfalls when using it to measure inflation expectations, and how they try to compensate for those pitfalls.
If inflation expectations remain constant but ordinary Treasury yields fall -- in a "flight to quality", for example -- then the nominal yield on the TIPS can actually become negative. TIPS yields could also become negative if the Treasury yield remains constant but inflation expectations rise a lot.
The Bloomberg piece -- and this CR post -- did not say which. The TIPS yield alone tells you nothing, even if it is negative. You need to know how the spread has changed if you want to make the case that the market is anticipating higher inflation; or, in Bernanke-speak, that inflation expectations are no longer "well-anchored".
I've been considering selling my house and renting for awhile. The trick I see is where to put the cash as a safe investment. I can see the logic in buying treasuries, given the negative outlook on the stock market, commodities, gold, real-estate, and munis.
I am still really confused... Are TIPS yields falling because the yields on treasuries are declining? Or are the TIPS yields falling because investors are worried about inflation?
There's been recent talk of the IMF liquidating gold. They're nuts if they do it. What are they going to do - print and trade more "money by proclamation"?
It is very unlikely that the IMF gold sales will upset the market. This para explains things rather well:
Secondly, the sale should take place within the existing Central Bank Gold Agreement, that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that the central banks might sell under the Central Bank Gold Agreement. And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market.
Sniglet, both. In general the five year tip follows the five year treasury with about a 2% spread (recently). Recently the spread has been increasing, indicating higher inflation expectations for investors.
Buying TIPs at these levels seems to have little to do inflation per se, maybe just another way to seek out the safety of treasuries.
Personally, I'm moving back into the deflation camp. I sold the last of my ag commodity ETFs today. The only way I see inflation becoming big is if the dollar really does completely collapse.
The $45T bond market says deflation, the $750B commodities market says inflation. I know who I believe
The $20T housing market says destruction.
I'm no economist, but it's perfectly logical to have a mix of deflation and inflation in prices; consumers will allocate spending with substitutions (or going without) accordingly.
The only inflation that matters is wage inflation, and this decade is quite a bit different from the 1970s.
It remains to be seen which employee sectors have bargaining power to demand higher wages in an inflationary environment.
Tech in the Silicon Valley certainly has demonstrated this power, 1994-2001, 2004-now.
Tech in the military space also has negotiating power. Government sector in general, dunno. Everybody else, not so much.
As the decade degresses I expect some prices up, some down, rents down, taxes up, debt servicing up, and wages slightly down overall.
Actually, Seiders was never that bad. I remember seeing him and one of the shills from the NAR on Bloomberg and they were practically on two completely sides of the debate.
I'm sure Bernanke is well aware that the anchor is slipping and that the Fed is taking that risk. I think his bet is that a slowdown will tame expectations.
The question I have is how much of the current commodity bubble is supported by the Fed's current lower rates and how much simply is a panic flight to a hoped-for stability.
There are interesting days ahead.
"It remains to be seen which employee sectors have bargaining power to demand higher wages in an inflationary environment."
Don't forget politics. If the larger mass of individuals suddenly comes to believe that employment and high prices is better than unemployment and low prices (especially if they're the ones unemployed), you could see quite an uptick in employee bargaining power by rule changes /pro-union regulations at the federal level. Especially with a Democrat administration.
Change the rules, change the game. That's what happened to the old labor market over the last 25 years, starting with Reagan's symbolic backhand to the air traffic controllers. I expect rule changes in the opposite direction.
Crude oil and other commodity prices: Tom Kloza of the Oil Price Information Service says that speculative investment inflows are boosting crude oil prices, and other commodities as well. He didn't use the word bubble, but you may want to read what he says:
Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
Some countries such as China, Saudi Arabia etc, would probably LOVE to buy the Federal Reserve's gold. The whole pile of it. Absolutely.
Just sell those 30 year bonds to raise the billions required and the could easily do it.
Nah, they use the sales thing as a pitch to scare the market. Or they make a deal that these countries will not buy it. You think The Fed wants to sell their best asset to foreigners?
Citi "comfortable" with its capital. Sure. Lots of banks were comfortable until....well ask UBS and Countrywide, and Washington Mutual and a few others......
Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
If this is true, why was the homeownership-rate so much lower in 1971 compared to today? It should have been 120% in 1971 according to your theory.
I would like to see the expression (pinched? pained? complacent?) on Ben's face when he cuts 3/4 of a percent in the face of 5-6% inflation. That would be interesting.
NEW YORK (Reuters) - Ambac Financial Group Inc (NYSE:ABK - News), the second-largest bond insurer, is progressing toward a deal to raise capital but has not yet reached an agreement, CNBC reported on Tuesday.
Ambac is looking to raise capital to help keep the top credit ratings at its main insurance unit.
CNBC's Charlie Gasparino said a group of banks working on the deal plans to work through the night.
PPT and CNBC issued around 3:00PM, Groups of Banks working through the night. I feel much better now. Shheesh
Check out dollar against the yen. As dollar declines the yen carry trade falls out so it has to be covered, and most of the hedge for these is in gold so gold falls....
If this is true, why was the homeownership-rate so much lower in 1971 compared to today?
Hey O-Joe, apparently you haven't noticed that the home ownership rate was artificially pumped up with all the NINJA EZ credit available in recent years... oh, and that home ownership rate is now falling rapidly.
And it's kind of hard to see sustained inflation with anemic wage growth.
If you've got money supply increasing faster than real output, you've got inflation, regardless of whether wages keep up or not. History is full of examples from Germany to the ex-USSR to Zimbabwe.
The 70's in the US were an exception - labor had a lot more pricing power back then.
You never cease to amaze. Although I am not sure I would call 30 bps a "surge" .
Thanks for the charts. I think the TIPS spread is very important to watch, because I suspect it is the most important "inflation expectations" indicator for the Fed.
Puhleeze. In early 70s, EVERY household in my neighborhood had one wage earner: steel workers, teachers, mailman - all in suburban SFHs. Hell, the guy who drove the Tastykake truck supported a family of six.
What has happened is the true erosion of the middle class, with debt being the substitution for wages. People are not richer: they have small (if any) pensions, little left for self-funded retirement, and basic costs that force them to fund with helocs/cc just to survive: healthcare, tuition, taxes - all the great points made above.
"Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
O-Joe asked: "If this is true, why was the homeownership-rate so much lower in 1971 compared to today?"
Because in 1971 you actually had to prove you could afford a house in order to get a loan. Typical conventional DTI ratios in 1971 was P & I
when you consider that wealth is stuff (physical wealth like furniture, TVs, cars), capital (both intellectual and physical) and not money (cash, savings, investments), then it is not incorrect to say that collectively we are much more wealthier now than we were 30-odd years ago.
