Posts filed under “Inflation”

What Does Inflation Say About Risk On/Off?

click for larger chart


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…”



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.

Category: Inflation, Quantitative, Trading

The Euro and You

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.


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.

Read More

Category: Currency, Inflation, Think Tank

Manhattan Rentals (Inflation Adjusted)

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…Read More

Category: Digital Media, Inflation, Real Estate

Fade the Inflation Hysteria: Gipper Edition

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…Read More

Category: Inflation, Taxes and Policy

Sick Minds

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…Read More

Category: Inflation, Really, really bad calls, Think Tank

To Find the Answers, Look Beyond Economics . . .

“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…Read More

Category: Economy, Inflation, Psychology, Taxes and Policy

Short Memories (Fade the Inflation Hysteria, II)

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…Read More

Category: Contrary Indicators, Cycles, Data Analysis, Economy, Federal Reserve, Inflation

Yardeni: Is the Fed Your Friend? It Depends . . .

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…Read More

Category: Economy, Employment, Federal Reserve, Inflation

Why Technology Price Drops Are Not Proof of Deflation

Plummeting prices of LCD screens, via this month’s Wired. > With everyone so focused on Inflation, I (naturally) want to discuss Deflation. Or rather, the lack of it in Technology prices. Instead, lets  look at the Recency Effect and the life cycles of new tech products. Technology poses a special challenge to the hordes of…Read More

Category: Inflation, Markets, Really, really bad calls, Technology

Comparing Prices: 2011 vs 2010

Inflation is sure to be part of the discussion at the press conference with Chairman Bernanke today, which gives us yet another excuse to look at some chart porn. Have a gander at the first graphic — its from the NYT, whose graphic department is usually pretty awesome: > The original click for larger graphic…Read More

Category: Digital Media, Financial Press, Inflation