October 27, 2011
Certainty vs. Uncertainty Update
Click to enlarge.
Here's where we are now.
Click to enlarge.
There are a few noteworthy items here.
1. The current distance from the blue trend line is small. That means we are very near the level that the Fed would prefer.
2. The distance from the blue trend line is roughly the same as it was back in October. This means that over the past few months inflation expectations have been extremely well anchored (at a level slightly below what the Fed would prefer).
3. There has been a large move along the blue line down and to the left just as the "Monetary Policy Trend" I offered in the chart would imply. Real yields fell. This is not an inflation story. It is not a deflation story. It is a real yield dying story. It has become harder to make money off of money. Big shocker.
4. The yields on the 10-year TIPS and 10-year nominal treasuries are currently at or near record lows. Welcome to ZIRP. I hope you enjoyed the ride.
Speaking of rides, here's your mileage update. (See this link for a description of the chart.)
Click to enlarge.
As seen in the chart, the road is a bit less bumpy now as we become more and more certain of ZIRPing along for the long-term. I'd tell you to fasten your seat belts but the car is in the parking garage, it is out of fuel, and all the exits are closed. What's the point?
Source Data:
FRB: Selected Interest Rates
US Treasury: Interest Rates
Here is a glimpse showing how far we've come since March 4, 2011.
ReplyDeleteRemember 1% 10-year TIPS yields? Remember 3.5% nominal treasury yields?
Good times, good times.
I remember those sweet 1% 10 year TIPS [pause to gaze in the distance].
ReplyDeleteBernanke is playing mind games. He wants a lot of inflation but he can't say that. If inflation gets unhinged, it might explode into the 20% range for a couple of years. Combined with forced low yields, it is the perfect solution to destroy the real cost of debt, especially if they have plausible deniability. Whether that kills the dollar system in the process is up in the air.
BTW, I love toilet paper as a tangible hedge. I've always agreed with you on that. Any chance of the heretic coming back to the church for at least a handful of rocks?
Mr Slippery,
ReplyDeleteFor what it is worth, I think Bernanke wants 2% inflation and if our debt keeps adding up then eventually he'll want just 1% inflation.
It's the ultimate can kicking policy, because at 0% inflation interest-only payments can become infinity.
It's just an opinion of course.
The heretic has permanently left the building. In fact, even the gold rocks in my mouth (crowns) are being replaced. At no small expense, sigh.
ReplyDeleteI meant that debt could become infinity if 0% interest-only payments were being made.
ReplyDeleteLove these posts Mark! Thanks.
ReplyDeleteFor what it is worth, this is one of my favorite charts to make.
ReplyDeleteIt's my "kitchen sink" chart. I very nearly added a compass to it.
Moving between upper left to lower right is all about inflation/deflation.
Moving between upper right and lower left is all about real yields.
For a while the deflation story was top priority. We're currently in a real yield story though.
I don't think we'll visit the upper left part of the chart any time soon. Heaven help us if we do though. That's where the stagflation story sits.
Brand new here, so my apologies for missing the subtleties a veteran poster would get....
ReplyDeleteWhat would be your trigger to sell bonds/tips? Or are we there?
Anonymous,
ReplyDeleteWelcome!
Great questions.
For what it is worth, I intend to hold all my TIPS and I-Bonds to maturity. If things go horribly wrong, I am at risk of going down with the Titanic of course.
Put another way, I have very little hyperinflation defense and even less outright default defense.
My only consolation will be that if I go down I'll be taking a lot of other investors with me, lol. Sorry. Just an attempt at gallows humor.
I'm of the belief that it is our debt that is propping all the other assets up, and without that support nothing is safe.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
I share his belief that nothing is safe. Pick your poison. Hindsight will show if you chose wisely.
I have opted to protect myself from a continual long-term inflation pain because that is the path that seems most likely to me. I could be wrong to think this way of course.
Bonus thought.
ReplyDeleteOne thing I like about TIPS is that in theory I do not require a greater fool to sell them to.
I buy them straight from the government. They have a maturity. I never really care all that much what other investors think they are worth. I can see what they are worth to me. (The exception would be if other investors think that my bonds have turned worthless, for that would imply that I will not be paid at maturity.)
I think the safest way to save can be seen in this picture though. The things shown will rise with inflation in theory, and I will never have to pay tax on the inflationary gains.
Sad state of affairs that it has come to this.