Sunday, January 17, 2010

Bond Market Investors Remain Inflation Skeptics

Greg Mankiw writes about inflation in the NY Times:

"Is galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple."

Mankiw ends with this somewhat non-committal conclusion:

"Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era."

MP: The top chart shows 10-year yields on Treasury notes back to the mid-1950s, and like the current 30-year yields that Mankiw mentions, are not showing the classic, inflation-inflated high nominal bond yields of the late 1970s and early 1980s that reflected both: a) high actual inflation, and b) rising expectations of future inflation. The bottom chart shows that annual M2 money supply growth just fell to 1.9% in early January, the first time since mid-1995 that M2 growth has been below 2%. Like the bond market investors (and maybe Mankiw?), I'm still an inflation skeptic.


At 1/17/2010 10:22 AM, Blogger PeakTrader said...

I heard, it may take another two years of capital destruction and private goods destruction to accelerate inflation.

At 1/17/2010 11:38 AM, Blogger Marko said...

I always find this confusing. Simple question - if Mark is right, is TBT a good investment?

TBT is an UltraShort 20+ Year Treasury (the Fund), that seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index (the Index).

Put another way, does this means bonds are going up or down?

At 1/17/2010 12:31 PM, Anonymous Anonymous said...

I have yet to see you post a chart that has supply AND demand of US currency. You are posting just half the picture. This is the same reason why monetarism failed in the 80's and why Keynesian always fail but politicians and economists don't care, they love the Mercantilism roots of manipulating money to force individuals to take action they wouldn't do in a free economy.

At 1/17/2010 12:35 PM, Anonymous American Delight said...

Any sensible portfolio would include at least a few hedges against inflation.

At 1/17/2010 1:29 PM, Anonymous gettingrational said...

Bill Gross, manager of PIMCO's Total Return Fund, says Fed is "fed up" with financing most of the 1.5 trillion dollar U.S. deficit. This will drive up interest rates according to Mr. Gross.

BTW, PIMCO Total Return has just passed one trillion dollars in ivestible funds!

At 1/17/2010 1:34 PM, Anonymous morganovich said...


TBT is not a long term instrument. the rebalancings make it (and other levered etfs) very difficult to assess long term as you are not making apples to apples price comparisons. compare the TBT chart to the 10 year bond yield chart (us10yy) and you'll see what i mean.

tbt is also pegged to bond yield, not bond price, so you are getting a great deal more than 200% leverage would give you in a straight bond short.

levered ETFs are really just short term trading instruments. if you call a short term trend change with one, they pay off big. but they are not terribly useful as long term and i'd recommend avoiding them.

At 1/17/2010 2:12 PM, Anonymous InfoManiac said...

I'm not not too bright when it comes to understand economics. I read an article this morning (about unemployment and the economy) which scared the daylights out of me.

Can others read it then come back here and let me know if that article makes sense?

At 1/17/2010 2:12 PM, Anonymous Anonymous said...

Check out Brian Wesbury's research over at First Trust. He's saying you shouldn't be looking at inflation stats on a Y-O-Y basis - you need to be looking at them on a M-O-M basis. Inflation is just starting to rear its ugly head and will start showing up in the economy in the next year or two if rates aren't raised soon.

At 1/17/2010 2:23 PM, Anonymous Norman said...

To under stand Mankiw, to understand why he's always so ambiguous you need to know that he's thinking about the questions he'd have to answer at his Senate Federal Reserve Board chairmanship hearings.

You'll always hear both sides and hardly ever a conclusion. Thus, Mankiw is a waste of time to read.

At 1/17/2010 3:04 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

Labor is dead.
Food and manufactured goods get cheaper all the time (except for military hardware).
Rents are soft in retail, office and industrial-warehouse. There is deflation, not inflation there.
Only health care and military services get more expensive.
In wash, no inflation.
Next story.

At 1/17/2010 5:11 PM, Blogger KO said...

PIMCO is also opening an equity group if that tells you how they're hedging their bets.

Look at El-Erian's timing in going to manage the Harvard endowment for 2 years with stellar returns, then going back to Pimco with a promotion right when bonds were the place to be. He may have been lucky in the timing, but I think both Gross and El-Erian have very sane long term views.

At 1/17/2010 10:22 PM, Blogger bobble said...

MP:"I'm still an inflation skeptic."

me too.

M3 growth is negative.

same for commercial bank credit growth.


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