It is indeed true that the lowliest house cleaner or janitor today has access to many goods that Howard Hughes could have only dreamt about.
We as a nation are also much more productive now than the 1970s.
If land valuations could have been held constant, eg. by an aggressive Georgist tax regime, we theoretically could afford to have triple the leisure time of the 1970s.
(But land prices have not been held constant, not to mention we've seen great price inflation WRT health maintenance and education), so overall our cost of living isn't all as rosy as just comparing the cost of a Walkman in 1979 vs. the iPod shuffle would indicate.
If this is true, why was the homeownership-rate so much lower in 1971 compared to today?
Also, demographically the boomers were just beginning household formation in the late 60s and 70s. It was natural that more and more boomers would join the ranks of homeowners as time progressed, even without the suicide loans of this decade.
I'm an iTulip select member. I think it's great value for the money -- some of the interviews Eric has done are really good, and although I'm about as far away as you can get from being a market timer, he does have a pretty good record of calling turning points. Plus, there are a group of really smart commenters posting in the select area - probably worth the price of admission by itself. You can try it for a month for $10, so it's pretty low risk to find out what you think for yourself.
In the interest of disclosure, I've known Eric for more than ten years and actually wrote for iTulip for a little while about 5 years ago.
It's amazing how the market can shed 200 pts in reaction to a broad array of facts and data about the economy, and then recover 75% of it in reaction to a single rumor.
All you shorts can breathe a sigh of relief. This is the last time you'll hear about the Ambac capital funding plan. I suspect the plan (which is back to square one and nothing sophisticated) will be announced tomorroww...
"At least someone knows how to fill a piggy bank. Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.
That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week..."
I'm sure that in my absence this was given appropriate weight by CR, so as to provide a balanced picture of what's happening in the economy.
because they were handing out loans like candy, 2003-1Q07.
Total Household debt, 2002: $8.5T
Total Household debt, 4Q07: $14T.
Troy
Finally someone else states that credit expansion is a good thing. Just to be fair, though, Troy: even 2002 the homeownership rate was higher than 1971. Agreed that credit expansion has been a great benefactor in expanding home ownership, you can't credit it all to the very recent expansion only.
O-Joe
It's hard to compare the wealth from one generation to the next. When my grandparents were my age (57) they didn't need a tv or a computer or a cell phone. Which was lucky, since none of those things had been invented yet. (actually when one of my grandfathers was my age he had been dead for two years, but that doesn't change my point--in fact, it reinforces it. When I got the inherited diverticulitis that killed him at about the same age, many thousands of dollars of medical treatment saved my life; that treatment hadn't been invented yet in his day so he didn't have to pay for it or for the medical insurance etc.) Their landline phone had a coin slot, and they only paid when they needed to call somebody, which wasn't that often. They also didn't need a car and didn't have one.
They had an ice box instead of a refrigerator.
As my dad loves to remind me, "We didn't know we were poor." They had a home and three meals a day and a radio.
Their standard of living was very low in dollar terms.
My point is that we may be wealthier today but we feel stressed because our overhead is so much higher.
When the current formulation of "core CPI" starts to rise above the Fed's "comfort zone", they just hedonically adjust it..."
This whole thing goes back to the clinton administration. The CPI was adjusted to reflect no "hedonism", ie, when steak goes up, hamberger will do and we price hamburger....because people who demand steak are headonists!! History, history, read about the clinton years. Real inflation rates have been over 7% for years.
When we're at 1200 in 3 months, do you promise to come back and admit you were wrong?
I absolutely will. That would mean my model is trash and I'd be the first to admit it. That said after a sharp rallye I expect a sideways move for some months, to be followed by another excellent rallye this year. New ATHs this year are a given.
Inflation will spiral out of control: gas will easily hit $4 a gallon and stay above for a good while, if not forever. Food will become very costly; people will go hungry.
The Fed will just ignore all this and create a new core inflation index consisting of nothing but flat-panel TV's and foreclosed homes. Inflation expections will be contained!
We'll all be dirt poor, but the rich will be happy, the Dow will go up 10% a year (even as inflation is 20%+ a year), and all will be well.
I wanted to sell my TIPs position today (I manage a fixed income portfolio for a living) but the Treasury market puked right as I was trying to sell them.
Commodities look played out to me, and I think TIPs are very expensive at these levels.
My point is that we may be wealthier today but we feel stressed because our overhead is so much higher.
John Stark
A lot of what we buy today (as a society) are services and they never seem to get paid off; another day another fee or another Sir Charge. Products are just baskets of services. And don't the marketers know that!
One more point: grandma and grandpa did't have to cover much in the way of interest payments. Credit cards hadn't been invented yet either. Does somebody remember what percentage of the average modern American's income goes to paying interest? It's a lot.
So maybe we are paying less for goods imported from countries with cheap labor, but we buy so much that we have to borrow money to do it, and the interest goes to the financial services class instead of to factory workers--and maybe we don't come out ahead under free trade after all? Just asking.
My personal experience is that prices are pretty flat--little to no inflation. My big expense is rent (Reno, NV). Up about 3%/year for the past six years. Lots of vacancies starting late last year, so I don't expect any rent increases this year. I don't own a car, but I take several long flights a year for vacations to Europe and Latin America. Because of the power of the internet to allow comparison shopping, I'm see little increase in airfare, despite the huge rise in gas. For example, I paid $651 for a round trip to Madrid back in spring 2006, but I'm paying $627 for a similar round trip this spring 2008. My food costs aren't going up much. The cable company is trying to gouge me for internet service, but guess what? The apartment complex is now offering free wireless (probably because they want to fill all those vacancies) so I may just drop the cable internet altogether. Cost of clothing is a joke these days. Ditto for computers--I helped a technophobic friend buy a computer back in December for $475. Again, using the internet to comparison shop makes it possible to make huge savings. I still visit a dentist in San Francisco. His prices are up, but then the technology really is better today than in the past (hedonics is a reality here) with the result that I'm spending more on cleaning, which is cheap, but probably won't be spending much on repairs, which is expensive. I don't get sick so my medical expenses are zero. I educate myself by reading books rather than paying tuition. When I'm finished with the books, I resell on amazon.com. Again, my costs are dropping due to the internet. The only place I'm being hit really hard is the dollar to euro exchange rate, since I spent 3 to 6 months a year in Europe. But I can adjust to that by staying in southern rather than northern Europe this year. Bottom line is that my expense have been declining every year since I retired in 2000, and yet my standard of living is getting better. The secret is that I am highly flexible and take advantage of modern technology.
