Monday, December 10, 2007

Bernanke's Inflation Expectations

Price Measure Says Rate Can't Fall as Traders Expect (Update4)
``One of the defining features of the Bernanke Fed to date is its emphasis on measures of longer-term inflation expectations,'' said Sack, whose partners at Macroeconomic Advisers LLC include former Fed Governor Laurence Meyer. ``The Fed is willing to tolerate short-run movements in inflation, but only as long as those movements don't appear to be dislodging long-run inflation expectations.''

I'm hoping that is true. Although I love to heckle the Fed in general, our Bernanke Fed seems to be doing okay (all things considered) in the aftermath of the Greenspan Fed (who helped "secure" us a stock market bubble in 2000 but more importantly the housing bubble we're experiencing now).

``The market, by keeping the same inflation expectations while lowering growth expectations, is implying there are inflationary pressures,'' Pond said. He held to that view even as the forward rate fell last week.

I agree. The market is not all-knowing but I do draw some comfort from the fact that future inflation expectations are somewhat tame. My expectations are not all that tame into the distant future, but it is always possible I am wrong. For what it is worth, I'd vastly prefer to be wrong.

The current level of the five-year five-year breakeven inflation rate has the Fed ``on yellow alert,'' Sack said. ``It is on their radar screen.''

Well, we certainly don't want them to forget about it. Here's another look. Since I think the game changed on August 20, 2007 ("credit crunch" day), that's when the chart starts. So far, so good.

Source Data:
FRB: Selected Interest Rates
Bloomberg: Rates & Bonds


Anonymous said...

Expectations are the key. I tend to think the focus has been shifted from fear of inflation to asset inflation expectations. Every investor believes they will outperform or benefit from inflation and gain purchasing power. Its akin to every parent believing their kids are above average. Statistically impossible of course. Oh my gawd, we are like such the big casino.

Stagflationary Mark said...


I think you've summed up why I like TIPS. It is such a wimpy bet. The pure inflationists will hoard the hard assets. The pure deflationists will hoard paper fiat dollars.

There's very few people willing to take the middle ground. Barring the inflationists being right with severe hyperinflation, TIPS are a relative safe haven in a casino world.

It isn't like the government really cares who wins and loses in the casino, as long as it can take its cut. The government will be extremely annoyed if everyone stops playing though. That cannot be allowed to continue. Sticks and carrots will be redeployed to ensure that we play.

We've seen that to some degree already. When they lowered the cap on I-Bonds from $30k to $5k they were really saying, "We're about out of carrots, but we'll never run out of sticks."

Anonymous said...

Tips are indeed a safe bet here, especially considering the boxes of hope that banks have become. I did like cash until recently though. The fact that they are forcing investors to play the game with higher stakes makes me lose sleep. You shouldn't have to get up in the morning and feel the need to go to church just because you are holding cash.

Anonymous said...


Another problem with the mortgage mess is the amount of effort required to dispose of it. At least with internet stocks, people could just wash their hands and continue on with their lives and jobs. Walking away from a house or living with a depreciating asset is a totally different story. This mess will require real effort to resolve. Unpaid work that is. This will be a tough pill for the "something for nothing" crowd to swallow. When you lose in a casino, you can just go home. When you lose with borrowed money and leverage, its a bit different. Debt and depreciation work 24/7. As someone with farm experience, I am certain you appreciate the amount of effort required to maintain depreciating assets. Eternal vigilance which most simply do not have. Throw in demographics and and its pain city.

Stagflationary Mark said...


I'm continually amazed at the amount a home can appreciate once it has been anchored to the ground. You'd think it would be the other way around.

The ability to have your home mobile would seem to be an advantage, but mobile homes depreciate just like cars it seems.

Once a home is anchored firmly to the ground though, just look at how fast it can appreciate. There's some sort of magical transformation that occurs the instant the wheels fall off.

Or so the theory goes. I may have heard this from a chief economist, presumably working for the NAR. I can't recall. ;)

By the way, the same problem applies to boats. If the boat is mobile it is a hole in the water you pour money into. If the boat is permanently anchored as a floating home though, it too only appreciates it seems.

(Beware, extra heavy sarcasm contained within this comment.)

Anonymous said...

Are you saying I should leave the boat in the driveway if I want appreciation?

Stagflationary Mark said...


NO! You need to plant it in the flower garden! It has to be permantenly anchored to the ground!

Picture this.

Client: What's that in the flower garden?
Real Estate Agent: That's the cabana with a sailing motif.
Client: Is it a boat or is it a building?
Real Estate Agent: Both. It is priced as a building, but it was once a boat.
Client: That's fantastic!
Real Estate Agent: Look what's behind it.
Client: Is that a play area for the kids?
Real Estate Agent: Absolutely. Nothing says fun like a half buried 1973 Ford Pinto and a half buried 52" big screen TV. Note the weathered look that blends in so nicely with the cabana.

Anonymous said...


Great point on houses. Land has some future productive value. Most homes do not unless you rent rooms like Ma Gump. As your point about tips I was buying I bonds in the past religously but I believe the true returns are negative with manipulated inflation numbers. The only true form of savings comes from postponed consumption in comparison to goods produced. Borrowing is just stealing from future production. If you are borrowing to make future production more efficient than more power to your society. If you are borrowing to increase consumption than you are making yourself poorer in the future. As a society we have negative savings but there are plenty of "idiots" like us that are trying to save. The only way our society can keep "feeding" the over consumers is to "steal" from the remaining savers. Inflation is the tactic and needs to be understated. The race is on for savers to hide their wealth before it is stolen from them.

Anonymous said...

Spot on Abby Normal.

Stagflationary Mark said...

abby normal & MAB,

The race is on for savers to hide their wealth before it is stolen from them.

That's how I see it and why I'm fairly comfortable with a long-term "death of real yields" outlook.

They're closin' the door on the I-Bonds ($30k annual max taken down to $5k). They've taken away the 30-year TIPS. They've changed the EE Savings Bond from an adjustable rate to a fixed 3%.

By the time the baby boomers think of saving (vs. investing) all the government approved options will be gone.

It is a popular saying that you can boil a frog alive if you turn the heat up slow enough. There should probably be a similar saying for boiling nest eggs.