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June 27, 2011
PIMCO: The Goldilocks Age Of Strong Growth And Weak Inflation Is Over
Long-term, I absolutely believe that the Goldilocks combination of strong growth and weak inflation is over. We'll either have less growth, higher inflation, or both. I do not have a good handle on the weighting between growth and inflation though. That's why I have owned inflation protected treasuries and I continue to own them.
From Mihir Worah:
But let me touch upon one other asset class that we feel is very important: inflation-linked bonds. In the U.S., for example, they have the same credit risk as regular U.S. Treasuries, but the interest payments and principal are linked to the rate of inflation. To be sure, there is currently a valuation issue with inflation-linked bonds as real rates on such bonds are low. But we believe those rates are likely to stay low – one way for developed markets to escape from their debt overhang is by artificially keeping real rates low, either through regulation or through higher inflation via inflationary/low-rate policies. So in our view, inflation-linked bonds have the potential to hold their value while serving as a cornerstone of an inflation-hedging strategy.
I too believe that real rates will remain low. I've been predicting the death of real yields since starting this blog (and long before it). TIPS are therefore not just my cornerstone. They are nearly my entire stone.
I have been investing in TIPS and I-Bonds since 2000. I don't think it will work out as well in the future as it has in the past, but I do think it will continue to protect me. If nothing else, if I hold TIPS until maturity at least I won't require a greater fool at any point in the process.
By owning TIPS and I-Bonds, I bet that one of the following five conditions would be met and I continue to bet that way.
1. Moderate growth with high inflation.
2. Low growth with moderate inflation.
3. Zero growth with low inflation.
4. Low negative growth with zero inflation.
5. Moderate negative growth with actual deflation.
In other words, I don't see TIPS as an inflation bet. I can't predict inflation with any accuracy. It depends on too many factors that are outside of my control. Right or wrong, I did think I could predict inflation rising compared to growth though (either because inflation rises, growth falls, or both).
As a side note, I think the Fed is attempting #2 from my list. For the most part, we've averaged #2 over the past decade. We've had low growth with moderate inflation (with episodes of #1 through #5 from the list). That's about the best they can do though. Although some may feel the Fed plays the role of a deity, they can no more create prosperity out of thin air than they can transform dollars (water) into oil (wine).
This is not investment advice.
See Also:
Real Yield Infection (Musical Tributes)
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
11 hours ago
7 comments:
The winter of the K-wave started in 2000, and natural credit processes would have given us low growth and deflation without Fed intervention.
Instead, the Fed intervention gave us moderate growth and the housing bubble that got us to 2007. Then, the natural took over again, and the most massive intervention in history hasn't been able to stop it. It got us low growth and a burst of moderate inflation, but that is starting to ebb. Including private debt, the US is still worse off than in 1929 and worse than after WW2.
Until bad credit is washed from the system, I don't believe we will see much if any growth. In ZH parlance, debt bitchez.
Short of some kind of Congressional jubilee, I think the US will wallow in the sea of debt. The private sector will pay down debt while the Fed tries to monetize bad debts and new government bond issuance up to the point of political rejection. If they try to push past that point, we might have some kind bond market black swan or divide by zero event (the result of this operation is undefined).
word verification: cries
May I introduce you to a fellow stagflationist?
http://www.moneyweek.com/news-and-charts/economics/uk/the-uk-can-learn-from-greeces-tragic-loss-of-faith-54327
Although some may feel the Fed plays the role of a deity, they can no more create prosperity out of thin air than they can transform dollars (water) into oil (wine).
Stag,
That's the fundamental point. We've had financial and eCONomic manipulation for decades and look at the results. The majority have been duped, looted and impoverished with debt. Prudence and industriousness were forced to compete with financial fraud in a (global) race to debt impoverishment.
Anyone that believes that further manipulations will lead to a good outcome needs to have their head examined. The system is now run by and for financial thieves. The knowledge of economic stewardship has been lost - replaced by a a perverse system of extractive and usurious finance which is euphemistically called "innovation".
Pyramiding eCONomic wrong doings (to avoid the inevitable negative CONsequences) will not set things right. NFW! That's just not the way things work.
The damage has been done.
Mark,
I too argued that QE2 would lead to lower intermediate and long term rates. I was told my thinking was wrong by the esteemed Mayor Bill Woolsey over at Macro and Other Market Musings back in Dec 2010. There was in fact a slight uptick in rates right after the announcement of QE2, but since then real rates have been racing to a no end in sight, bottom. Excess demand for money coupled with a severe output gap and high unemployment has been the main driver of this, in my opinion. Talk of further reductions in spending by federal and state governments will keep the ball rolling down hill. I know you are not a proponent of inflationary measures to re-ignite the economy. The fact of the matter is that without higher levels of interest and additional spending by private or public sectors, this economy is stuck on red. Banks are content to sit on reserves and take the vig, rather than put it at risk at such low rates of return. There isn't enough risk premium to take the plunge. Creating speculative bubbles in commodities is where the action is right now.
mab writes:
"We've had financial and eCONomic manipulation for decades and look at the results... Anyone that believes that further manipulations will lead to a good outcome needs to have their head examined... The knowledge of economic stewardship has been lost... Pyramiding eCONomic wrong doings (to avoid the inevitable negative CONsequences) will not set things right."
I agree and disagree. Certainly the knowledge of economic stewardship has been lost. Certainly the people in charge do not know how to fix the problem. Nor do their advisors. Nor do their critics.
Still, if they *did* understand the problem and if they *did* know how to fix the problem, then "further manipulations" would be exactly what is needed.
Meanwhile, the only needful thing is to understand the problem.
ArtS
ArtS,
The "problem" (as I see it) is that the privilege of credit creation has been abused. Credit has increasingly been used to extract wealth rather than create wealth.
To make matters worse, credit was increasingly used for consumption.
Productive credit produces wages and GDP. Unproductive credit produces debt with no corresponding economic output - hence the rising debt to GDP ratio.
Here's something to keep in mind. CONtrary to popular propaganda, the Fed does not have a dual mandate. The Fed has a singular mandate to control the growth of monetary and credit aggregates commensurate with long term potential growth (~ 3% by the Fed's own projections!).
Like I keep saying, the system is run by and for the benefit of financial thieves (and they own the legislative process). Further manipulation by the thieves will only make matters worse.
All,
I've compiled your quotes (or quotes from your links).
* ...wallow...
* So what next? More of the same.
* Anyone that believes that further manipulations will lead to a good outcome...
* ...this economy is stuck on red.
* Certainly the people in charge do not know how to fix the problem.
* Further manipulation by the thieves will only make matters worse.
I'm glad we were all able to collaborate on this intellectual endeavor. I think we've really accomplished something special here, lol. Sigh.
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