My impression is that people who say their personal cost of living is going up 7% a year are the opposite of me. They insist on living on the coasts instead of fly-over country, despite the fact that modern telecommuniations and delivery services has made the world a much smaller place. They insist on paying tuition instead of self-educating using computers and books ordered from Amazon. They don't take advantage of the internet to save lots of money on purchases. They allow themselves to get sick from stress and then run up huge medical bills trying to get well again. They own cars instead of taking a lower paying job which allows them to live near where they work and therefore walk everywhere. Etc, etc.
There are three numbers: CPI (which is what TIPS pay on), "core" CPI, and in some sense what the "real" inflation rate is, which probably varies a lot by age and income bracket. I agree with others that CPI is way below "real" inflation, however measured.
On another subject, I've seen many claims that the 2-year Treasury rate is easily manipulated by the Fed, but not the 10-year rate. Why should this be so?
"Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
If this is true, why was the homeownership-rate so much lower in 1971 compared to today? It should have been 120% in 1971 according to your theory.
O-Joe"
The correlation between the rate of homeownership and wealth isn't that linear. Only recently has it been possible to afford a house with less downpayment than before. IIRC, the avg downpayment required in the '60s-'70s was something like 25-30%. just before the Great Depression, it was 50% (!)
Moreover, getting credit was much more tied to race, gender and all sorts of prejudices that had nothing to do with the ability to pay a mortgage.
How do you think Fair Isaac made its fortune?
BTW, in the '70s, the financial sector was much more controlled than today. Today, while it is 18% of the S&P500, it generates 41% of all earnings. Think about that for a minute. All this wealth diverted to nil, save execs and shareholders. For instance, It always amazes me to see how docile Americans are toward the credit card industry, in spite of well-documented egregious behavior that borders on fraud. These asshats are siphoning so much more money than ever before, while failing to produce anything meaningful for the common good, let alone useful investments. They view their customers as pockets to be picked. All this wealth was AVAILABLE to people in the '70s. Now, guess where the hell it is going.
This country used to be the Home of Brave, Land of the Free. Now, it looks more like the Home of the Slave, Land of the Fee.
Siv writes: "All you shorts can breathe a sigh of relief."
Not short ABK. May consider it once the deal is announced.
My objection is to the way the company is leaking to the press. This is now the second time CNBC has acted as ABK's publicist in the last hour of trading.
Whenever material news is about to be announced, trading must be halted. These are the rules of the exchange.
It would be hypocritical for ABK longs to decry Mr. Ackman's very public position as "market manipulation" and turn a blind eye to this.
And what about that futures buying that preceded this news by ~15 - 20 minutes? Do you think that will ever be prosecuted?
For all the bluff and bluster occurring, no one seems to be paying attention to the fact that the ARS market is getting worse, not better, with 70% of offerings failing last week.
ZACK ATTACK: "Not short ABK. May consider it once the deal is announced. "
Go ahead... I'm long and although you may make some money, your risk-reward is tenuous unless you think run-off value near zero is certain.
ZACK: "My objection is to the way the company is leaking to the press. This is now the second time CNBC has acted as ABK's publicist in the last hour of trading. "
Well, a few months ago, it was the opposite. How about all those lame bogus rumours (mostly through shorts) that caused the stock price to collapse? In any case, this happens all the time. None of this is news. It's surprising to me that it is actually moving the market...
ZACK: "Whenever material news is about to be announced, trading must be halted. These are the rules of the exchange. "
These are unsubstantiated rumours.
ZACK: "It would be hypocritical for ABK longs to decry Mr. Ackman's very public position as "market manipulation" and turn a blind eye to this. "
I have no problem with Ackman. He is an activist investor so it is to be expected that he'll be sending letters, trying to get on TV, and so on. Where I have an issue is with him representing in the industry in government hearnings and the like. He doesn't work in the industry; he isn't a policyholder; he isn't an owner.
ZACK: "For all the bluff and bluster occurring, no one seems to be paying attention to the fact that the ARS market is getting worse, not better, with 70% of offerings failing last week."
As an Ambac long, that is irrelevant to me. I think the ARS market will be dead within an year. The monoline situation doesn't help matters there but that market is collapsing under its own problems (namely, brokers/banks/etc don't have enough capital to throw around on likely low-margin ARS market).
Municipalities and other debt issuers aren't going to like it but they also have to get used to the fact that insurance costs will be higher in the future.
TIPS spreads are really exploding today. They have widened by 6 basis points in the 10 year sector which is a very unusual move in a market where movement is generally a basis point or so in either direction.As we speak the spread rests at 256 basis points.
The currency is plumbing new lows,commodities are racing to higher prices and the central bank is expected to vigorously ease policy. Not exactly a backdrop in which investors will desire to own 10 year Treasuries in the 3 .60s.
Feeeeurrrsst!
Anchor?
as in tied to an anchor that is being thrown overboard..
Ciao
MS
Inflation going up, but gold going down? hmmm.
Below zero or near zero real interest rates are precisely what should be expected w/ inflation, i.e., too much money.
Interest rates are the price of money. Too much money and the (real) price goes down. As these are TIPs, the real price is fairly close to the nominal price.
Real interest rates on Treasuries have been close to zero or negative for some time now. No surprise.
The spread is what matters for inflation expectations, and the Bloomberg piece does not mention whether that has changed (or how much).
The chart at the Cleveland Fed site shows an uptick in the "adjusted TIPS-derived expected inflation" but not the raw spread. (Also, it uses the 10-year, not the 5-year.) In any event, 2.35% is not much of a spread.
CR, I think you need to crunch more data to justify "the anchor is slipping a bit".
"Inflation going up, but gold going down? hmmm."
could be due to the speculation aspect of gold.
it wouldn't surprise me if a lot of hedgies are heavy into gold, but now are getting margin calls. thus, they must liquidate gold to meet margin calls.
Mish a while back (a year?) did some good posts showing that gold is not great in deflation, and also not great in inflation either. But that it was best in times of uncertainty.
then again, if the hedgies are liquidating, and stocks falling, and home values falling, perhaps that would be a good indicator of deflation, huh?
Eight metro areas -- seven in California and one in Florida -- have
seen home prices contract by more than 20%
Single Family Home Price Declines Pervasive in Q4 2007
It's really quite simple, people. When the current formulation of "core CPI" starts to rise above the Fed's "comfort zone", they just hedonically adjust it by dropping a rapidly inflating commodity or two (housing, energy, food, education, etc.) and/or adjust for new "quality improvements" in the existing basket of goods.
The core CPI will always hover around a constant 2%, no matter what it takes. If that means only measuring big-screen TVs and Chinese lawn furniture, so be it.
