Yesterday we looked at 4 Major Secular Bear Markets.
Several people asked for an inflation adjusted version. Thanks to Lance Roberts of Street Talk Advisors, you will find that below:
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Source:
Gary Shilling Says U.S. Faces Deflation
Bloomberg, September 28, 2011
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Michael Gayed observes:
“When the TIP/IEF price ratio (Inflation-Protection/Nominal-No-Inflation-Protection) trends higher, it means bond market is swinging towards increased inflation expectations. When the ratio is trending down, bond market is favoring deflation through outperformance of Nominal bonds.
Inflation hedge tends to be equities: risk-on. Deflation hedge tends to be nominal bonds: risk-off. In nearly all cases, the ratio moved ahead of the stock market (mid-2008 downtrend before Lehman Crash, November 2008 ratio low before March 2009, Europe Problems April 2010 before Flash Crash/Correction, August 2010 QE2 inflation bets and stock market rally, decline for most of 2011 before August Summer Plunge). Curious to see that the trend now still appears lower even with QE3 on the horizon, no? May be suggesting bond market doesn’t believe QE3 will cause inflation and ultimately work.
If that’s the case, the stock market may be in for a rude awakening…”
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Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder.
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
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Greece may seem a long way from Newport Beach, California. Well, it is. But, we live in the global village, or some other dim construction. In his June 16, 2011, edition of The Credit Strategist, Michael Lewitt explained “the interconnected nature of global financial markets render Europe’s problems the world’s problems…. [T]here is no longer any periphery.”
Lewitt also writes: “The list of interconnections goes on and on….[G]lobal regulators… have no real sense of what type of contagion effect would occur if Greece were to default. No doubt they believe it is significant enough that they are willing to do virtually anything humanly possible to prevent this scenario from unfolding.”
That is demonstrably correct. Since 2007, global bureaucrats have broken any law that has hindered their attempts to ward off our inevitable reckoning. Attempts to prevent a euro eruption have become preposterous. The European Central Bank (ECB) is clearly in extremis.
The interconnections that start with Greece and the ECB wind their way through the European, then U.S., banking systems, government bond yields, and the dollar. Extrapolating the script (“that they are willing to do virtually anything humanly possible…”), the ECB will print euros like never before (and never after, since its credibility will be nil.) Doing so, the ECB will enlighten the perplexed as to the central, financial tendency since 2007: the proportion of “money good” financial paper to the expanding universe of IOU’s is dwindling. As the percentage of worthy paper declines, the relative affection for government issues that would otherwise fail a screen test are, instead, improving. Specifically, the deluge of euros will, all else being equal (an escape clause of Greenspanian inspiration), drive U.S. Treasury yields down.
A week does not go by without the ECB reducing its standards of collateral. The cost is not only its credibility as a central bank (which, in any case, it is not) but in the composition of its deteriorating balance sheet.
To make matters worse, Greece is the smallest economy among the impoverished PIIGS: Portugal, Ireland, Italy, Greece, and Spain. Since others will probably follow Greece, the current impasse is all the more discouraging. The Greek government cannot meet its July interest payment obligations to banks, central and commercial. It can no longer borrow from banks or in the bond markets. (This is also true for Ireland and Portugal, and possibly others.) The Greek government has bills and salaries to pay. The ECB is doing its all to avoid default. This presents a dilemma: the further it goes in preventing (in fact: forestalling) a default by the Greek government, the more it compromises its legitimacy by breaking its own rules and ruining its balance sheet. A credit-sensitive bystander would say the ECB’s legitimacy and balance sheet are cases of the emperor wearing no clothes but conventional opinion being afraid to state the obvious.
Remembering that the euro is an experiment – a currency that is only 13-year-old and not issued by a sovereign government – the European Central Bank should, above all, adhere to the highest standards of integrity.
Jonathan Miller of Matrix RE released a rental study of Manhattan real estate:
Last week we released our rental study and the consensus was that the rental market was strong, better than the sales market (and expensive). So I thought I’d present the past 20 years and look at some of the peaks. When adjusted for inflation, the perspective of when peak was actually changes quite a bit.
Curbed has argued Manhattan rents are rising, but as Jonathan points out, that is before you account for inflation. Back out CPI price increases, and you end up with a different view of NYC rental prices. As Jonathan notes, “adjusted for inflation – we have a long we to go before we see actual peak numbers.”
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As I believe there is a tremendous amount of revisionist history going on surrounding the Reagan era as it relates to economic and fiscal policy, I’ve begun to research available online archives, including the The American Presidency Project. One never knows what one will find upon diving into a research project, but surprises are always to be expected. And so today’s tidbit:
It appears the Gipper would tell all of today’s inflationistas to relax and stop running around with their hair on fire:
Surges of inflation are not unusual in history; there were price explosions after both World Wars, as well as smaller outbursts in the 1920s and late 1930s. Therefore, in spite of the role played by food and energy prices in recent inflationary outbursts, it is misleading to concentrate on these transitory factors as fundamental causes of the inflationary bias in the American economy.
