Thursday, September 20, 2007

Gasoline vs. Treasuries

The chart shows the real price (CPI adjusted) of unleaded regular gasoline vs. the yield on the 10 year treasury note. Note the possible lag between the secular rise and fall in gasoline prices and the secular rise and fall in treasury yields.

Our leaders are hard at work to give this country the deflationary benefits of the Great Depression combined with the inflationary benefits of the 1970s. Two wrongs make a right!

I'm both deflationary and inflationary, combined with slowing growth. It is enough to make me want to change my name to Destagflationary Mark!

Source Data:
Motor Gasoline Retail Prices, U.S. City Average
Selected Interest Rates
Consumer Price Indexes (CPI)


Market Factors said...

Wow - nice work. Pretty compelling to me. So what can I buy that will make me money with limited risk if the 10 year shoots through the roof? :) Interesting....

Stagflationary Mark said...

market factors,

I owned gold and silver from 2004 to 2006. It was a fantastic ride. Looks like I got out a bit early (just couldn't ride the parabola up any longer).

I'm now sitting in TIPS, I-Bonds, and short-term treasuries. In theory, they would have done okay during the 1970s.

TIPS have had a good year so far but today was rather brutal to the downside. They got caught up in the rising interest rate environment. However, in theory TIPS are designed to do best during stagflation (slowing growth with rising inflation).

If you believe in this chart with a passion, then just pick a hard asset (preferably not bedpans ;)). There is one problem though. Housing is a hard asset. It did well during the 1970s. I'm not that confident it will continue to do great. It might take some other hard assets down with it, maybe.

Of course, this isn't investment advice. If I had all the answers I wouldn't need to keep making charts (some of which tell exactly opposite stories!).

I don't think there are easy answers going forward. I'm just generally terrified, lol. ;)

russell1200 said...

NO! NO! N0!

Everyone knows that gasoline (and housing prices) don't count for inflation.

Therefore any chart showing their relationship to the CPI should have them flat-lining.

Unless of course you need to use them as an excuse why it is OK to cut interest rates.

Stagflationary Mark said...

A flat-line chart? Fantastic idea!

Instead of adjusting the price of gasoline by the CPI, I'll adjust the price of gasoline by the price of gasoline.

Problem solved!

Anonymous said...

Mark -
Looks like correlation between 1979 - 1986, no correlation in other periods.
Am I missing something?
- jus me

Stagflationary Mark said...

Maybe you are and maybe you aren't! Your guess truly is as good as mine.

Here are a couple of thoughts.

1. Maybe there are enough deflationary forces so that even the rising price of gasoline isn't enough to cause the inflation needed to bring treasury rates up this time. That would back your comment.

2. Maybe the price of gasoline rises and THEN the inflation appears. If you look at the two rather simplistic trendlines it seems possible that the price change in gasoline generally leads the change in interest rates (by a few years or more perhaps). Maybe gasoline is like the canary in the coal mine. Maybe it takes time for the inflation to appear. Maybe the relatively low gas prices of the late 1980s to late 1990s simply took time for the markets to trust that low prices were somewhat permanent. If so, oops!

In any event, I do think things are somewhat different and that explains why "I'm both deflationary and inflationary..."

Anonymous said...

Mark -
Not to start a flame war but
(never use a polynomial for a trend line. A polynomial fit will always show a large increase or decrease at the ends)

Althougn you're probably right that long yields will go up.
- jus me

Stagflationary Mark said...

jus me,

Have no fear. I don't consider that a flame. You are quite right. Polynomials are inherently unstable and virtually useless for prediction purposes. I just throw them on there to get a "feel" for the data. Nothing more.

Stagflationary Mark said...

jus me,

For your amusement:

Excel Polynomial Trendline Equation doesn't accurately predict future data

Duh! ;)