I track every expense. My personal inflation rate has been well above CPI for years. It's all coming from items I have no control over too. Real estate taxes, medical insurance, gas, auto insurance, home owner's insurance, tuition, food, monthly utilities (excluding telephone) have all increased significantly for me.
Our situation today is so much more dire than the 1970s. Most have no savings and a crushing debt load. Any increase in "actual" cost of living will really be felt by the majority that are living beyond their means.
It sounds like TIPS are at odds with t-bonds -- long rates do not seem to reflect any sort of inflation concerns.
I wonder why the discrepancy here.
In the 70s the bond market screamed out "inflation". Today it does not.
Is this really an indication that the markets expect inflation? Isn't the decline TIPS yields resulting more from a massive rally in treasuries than anything else? The decline in treasury yields inevitably pushes TIPS rates down, doesn't it?
It would definitely be an indication that the markets expected inflation if TIPS yields were falling at the same time that treasuries were rising.
If the TIPS yields are droppingg due to the fact that treasuries are rallying, then this could actually indicate that investors are much more worred about asset price deflation than anything else, and are running to the safest asset class they can think of that will keep it's value as the value of everything else crashes.
""Inflation going up, but gold going down? hmmm."
could be due to the speculation aspect of gold.
it wouldn't surprise me if a lot of hedgies are heavy into gold, but now are getting margin calls. thus, they must liquidate gold to meet margin calls."
Well, if gold is a store of value, then it holds that people will cash in that store in time of need. Especially if their other, leveraged investments are in trouble.
I don't think gold's upward run is finished again, but I do expect more sudden downward movements like this after new highs as big investor take the money and run -- or use it to maintain troubled positions in other investments.
check out the disclaimer to FAKEPAYCHECKSTUBS.com .......extremely funny!!!
Mish has some good insights, but his views on deflation are meaningless for the majority.
For the lower five quintiles of wage earners, CPI is a much more meaningful measure than credit creation. Does a family of four making 50K/yr really care if Blackstone and banks successfully create credit to re-value an asset?
House prices are going to fall, PERIOD. Adding an inflation burden will really hurt the middle and lower classes. The feds goal should ALWAYS be zero inflation.
We are so much richer than we were in 1971 that relative declines are not useful comparisons. We won't be looking at horse meat versus home heating choices.
The TIPS behaviors are perfectly logical. Investors are betting that CPI incl/food+energy will be 3.25% or greater. Talk about a safe bet. Food & energy are leveraged in the CPI with a time delay. Look at the last three years of food & energy and know what the CPI has to eventually acknowledge. Good thing the US CPI is not obligated to track the price of corn tortillas in Mexico as a market basket component.
YTL,
Feels like margin call to me as well. Entire CRB is down 2%+.
Cheers,
"We won't be looking at horse meat versus home heating choices."
"We" meaning... whom?
We won't be looking at horse meat versus home heating choices.
Only because the US banned the slaughter of horses for food.
http://www.rapidcityjournal.com/articles/2008/03/04/news/opinions/doc47cc91d7199e3035968644.txt
I thought BB like looking to PCE as an inflation guage? It's around 4.8% annualized, for the last two months.
I could be wrong on both, though.
Sorry, but I have not understood the post. Could someone explain to me it again ? Thank you. What about an uber-nerd post about TIPS ? Maybe a short one... thank you.
p.s.: I am italian. Here in Italy we have too treasury bonds tied to inflation and similar bonds: "buoni postali fruttiferi indicizzati"
2:33
Citigroup Inc. executives are confident with the company's capital levels and aren't looking to raise additional funds from outside investors, according to people familiar with the matter.
The New York bank's confidence that it sufficiently strong is at odds with heightened speculation that the New York-based banking giant will be forced to seek another infusion of capital from sovereign-wealth funds or other investors
[close quote]
I am going to believe that what is up, is down.
Plenty of reasons for gold to go down now (profit-taking/overall market adjustment/liquidity issues for big holders). Then there will be plenty of reason for it to push back up through $1,000 (currencies crashing/credit locked up/ripples of distrust due to fraudulent activities).
I'll worry when gold goes to $700.
There's been recent talk of the IMF liquidating gold. They're nuts if they do it. What are they going to do - print and trade more "money by proclamation"?
At this point, the most optimistic outcome of our current economic situation - within the bounds of reason - would be that we don't end up in a real war. There will be plenty of pain to go around, as there are no "good" solutions (as is evident by the comments by very intelligent and informed people on this and similar blogs). War will be increasingly viewed as a political and economic option - by other nations if not by us. It'll most likely be us, however, 'cause that's where our capital is invested, and that's where we'll get the best bang for the buck.
I think I hear our social fabric tearing. Wonder what the next version of The USA will look like.
OTOH, I could be completely wrong.
That's funny because the TIP spread is well below what it was in the fall. ECRI's leading indicator for inflation is falling quite strongly. And today -finally- (drumroll please) the metals got the news and broke down. I expect this to continue for at least two weeks, maybe the (by me expected) longer term top is in, although that's hard to say. Really longer term metals are still a good place to be.
We seem to be getting the retest of the Jan. 22 lows in the stock market this week. A test the market will stand and then push ahead.
I'm only waiting for CR to post stock future indexes again, that would be a sure sign the low was in (just kidding).
O-Joe
The $45T bond market says deflation, the $750B commodities market says inflation. I know who I believe
Fremont on the ropes?
Fremont Gets Default Notices, Survival Threatened
| Reuters
Could someone please explain how the yield can fall below zero? Do I have to pay the government interest for them to keep my money?
There's way too much pessimism in this board to really get a recession. Even the most absurd bear fantasies are being believed. The kind of stuff a super-bull market develops from.
O-Joe
OT: Anyone know why the Jan Philly Fed coincident indicators are STILL not out? Are they that bad?
O-Joe,
You're right. Please disregard my previous post(s).
if you haven't already.
Emma,
Tip yield can only fall below zero on the secondary market. At the treasury auction, the lowest rate is zero (plus future cpi inflation).
In the 70s the bond market screamed out "inflation". Today it does not.
ac
That's got to do with reality I guess. Reality being the inflationary pressure now is a far cry from the 1970s.
O-Joe
marco --
Ordinary Treasuries pay a fixed nominal rate of interest on a fixed principal. TIPS pay a variable rate of interest adjusted for inflation (specifically, CPI). Put another way, ordinary Treasuries pay a fixed nominal rate of interest, while TIPS pay a fixed real rate of interest.
