Well, Scott Grannis forgot his premise might be wrong: The market does not have an outlook for 2 percent to 3 percent inflation.The market is anticipating inflation sub-2 percent, or even a Japan scenario (perma-deflation recession). Any number of solons have been crying inflation, from Bill Gross to Richard Fisher. And they have been consistently wrong. In fact, the CPI may overstate true inflation, and the market is adjusting for that as well. As pointed by Krugman and Carpe Diem (Perry), inflation looks like it is again turning the corner--downward. Possibly to deflation again.Yesteryear's hoary shibboleths about inflation and interest rates may no longer apply.
Thanks to Mr. Grannis for this awesome post. The treasury market indeed is in a state of irrational exuberance. As Mr. Greenspan's famous 1996 remarks prove, it can stay irrational longer than most participants expect. Eventually, it will return to normal and that means higher rates. BTW the futures markts show that people expect the FED to raise rates earlier than they stated the last time.
This link from Cleveland Fed ten year inflation forecast.Cleveland Fed Estimates of Inflation ExpectationsHint: Less than you'd think. We all remember the late 70's, and keep looking for it to repeat.
According to Carpe Diem, Dr Perry, Cleveland Fed, expected inflation is the lowest in 30 years.
Expected inflation according to the pricing of TIPS and Treasuries is consistent with past experience. I don't know of any shortcomings in this. The 5-yr, 5-yr forward expected inflation rate today is 2.5%. The 10-yr expected inflation rate based on 10-yr TIPS and 10-yr Treasuries is about 2.3%.
Sir, As you keep highlighting inflation is an ongoing problem. The Fed cynically believes it can manage this damaging, stealth inflation by conveniently switching its favorite metric. They started with a sub 2% core PCE and have slowly switched to a headline PCE north of 2%. A half dead real estate market is giving them cover for now but that may not last much longer. The Fed's stated policy is to inflate. Why so many deny that reality is beyond me.
Long term chart of Tips based 10 year inflation expectations http://bit.ly/zqrtgjAnyone claiming that those expectations are at any kind of historic low is misrepresenting reality.
Scott --Just out of curiosity, how much more divergence between bond yields and equities (or some other measure of bond exuberance) would you have to see before you would be tempted to take a short position on treasuries?
I use a relative strength model between TLT and TBT to tell me when to short treasuries. It has been long TLT since 4/26/11. Thereare lot of investors expecting the great rise of treasury yields and they have slaughtered over the last 3 years. TBT has lost 57% over the last 3 years. I agree itstime will come but would rather usemomentum indicators to tell me on this trade.
Interesting post. However, I suspect the inflation story is fairly simple: no serious inflation without wage growth. Plus, the KISS rule is not in effect. The global economy is more complex, uncertain, and fraught with danger. Proceed with caution. Treasuries remain popular because they are simple, predictable.
The good news is that the ongoing Main Street depression is an investment opportunity for long-term investors -- high quality (i.e., occupied) real estate can be purchased at a deep discount assuming the offer is cash -- also, dividend-paying stocks are still on sale in the secondary markets -- now is the time to exploit the Main Street depression by converting cash into high quality equities -- skills are also still earning premium wages along Main Street -- whatever the outcome of the Federal macroeconomc shake-down is irrelevant as high quality equities stand to earn outstanding returns regardless of whether the economy enters deflation, inflation, or stagflation -- now is the time to think with your "Main Street hat" and to put one's "Federal hat" away for a while -- the Federalists will soon find their world at risk as dollars dry up to pay public sector workers, and to subsidize Wall Street and unionized labor manufacturing -- all signs along the Federal front are horrific with real potential for decreasing Federal budgets, defense spending, and entitlement spending -- today's "deals" are all related to the much neglected and maligned Main Street row of opportunties, which are available now at bargain basement prices -- now is the time to buy Main Street, includign products and services that cater to Main Street -- now is not the time to bank on Federal bailouts, spending, and subsidies, which are all likely to collapse in the coming years -- the best place to "take cover" now is along Main Street...
Hi Scott, I would like to re-publish your commentary on two sites that I have recently launched focused on the fixed income space. I realize that this comment will be posted on your blog - so I will not mention the name of the sites. Could you contact me via e-mail to discuss mzprosser@gmail.com.Best regards,Marc Prosser
LIPPER FUND FLOW REPORT(this includes ETFs)4th Quarter 2011 - Equity Funds Outflows of $41 BillionTaxable Bond Funds Inflows of $40.4 BillionEntire Year of 2011 -Equity Funds Outflows of $50.4 BillionTaxable Bond Fund Inflows of $178 Billion
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