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
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DOW JONES NEWSWIRES – June 22, 2011 –
“Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.
“According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.
“Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.”
Social Security payments must be reduced. Promises were made – by lawmakers – that are beyond the government’s (the taxpayer’s) ability to pay. The latest scheme is a ploy by cowardly elected representatives who surreptitiously cut benefits for those most in need: the old and the frail.
First, the logic is indefensible: Gasoline prices rise; higher prices are unaffordable; people drive less; less gasoline is consumed; the Bureau of Labor Statistics (BLS) reduces the weighting of gasoline in the Consumer Price Index (CPI) calculation; this cuts gasoline’s (and, other products that are rising in price) influence on the CPI; the Consumer Price Index falls. Ergo, Chairman Ben S. Bernanke, in a future and “dreary” press conference (the adjective used by the Wall Street Journal to describe his session with reporters on June 22, 2011), states that inflation is falling.
Second, as mentioned above, this is hidden from public view. The official, government CPI which is used to increase Social Security benefits (e.g., if the CPI rises by 2.0%, next year’s Social Security checks go up 2.0%), will understate costs, reduce the ability to buy gas further, which will reduce gasoline’s proportion in the CPI even more.
By the way, this also reduces the inflation credited to owners of TIPS, or TIIS (Treasury Inflation-Protected Securities). The change reduces the value of TIPS.
It would be interesting to know if the amount spent on gasoline actually falls. The amount of gas (in gallons) might be less, but the increase in price could mean the dollars spent are proportionately greater to total costs. You can be sure the BLS has devised a method that has eliminated the possibility, which leads to:
Third, this latest scam is part of a long-running ploy to reduce Social Security benefits without inconveniencing politicians. Chapter 12 of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession is the history of Social Security and inflation manipulations between 1983 and the mid-1990s. From Alan Greenspan’s 1983 Social Security Commission through Michael Boskin’s contorted changes to the CPI measurement (1995), Social Security payments have already been reduced well below what they should be. One estimate, by Richard Karn, author of Emerging Trends Report, calculates that Social Security checks would have been 43% higher by 2006 if not for the chicanery of the scandalous Boskin Commission, a decade before.
Fourth, this latest effort shows the talk about reducing the deficit, cutting spending, and reaching an agreement on the debt ceiling is exactly that – talk. (As if you needed to be told.) Lawmakers may pat themselves on the back for this gift from the BLS, but a $220 billion spending cut is a drop in the ocean (and, probably a projection over the next 20 or 50 years). Social Security needs to be addressed by increasing, and by a substantial amount, the age at which retirement benefits can first be collected. Starving the old and the frail is not only a sick policy, it is also camouflage to win the next election.
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Previously:
Sheehan on Michael Boskin (January 2010)
Why Michael Boskin Deserves Our Contempt (January 2010)
“AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers…”
-Greg Mankiw
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This week’s Sunday NYT Business section has an interesting column from Greg Mankiw: If You Have The Answers, Tell Me.
Well, Professor Mankiw, you asked. Rather than just give you the answers, I want to start by suggesting you are looking in the wrong places. That wrong place, is the field of economics.
Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus. Frequently emotional, occasionally self-destructive, often times erratic, humans only rarely exhibit the traits that economics ascribe to them. If the study of economics begins with such a shaky foundation, is it any wonder they get so much wrong?
Back to the questions Prof Mankiw asked about: Let’s see if we can’t give you a shove in the right direction (I have to warn you, I doubt you are going to like the answers):
1) How long will it take for the economy’s wounds to heal?
Most economists seem to focus on the post WWII economic cycles. This is the wrong approach. The most recent contraction was quantitatively different than the typical recession/recovery cycles. To get a better grasp as to what to expect, turn to history and statistical analysis instead of economics.
That is essentially what Reinhart & Rogoff did. In their December 19, 2008 paper, they showed historically, “the aftermath of banking crises is associated with profound declines in output and employment.” They had identified this phenomena 3 years ago, while the collapse was still unfolding. Their book, This Time Is Different: Eight Centuries of Financial Folly, expanded their prior paper on credit-crisis recessions.
2) How long will inflation expectations remain anchored?
Like the premature New York Journal obituary for Mark Twain, reports of inflation expectations have been greatly exaggerated. Human beings cannot forecast their own behaviors, let alone act on their expectations for inflation. Indeed, the only time most people even notice inflation is AFTER prices have skyrocketed — not before. The Recency Effect, the tendency to over-emphasize a single data point of what has just occurred rather than focus on long term series or trends –THAT is what drives behavior.