Therefore, if you compare the prices people are willing to pay for 5-year TIPS versus what they are willing to pay for 5-year ordinary Treasuries, you obtain insight into what the market expects for inflation over the next five years.
The Cleveland Fed has an excellent set of pages about the 10-year TIPS spread, as well as the pitfalls when using it to measure inflation expectations, and how they try to compensate for those pitfalls.
If inflation expectations remain constant but ordinary Treasury yields fall -- in a "flight to quality", for example -- then the nominal yield on the TIPS can actually become negative. TIPS yields could also become negative if the Treasury yield remains constant but inflation expectations rise a lot.
The Bloomberg piece -- and this CR post -- did not say which. The TIPS yield alone tells you nothing, even if it is negative. You need to know how the spread has changed if you want to make the case that the market is anticipating higher inflation; or, in Bernanke-speak, that inflation expectations are no longer "well-anchored".
I've been considering selling my house and renting for awhile. The trick I see is where to put the cash as a safe investment. I can see the logic in buying treasuries, given the negative outlook on the stock market, commodities, gold, real-estate, and munis.
I am still really confused... Are TIPS yields falling because the yields on treasuries are declining? Or are the TIPS yields falling because investors are worried about inflation?
Marcus Aurelius,
There's been recent talk of the IMF liquidating gold. They're nuts if they do it. What are they going to do - print and trade more "money by proclamation"?
It is very unlikely that the IMF gold sales will upset the market. This para explains things rather well:
Central Bank Sales over the Next 19 Months to Reduce by 400 Tonnes?
Secondly, the sale should take place within the existing Central Bank Gold Agreement, that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that the central banks might sell under the Central Bank Gold Agreement. And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market.
Nemo, graph of spreads added.
Best to all.
Sniglet, both. In general the five year tip follows the five year treasury with about a 2% spread (recently). Recently the spread has been increasing, indicating higher inflation expectations for investors.
Best Wishes
Seiders kicked the kool-aid habit?
Housing in 'deepest, most rapid' decline since Great Depression - MarketWatch
Buying TIPs at these levels seems to have little to do inflation per se, maybe just another way to seek out the safety of treasuries.
Personally, I'm moving back into the deflation camp. I sold the last of my ag commodity ETFs today. The only way I see inflation becoming big is if the dollar really does completely collapse.
The $45T bond market says deflation, the $750B commodities market says inflation. I know who I believe
The $20T housing market says destruction.
I'm no economist, but it's perfectly logical to have a mix of deflation and inflation in prices; consumers will allocate spending with substitutions (or going without) accordingly.
The only inflation that matters is wage inflation, and this decade is quite a bit different from the 1970s.
It remains to be seen which employee sectors have bargaining power to demand higher wages in an inflationary environment.
Tech in the Silicon Valley certainly has demonstrated this power, 1994-2001, 2004-now.
Tech in the military space also has negotiating power. Government sector in general, dunno. Everybody else, not so much.
As the decade degresses I expect some prices up, some down, rents down, taxes up, debt servicing up, and wages slightly down overall.
Dow off 102 pts, recouping losses on word of Ambac bailout
Actually, Seiders was never that bad. I remember seeing him and one of the shills from the NAR on Bloomberg and they were practically on two completely sides of the debate.
I'm sure Bernanke is well aware that the anchor is slipping and that the Fed is taking that risk. I think his bet is that a slowdown will tame expectations.
The question I have is how much of the current commodity bubble is supported by the Fed's current lower rates and how much simply is a panic flight to a hoped-for stability.
There are interesting days ahead.
There ya are Charlie!
The best part is how good a bond insurer bailout will be for tech stock prices...
It's gotten tragi-comical!
"Dow off 102 pts, recouping losses on word of Ambac bailout"
So thats still working eh?
Do my stocks go up with this or just the financials?
"It remains to be seen which employee sectors have bargaining power to demand higher wages in an inflationary environment."
Don't forget politics. If the larger mass of individuals suddenly comes to believe that employment and high prices is better than unemployment and low prices (especially if they're the ones unemployed), you could see quite an uptick in employee bargaining power by rule changes /pro-union regulations at the federal level. Especially with a Democrat administration.
Change the rules, change the game. That's what happened to the old labor market over the last 25 years, starting with Reagan's symbolic backhand to the air traffic controllers. I expect rule changes in the opposite direction.
The only way I see inflation becoming big is if the dollar really does completely collapse.
Huh?
Could it be that CR becomes even more of a counter-indicator like:
We'll see.
O-Joe
It remains to be seen which employee sectors have bargaining power to demand higher wages in an inflationary environment.
Yeah, my guess is not too damn many. And it's kind of hard to see sustained inflation with anemic wage growth.
"Housing is in its "deepest, most rapid downswing since the Great Depression,"
Who said this: Jas?
Nope, Seiders.
More vindication.
Anchors don't slip.
'Dragging anchor' is the better term, or 'about to part rode' (i.e., the line holding the anchor is about to break) would do.
Don Kei wrote
"Below zero or near zero real interest rates are precisely what should be expected w/ inflation, i.e., too much money."
i respectfully disagree; inflation expectations raise interest rates charges because dollars are worth less into the future.
inflation expectations, however will lower the face value of existing securities in the secondary market as new issues demand higher interest rates.
Crude oil and other commodity prices: Tom Kloza of the Oil Price Information Service says that speculative investment inflows are boosting crude oil prices, and other commodities as well. He didn't use the word bubble, but you may want to read what he says:
Speaking of Oil : The Broken Record
Citigroup at 9 year low on capital, write down worries
Citigroup at 9-year low on capital, write-down worries
| Reuters
We are so much richer than we were in 1971
Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
We are so much richer than we were in 1971
Oh, and I'll add that in '71 the riches were more evenly distributed than they are now.
Some countries such as China, Saudi Arabia etc, would probably LOVE to buy the Federal Reserve's gold. The whole pile of it. Absolutely.
Just sell those 30 year bonds to raise the billions required and the could easily do it.
Nah, they use the sales thing as a pitch to scare the market. Or they make a deal that these countries will not buy it. You think The Fed wants to sell their best asset to foreigners?
Thank you Bofiz..dam strait I have to work 2 jobs to survive debt free...as early as 2000 i only had to work one...so that has to tell you something.
Citi "comfortable" with its capital. Sure. Lots of banks were comfortable until....well ask UBS and Countrywide, and Washington Mutual and a few others......
Citigroup confident in capital levels - WSJ
| Reuters
Barley, sorry, I posted before I saw your prior post.
Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
If this is true, why was the homeownership-rate so much lower in 1971 compared to today? It should have been 120% in 1971 according to your theory.
