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MSN Money: Market meltdown ahead?
Bond traders are also gearing up for a period of economic disappointment and price deflation -- a sign they expect a period of sub-par growth. You can see this in the ratio of inflation-protected Treasury securities vs. traditional Treasury securities. The chart above illustrates this with the iShares TIPS (TIP) and the iShares 20+ Year Treasury Bond (TLT). Translation: Inflation expectations have dropped, on growth concerns, to levels last seen in December.
This is absolutely horrible analysis. It's enough to make me want to pull my hair out.
TIP has a weighted average maturity of 9.44 years.
TLT has a weighted average maturity of 28.13 years.
One cannot determine inflation expectations by comparing the price of these two funds. It is ridiculous.
At the very least, TIP should be compared to IEF. IEF is like TLT but it has a weighted average maturity of 8.63 years. In other words, it is much more similar to TIP in maturity.
It is still an incredibly lazy and error prone way to determine the bond market's inflation expectations, but here it is.
TIP:IEF
Note that the results change and so would the conclusions. Here's why. Money has been flowing into all long-term treasury bonds. TLT is outperforming TIP because TLT has more exposure to long-term bonds. It isn't because inflation expectations are changing much.
If one is going to use the bond market to determine inflation expectations, then at least look at the bonds directly, don't use funds to do it. Further, using mismatched bond funds (of widely varying maturities) just adds that much more error. Here's a chart that compares 10 year treasuries with inflation protection to 10 year treasuries without inflation protection. It is a much more rational way to determine the bond market's inflation expectations for the next 10 years.
Spot the recent breakdown of inflation expectations and win a prize. I can't seem to see it. Money continues to flow into all treasuries due to the economic slowdown but the bond market has yet to determine if it will be deflationary. I think it will be somewhat deflationary but that's just an opinion and one not supported by the evidence contained within this chart.
The median 10 year inflation expectations have been 2.38% so far in 2011. The median 10 year inflation expectations over the entire chart have been 2.33%. The 10 year inflation expectations are 2.37% today. There's nothing to see here.
Anthony Mirhaydari's claim that "inflation expectations have dropped" among bond traders certainly isn't supported by the evidence. If he ends up being right it will be for the wrong reasons.
Source Data:
FRB: Selected Interest Rates
US Treasury: Yiled Curve Rates
7 comments:
I want to point out that I do lean deflationary in the short-term (as seen in the upper left hand corner of this blog).
It bugs me when I see horrible analysis that tries to support my case though. That's especially true when it is in the mainstream and is therefore supposedly written by experts on the subject.
Bonus thought.
Why would we even care what the bond traders think? It wasn't like they saw the deflation in 2008 ahead of time. And when they finally did see it they ended up predicting 0% inflation over the next 10 years. How's that working out so far?
We've got to stop using the rear view mirror to determine tomorrow's economic weather.
I'll start.
The economic weather of the past looks pretty good over the long-term.
The economic weather of the future is going to be filled with thunderstorms.
That's my prediction for what it is worth.
Stag,
I think if we "stay the course" and keep using the credit creation privilege to extract wealth rather than create wealth everything is going to be peachy - for the wealth extractors. *sigh*
Bonus thought. We probably shouldn't put much faith in alleged mathematical inevitabilities that are founded on outdated and inapplicable eCONomic theories about the eCONomy and money.
So many have hitched their wagons to eCONomic myths (and lies!) for so long that they just can't let go. They've spilled so much nonsensical digital ink that their egos won't allow them to change course and admit they've not only been wrong but profoundly wrong. That's how it appears to me anyway.
mab,
So many have hitched their wagons to eCONomic myths (and lies!) for so long that they just can't let go.
I think it should be called siegelsyndrome.
@ mab:
"I think if we "stay the course" and keep using the credit creation privilege to extract wealth rather than create wealth everything is going to be peachy..."
I think the fact that current fiscal and monetary policies have not worked is well understood by all. Please offer your alternative solution that "creates wealth". By only complaining and not offering an alternative solution, you are no better than the idiots in D.C. running the country into the ground.
WSM,
Was that attack really necessary?
We should have never allowed debt to rise at a pace much faster than wages over the long-term. We would therefore not find ourselves trying to figure out a painless way to reduce it someday.
We should have also never allowed a trade deficit over the long-term. We would therefore not find ourselves trying to figure out a painless way to reduce it too someday.
We should realize that "free lunch" monetary and fiscal policies come at a price. That would certainly seem to be a good start to me.
Squanderville versus Thriftville (Warren Buffet)
I've shared his proposed solution for at least some of our problems. Most seem to think it would be too draconian, protectionist, and painful.
From where I sit, it would be extremely painful. I'd phase it in over time personally (and it would still be painful). Doing nothing got us where we are now. Continuing to do nothing will create even more pain over the long run.
We cannot live beyond our means forever. That's a mathematical certainty. Every solution will cause pain. (There is always pain when an addict tries to kick the habit.)
If credit cards didn't exist, the economy would be better off. - Warren Buffett
I believe that. Excess credit is not the life-blood of our economy. It is the heroin of our economy.
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