Friedman’s belief that people were engaging in immediate behavior based upon their momentary consideration of long term inflation reveal he hadn’t a clue as to how actual human beings operated in the real world. No wonder he foolishly believed we could get rid of the FDA — who needed Food inspections anyway? And the marketplace will help determine what Drugs will and should sell.
As Prof Mankiw writes, this “theory is now textbook economics, and is at the heart of Federal Reserve policy.” Which perhaps goes a long way in explaining why the Fed gets so much wrong in terms of recognizing inflation on a timely basis.
3) How long will the bond market trust the United States?
This is the most revealing question, because it reveals some biases that Professor Mankiw labors under.
He writes: “A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms.” This must be a change of heart for the professor, given his role as Chairman of the Council of Economic Advisors from 2003-05. He never said much — at least publicly — about this “unsustainable fiscal trajectory” when his boss was busy turning a surplus into a “huge budget deficit.”
From the CBO to the GAO, every honest broker who has analyzed the situation has observed that the Bush tax cuts, the war of choice in Iraq, the prescription drug entitlement were the biggest factors pre-2008 in the runaway budget. Add to that the collapse of revenues brought about by the financial crisis, and you have the makings of a awful balance sheet.
Ironically, this is the one question Prof Mankiw asked that COULD be solved by economics. I do not know why he chose to ignore the answer. Perhaps it might be because he did not care for the answer economics gave.
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One last comment: Prof Mankiw noted that “It is easier to attract with certainties than with equivocation.” Do not overlook a key underlying issue: The causal factor here is that the public wants certitude, regardless of how erroneous. Study after study has revealed that a “Frequently wrong, never in doubt” commentator is much preferred by the majority of viewers/readers over an intelligent commentator honestly discussing the unknowable future in terms of what is unknown and unknowable.
Probabilistic nuance versus strongly confident (but wrong)? The public chooses the latter almost every time.
You can see this not only in the ratings for various shows, but in the public’s investing performance. Its about as good as their favorite pundits are.
Which is to say, not very . . .
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Source:
If You Have the Answers, Tell Me
N. GREGORY MANKIW
NYT, May 7, 2011
http://www.nytimes.com/2011/05/08/business/economy/08view.html
Flashback to June 2008 (only three short years ago):
Headline CPI was running very close to 5.0 percent. The Fed funds rate was at 2.0 percent. Brent crude was $132/barrel. The Fed’s June 2008 minutes mentioned the word “inflation” 110 times (“deflation” and “disinflation” combined: zero), and also contained this caveat (emphasis mine):
With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed, one member thought that policy should be firmed at this meeting.
And CNBC reported (in May) that: “One-year inflation expectations surged to 5.2 percent — their highest since February 1982 — from 4.8 percent in April.”
Fast forward one year:
Headline CPI was -1.2 percent (so much for the public’s ability to foretell inflation trends, but who didn’t know that?). The Fed funds rate had been lowered to its current range of 0.00 – 0.25 percent. Brent crude was $69/barrel. The Fed minutes were, amazingly, discussing “reduced concerns about deflation.”
Current day:
Bernanke’s prepared remarks and Q&A on Wednesday mentioned the word “inflation” 82 times. (The word “deflation”: twice.) It is unfortunate that “inflation” was far and away the dominant theme on Wednesday, swamping “jobs,” “employment,” and “unemployment” which, in my opinion, should have been the focus.
Of course, no two business cycles or economic environments are exactly the same, but as I pointed out recently here, it is unlikely that we will enter a period of sustained high inflation absent a more taut labor market, and that, unfortunately, still seems a ways off.
Dr. Ed Yardeni eloquently delivers our Quote of the Day on inflation, jobs, and the Fed:
“The Fed is still your friend if you are invested in cyclical stocks , commodities, and foreign currencies. If you eat food and run your car on gasoline, the Fed will continue to hurt you. If you are looking for a job, you may be wondering why it is still so hard to find ond despite all the money the Fed has spent so far on QE2.0. If you are retired and living on interest from your CDs, then you are getting really squeezed between rising food and fuel prices and the Fed’s zero interest rate policy. In other words, the Fed seems to be doing everything to widen the gap between the Haves and Have Nots than to lower unemployment and boost economic growth, which remains “moderate” according to yesterday’s FOMC statement.”
Hat tip Doug Kass
"Dollar depreciation leads to higher inflation and ultimately forces foreign creditors to question their rationale and indeed their sanity for continuing purchases of U.S. Treasuries." -Bill Gross
Signs continue that European markets are getting tired. The Spanish and Italian stock markets, big beneficiaries of the sharp decline in their bond yields over the past few months are falling to the lowest since Feb 1. The European bank index is at a 1 1/2 week low after earnings reports from Commerzbank and Credit Ag (RBS bouncing although reporting weaker than expected earnings) were disappointing. This market action is in spite of the German IFO business confidence figure which rose to a 7 month high coming in a touch above expectations and Italian consumer confidence which bounced more than...
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