O-Joe
I would like to see the expression (pinched? pained? complacent?) on Ben's face when he cuts 3/4 of a percent in the face of 5-6% inflation. That would be interesting.
NEW YORK (Reuters) - Ambac Financial Group Inc (NYSE:ABK - News), the second-largest bond insurer, is progressing toward a deal to raise capital but has not yet reached an agreement, CNBC reported on Tuesday.
Ambac is looking to raise capital to help keep the top credit ratings at its main insurance unit.
CNBC's Charlie Gasparino said a group of banks working on the deal plans to work through the night.
PPT and CNBC issued around 3:00PM, Groups of Banks working through the night. I feel much better now. Shheesh
Irritating, these darn hedge fund rescues at the last two hours.
Good to see Eric Janzen over at iTulip say, on Friday, that it is now time to short the market.
It is going to be an exciting March.
I think the February employment report on Friday should be an eye-opener for the holdout mutual fund managers.
Check out dollar against the yen. As dollar declines the yen carry trade falls out so it has to be covered, and most of the hedge for these is in gold so gold falls....
I'm not sure if this was already THE retest of the Jan. 22 lows, but it looks very good to me. Again, next week is too late for the bears IMO.
Too good that CR marked the high in inflation expectations today as well
O-Joe
Anchors don't slip.
From which we can infer that CR doesn't sail a yacht.
Yawn! on the Ambac News...
If this is true, why was the homeownership-rate so much lower in 1971 compared to today?
Hey O-Joe, apparently you haven't noticed that the home ownership rate was artificially pumped up with all the NINJA EZ credit available in recent years... oh, and that home ownership rate is now falling rapidly.
Debt is not wealth.
jg -
If you check that iTulip article, you'll see it's an update to an article he posted in December.
That ABK wheeze just doesn't pack the punch it used to...
And it's kind of hard to see sustained inflation with anemic wage growth.
If you've got money supply increasing faster than real output, you've got inflation, regardless of whether wages keep up or not. History is full of examples from Germany to the ex-USSR to Zimbabwe.
The 70's in the US were an exception - labor had a lot more pricing power back then.
Calculated Risk --
You never cease to amaze. Although I am not sure I would call 30 bps a "surge"
.
Thanks for the charts. I think the TIPS spread is very important to watch, because I suspect it is the most important "inflation expectations" indicator for the Fed.
bofiz,
Yep - the bank ownership of real estate is at an all time high!
Yep - the bank ownership of real estate is at an all time high!
Exactly!
CNBC's Charlie Gasparino said a group of banks working on the deal plans to work through the night.
I hope they rented movies for the night.
"We are so much richer than we were in 1971"
Puhleeze. In early 70s, EVERY household in my neighborhood had one wage earner: steel workers, teachers, mailman - all in suburban SFHs. Hell, the guy who drove the Tastykake truck supported a family of six.
What has happened is the true erosion of the middle class, with debt being the substitution for wages. People are not richer: they have small (if any) pensions, little left for self-funded retirement, and basic costs that force them to fund with helocs/cc just to survive: healthcare, tuition, taxes - all the great points made above.
Richer? Dude, pass it down here and stop jonsing.
dd
Saw that, MLM; thanks.
Do you subscribe to iTulip? How do you like it?
Bofiz,
As the old joke goes, there are plenty of jobs out there. My neighbor is working 3 of them.
Welcome to free trade in all its glory.
why was the homeownership-rate so much lower in 1971 compared to today
because they were handing out loans like candy, 2003-1Q07.
Total Household debt, 2002: $8.5T
Total Household debt, 4Q07: $14T.
"Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
O-Joe asked: "If this is true, why was the homeownership-rate so much lower in 1971 compared to today?"
Because in 1971 you actually had to prove you could afford a house in order to get a loan. Typical conventional DTI ratios in 1971 was P & I
Mock Turtle,
I'm talking about real interest rates, i.e., after discounting the decreasing value of the money w/ which they are being paid.
And real interest rates on treasuries are now negative, or close to negative, even using "core CPI"
Richer? Dude, pass it down here and stop jonsing
when you consider that wealth is stuff (physical wealth like furniture, TVs, cars), capital (both intellectual and physical) and not money (cash, savings, investments), then it is not incorrect to say that collectively we are much more wealthier now than we were 30-odd years ago.
It is indeed true that the lowliest house cleaner or janitor today has access to many goods that Howard Hughes could have only dreamt about.
We as a nation are also much more productive now than the 1970s.
If land valuations could have been held constant, eg. by an aggressive Georgist tax regime, we theoretically could afford to have triple the leisure time of the 1970s.
(But land prices have not been held constant, not to mention we've seen great price inflation WRT health maintenance and education), so overall our cost of living isn't all as rosy as just comparing the cost of a Walkman in 1979 vs. the iPod shuffle would indicate.
If this is true, why was the homeownership-rate so much lower in 1971 compared to today?
Also, demographically the boomers were just beginning household formation in the late 60s and 70s. It was natural that more and more boomers would join the ranks of homeowners as time progressed, even without the suicide loans of this decade.
Ah, where would we be without the 3PM ABK S&P stick-save? Coincidental, I'm sure, that it was right at 1310 support.
I guess they gotta do something since they can't Buffettize this stock anymore.
I wonder if there'll be any prosecutions for all those trades that went off about 20 minutes before the rumor?
Do you subscribe to iTulip? How do you like it?
I'm an iTulip select member. I think it's great value for the money -- some of the interviews Eric has done are really good, and although I'm about as far away as you can get from being a market timer, he does have a pretty good record of calling turning points. Plus, there are a group of really smart commenters posting in the select area - probably worth the price of admission by itself. You can try it for a month for $10, so it's pretty low risk to find out what you think for yourself.
In the interest of disclosure, I've known Eric for more than ten years and actually wrote for iTulip for a little while about 5 years ago.
ABX almost pulled off a hat trick today, all new lows except one - sharp deterioration in the AAA's
It's amazing how the market can shed 200 pts in reaction to a broad array of facts and data about the economy, and then recover 75% of it in reaction to a single rumor.
All you shorts can breathe a sigh of relief. This is the last time you'll hear about the Ambac capital funding plan. I suspect the plan (which is back to square one and nothing sophisticated) will be announced tomorroww...
CMBX likewise all but one new high
bofiz said: "...Debt is not wealth."
From today's NYT, "Unlike Consumers, Companies Are Piling Up Cash"
As Consumers Struggle to Save, Companies Are Piling Up Cash - NY Times
"At least someone knows how to fill a piggy bank. Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.
That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week..."
I'm sure that in my absence this was given appropriate weight by CR, so as to provide a balanced picture of what's happening in the economy.
