tag:blogger.com,1999:blog-8515247115132134144.post6765689897870755838..comments2024-02-17T12:34:01.400-08:00Comments on Illusion of Prosperity: Behold the Power of the Rear View MirrorStagflationary Markhttp://www.blogger.com/profile/04568993350246477976noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8515247115132134144.post-72477260275195292932012-10-24T17:03:43.053-07:002012-10-24T17:03:43.053-07:00I should add one more thing to the mix.
It has be...I should add one more thing to the mix.<br /><br />It has been my belief that comparing TIPS to nominal treasuries to determine future inflation expectations is more than a bit distorted. Here's why.<br /><br />Investors who are absolutely sure that serious deflation will appear would flock to nominal treasuries.<br /><br />Investors who are absolutely sure that serious inflation will appear would flock to hard assets. Not TIPS! As I have stated here many times, the taxation of TIPS would financially ruin me if we hyperinflate.<br /><br />TIPS, to me, are therefore not the opposite of nominal treasuries. They are for the relatively humble investor who isn't sure what inflation will do and would like at least some insurance.<br /><br />I therefore think that inflation will probably always be a bit higher than using TIPS math would suggest. It's just not balanced between the serious deflationists and the serious inflationists.<br /><br />Just a thought.Stagflationary Markhttps://www.blogger.com/profile/04568993350246477976noreply@blogger.comtag:blogger.com,1999:blog-8515247115132134144.post-14349505938244880602012-10-24T16:46:18.186-07:002012-10-24T16:46:18.186-07:00CP,
I actually really wanted to do that. Unfortun...CP,<br /><br />I actually really wanted to do that. Unfortunately, TIPS weren't introduced until 1997. I therefore can't look back 20 years for even one data point.<br /><br />I can provide a hint though.<br /><br />On April 8, 1998, <a href="http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912810FD5" rel="nofollow">a 30-year TIPS</a> was auctioned with a high yield of 3.74%. On that same date, the U.S. Treasury claims <a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=1998" rel="nofollow">the 30-year nominal treasury</a> yielded 5.90%.<br /><br />The bond market therefore expected 2.16% inflation over the next 30 years (5.90% - 3.74%).<br /><br />In April of 1998, the <a href="http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt" rel="nofollow">seasonally adjusted CPI</a> was 162.200. In September of 2012, the seasonally adjusted CPI was 231.414.<br /><br />That's an increase of 42.7% over 14.42 years. Inflation has actually been running at a 2.50% annual rate. The bond market now predicts more of the same.<br /><br />It's not quite apples to apples, but I think it would be safe to say that the bond market underestimated inflation from 1998 to 2012.<br /><br />I can't say I blame it all that much. There were quite a few deflationary forces. There still are.<br /><br />That said, <a href="http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm" rel="nofollow">"the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."</a>. Go figure.Stagflationary Markhttps://www.blogger.com/profile/04568993350246477976noreply@blogger.comtag:blogger.com,1999:blog-8515247115132134144.post-39202673317729280232012-10-24T15:22:34.617-07:002012-10-24T15:22:34.617-07:00Can you do a chart of expected inflation vs realiz...Can you do a chart of expected inflation vs realized inflation over that time period? Would be interesting to see when people were too optimistic vs too pessimistic. CPhttps://www.blogger.com/profile/12701174164478027499noreply@blogger.com