Sebastia
"I suspect the plan (which is back to square one and nothing sophisticated) will be announced tomorroww..."
Boy, I hope so... this is like waiting for Franco to die.
Sebastian and O-Joe together again on the same thread. That's got to be an indicator of something.
because they were handing out loans like candy, 2003-1Q07.
Total Household debt, 2002: $8.5T
Total Household debt, 4Q07: $14T.
Troy
Finally someone else states that credit expansion is a good thing. Just to be fair, though, Troy: even 2002 the homeownership rate was higher than 1971. Agreed that credit expansion has been a great benefactor in expanding home ownership, you can't credit it all to the very recent expansion only.
O-Joe
O-Joe,
When we're at 1200 in 3 months, do you promise to come back and admit you were wrong?
Or will that just be another blip in your 100 year forecast that the S&P will be higher in 2020 than it is today?
HARM -
When the current formulation of "core CPI" starts to rise above the Fed's "comfort zone", they just hedonically adjust it..."
Does anyone know where to find the actual data showing the FED removing (substitutes) or hedonically adjusting pieces of the CPI basket?
pish! I'm riding both the TIPS and Gold gravy train right now, with all of my other stuff in cash.
I'm up 15% in my Gold on the year
TIPS are giving me a 9% Y/Y right now.
I sold all my int'l exposure 3-6 months ago, and don't feel dumb about it yet!
You can't argue with this chart
VIPSX: Basic Chart for VANGUARD INFLATION PROTECTED SE - Yahoo! Finance
or this one:
USAGX: Basic Chart for USAA MUTUAL FDS TR PRECIOUS MET - Yahoo! Finance
inflation expectations have surged...
That pretty much says it all. What is a Fed. Chairman to do?
when will "expectations" get waway from us?
my poor savings account:
Yeah, TIP has been great. Who would'a thunk it? But SKF and SRS have been doing even better.
Sivaram
The problem with the monolines is that housing will steadily worsen all of 2008. Mr. Market is in complete denial.
MJ -
If you really want to dig into inflation stats, you could do worse than starting here:
Stephen G. Cecchetti, Brandeis International Business School
It's hard to compare the wealth from one generation to the next. When my grandparents were my age (57) they didn't need a tv or a computer or a cell phone. Which was lucky, since none of those things had been invented yet. (actually when one of my grandfathers was my age he had been dead for two years, but that doesn't change my point--in fact, it reinforces it. When I got the inherited diverticulitis that killed him at about the same age, many thousands of dollars of medical treatment saved my life; that treatment hadn't been invented yet in his day so he didn't have to pay for it or for the medical insurance etc.) Their landline phone had a coin slot, and they only paid when they needed to call somebody, which wasn't that often. They also didn't need a car and didn't have one.
They had an ice box instead of a refrigerator.
As my dad loves to remind me, "We didn't know we were poor." They had a home and three meals a day and a radio.
Their standard of living was very low in dollar terms.
My point is that we may be wealthier today but we feel stressed because our overhead is so much higher.
MJ writes:
HARM -
When the current formulation of "core CPI" starts to rise above the Fed's "comfort zone", they just hedonically adjust it..."
This whole thing goes back to the clinton administration. The CPI was adjusted to reflect no "hedonism", ie, when steak goes up, hamberger will do and we price hamburger....because people who demand steak are headonists!! History, history, read about the clinton years. Real inflation rates have been over 7% for years.
MJ -
Forgot to add this one:
Shadow Government Statistics - Home Page
and of course you could go read about hedonic adjustments at bls.gov, but that is guaranteed to make your head hurt.
TIPS are a smart move for tax-free accounts! After taxes, not so much.
TIILX, in particular has done amazingly. Up 15% YOY.
ZackAttack,
Of course the $/Y started heading at ~1PM.
Cheers,
"Unlike Consumers, Companies Are Piling Up Cash"
...smells to me like a setup for increased wage demands, slowdown or not.
O-Joe,
When we're at 1200 in 3 months, do you promise to come back and admit you were wrong?
I absolutely will. That would mean my model is trash and I'd be the first to admit it. That said after a sharp rallye I expect a sideways move for some months, to be followed by another excellent rallye this year. New ATHs this year are a given.
O-Joe
Inflation will spiral out of control: gas will easily hit $4 a gallon and stay above for a good while, if not forever. Food will become very costly; people will go hungry.
The Fed will just ignore all this and create a new core inflation index consisting of nothing but flat-panel TV's and foreclosed homes. Inflation expections will be contained!
We'll all be dirt poor, but the rich will be happy, the Dow will go up 10% a year (even as inflation is 20%+ a year), and all will be well.
Argh!
Or will that just be another blip in your 100 year forecast that the S&P will be higher in 2020 than it is today?
dunham
In 2020 I'll be short the market.
O-Joe
in response to: "When we're at 1200 in 3 months, do you promise to come back and admit you were wrong?"
Optimistic Joe said: "I absolutely will. That would mean my model is trash and I'd be the first to admit it..."
This is why I don't run off and hide, either. If my recession model gets it wrong, I learn something new and valuable.
It'll be interesting to see if anyone else here learns anything new and valuable if there isn't a recession.
S.
This is your story here IMHO:
^TNX: Basic Chart for 10-YEAR TREASURY NOTE - Yahoo! Finance
10 year Treasury is moving lower and The Fed is trying to push up the 30
I wanted to sell my TIPs position today (I manage a fixed income portfolio for a living) but the Treasury market puked right as I was trying to sell them.
Commodities look played out to me, and I think TIPs are very expensive at these levels.
My point is that we may be wealthier today but we feel stressed because our overhead is so much higher.
John Stark
A lot of what we buy today (as a society) are services and they never seem to get paid off; another day another fee or another Sir Charge. Products are just baskets of services. And don't the marketers know that!
setup for increased wage demands
you can demand all you want but when 3 people are willing to work your job for less, u r f'd.
The recession would appear inevitable. Whether the stock market follows or not is the bigger question.
We blew through significant support levels intra-day today, only to rally back above them in the last 1.5 hours.
Who knows what happens from here.
One more point: grandma and grandpa did't have to cover much in the way of interest payments. Credit cards hadn't been invented yet either. Does somebody remember what percentage of the average modern American's income goes to paying interest? It's a lot.
So maybe we are paying less for goods imported from countries with cheap labor, but we buy so much that we have to borrow money to do it, and the interest goes to the financial services class instead of to factory workers--and maybe we don't come out ahead under free trade after all? Just asking.
Nemo | 03.04.08 - 3:10 pm |
Thanks to you and to calculated risk. I'll pay you a drink (Martini dry or whichever you want) when you'll come here in Milan.
My personal experience is that prices are pretty flat--little to no inflation. My big expense is rent (Reno, NV). Up about 3%/year for the past six years. Lots of vacancies starting late last year, so I don't expect any rent increases this year. I don't own a car, but I take several long flights a year for vacations to Europe and Latin America. Because of the power of the internet to allow comparison shopping, I'm see little increase in airfare, despite the huge rise in gas. For example, I paid $651 for a round trip to Madrid back in spring 2006, but I'm paying $627 for a similar round trip this spring 2008. My food costs aren't going up much. The cable company is trying to gouge me for internet service, but guess what? The apartment complex is now offering free wireless (probably because they want to fill all those vacancies) so I may just drop the cable internet altogether. Cost of clothing is a joke these days. Ditto for computers--I helped a technophobic friend buy a computer back in December for $475. Again, using the internet to comparison shop makes it possible to make huge savings. I still visit a dentist in San Francisco. His prices are up, but then the technology really is better today than in the past (hedonics is a reality here) with the result that I'm spending more on cleaning, which is cheap, but probably won't be spending much on repairs, which is expensive. I don't get sick so my medical expenses are zero. I educate myself by reading books rather than paying tuition. When I'm finished with the books, I resell on amazon.com. Again, my costs are dropping due to the internet. The only place I'm being hit really hard is the dollar to euro exchange rate, since I spent 3 to 6 months a year in Europe. But I can adjust to that by staying in southern rather than northern Europe this year. Bottom line is that my expense have been declining every year since I retired in 2000, and yet my standard of living is getting better. The secret is that I am highly flexible and take advantage of modern technology.
My impression is that people who say their personal cost of living is going up 7% a year are the opposite of me. They insist on living on the coasts instead of fly-over country, despite the fact that modern telecommuniations and delivery services has made the world a much smaller place. They insist on paying tuition instead of self-educating using computers and books ordered from Amazon. They don't take advantage of the internet to save lots of money on purchases. They allow themselves to get sick from stress and then run up huge medical bills trying to get well again. They own cars instead of taking a lower paying job which allows them to live near where they work and therefore walk everywhere. Etc, etc.
Debt is not wealth.
Bumper sticker worthy.
There are three numbers: CPI (which is what TIPS pay on), "core" CPI, and in some sense what the "real" inflation rate is, which probably varies a lot by age and income bracket. I agree with others that CPI is way below "real" inflation, however measured.
On another subject, I've seen many claims that the 2-year Treasury rate is easily manipulated by the Fed, but not the 10-year rate. Why should this be so?
"Are we? Back in '71 a one breadwinner family could afford to buy a house. Now you need two breadwinners and families are wondering if they should start putting the kids to work next...
bofiz
If this is true, why was the homeownership-rate so much lower in 1971 compared to today? It should have been 120% in 1971 according to your theory.
O-Joe"
The correlation between the rate of homeownership and wealth isn't that linear. Only recently has it been possible to afford a house with less downpayment than before. IIRC, the avg downpayment required in the '60s-'70s was something like 25-30%. just before the Great Depression, it was 50% (!)
Moreover, getting credit was much more tied to race, gender and all sorts of prejudices that had nothing to do with the ability to pay a mortgage.
How do you think Fair Isaac made its fortune?
BTW, in the '70s, the financial sector was much more controlled than today. Today, while it is 18% of the S&P500, it generates 41% of all earnings. Think about that for a minute. All this wealth diverted to nil, save execs and shareholders. For instance, It always amazes me to see how docile Americans are toward the credit card industry, in spite of well-documented egregious behavior that borders on fraud. These asshats are siphoning so much more money than ever before, while failing to produce anything meaningful for the common good, let alone useful investments. They view their customers as pockets to be picked. All this wealth was AVAILABLE to people in the '70s. Now, guess where the hell it is going.
This country used to be the Home of Brave, Land of the Free. Now, it looks more like the Home of the Slave, Land of the Fee.
Siv writes: "All you shorts can breathe a sigh of relief."
Not short ABK. May consider it once the deal is announced.
My objection is to the way the company is leaking to the press. This is now the second time CNBC has acted as ABK's publicist in the last hour of trading.
Whenever material news is about to be announced, trading must be halted. These are the rules of the exchange.
It would be hypocritical for ABK longs to decry Mr. Ackman's very public position as "market manipulation" and turn a blind eye to this.
And what about that futures buying that preceded this news by ~15 - 20 minutes? Do you think that will ever be prosecuted?
For all the bluff and bluster occurring, no one seems to be paying attention to the fact that the ARS market is getting worse, not better, with 70% of offerings failing last week.
ZACK ATTACK: "Not short ABK. May consider it once the deal is announced. "
Go ahead... I'm long and although you may make some money, your risk-reward is tenuous unless you think run-off value near zero is certain.
ZACK: "My objection is to the way the company is leaking to the press. This is now the second time CNBC has acted as ABK's publicist in the last hour of trading. "
Well, a few months ago, it was the opposite. How about all those lame bogus rumours (mostly through shorts) that caused the stock price to collapse? In any case, this happens all the time. None of this is news. It's surprising to me that it is actually moving the market...
ZACK: "Whenever material news is about to be announced, trading must be halted. These are the rules of the exchange. "
These are unsubstantiated rumours.
ZACK: "It would be hypocritical for ABK longs to decry Mr. Ackman's very public position as "market manipulation" and turn a blind eye to this. "
I have no problem with Ackman. He is an activist investor so it is to be expected that he'll be sending letters, trying to get on TV, and so on. Where I have an issue is with him representing in the industry in government hearnings and the like. He doesn't work in the industry; he isn't a policyholder; he isn't an owner.
ZACK: "For all the bluff and bluster occurring, no one seems to be paying attention to the fact that the ARS market is getting worse, not better, with 70% of offerings failing last week."
As an Ambac long, that is irrelevant to me. I think the ARS market will be dead within an year. The monoline situation doesn't help matters there but that market is collapsing under its own problems (namely, brokers/banks/etc don't have enough capital to throw around on likely low-margin ARS market).
Municipalities and other debt issuers aren't going to like it but they also have to get used to the fact that insurance costs will be higher in the future.
TIPS spreads are really exploding today. They have widened by 6 basis points in the 10 year sector which is a very unusual move in a market where movement is generally a basis point or so in either direction.As we speak the spread rests at 256 basis points.
The currency is plumbing new lows,commodities are racing to higher prices and the central bank is expected to vigorously ease policy. Not exactly a backdrop in which investors will desire to own 10 year Treasuries in the 3 .60s.