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Click to enlarge.
As seen in the high correlation, the assumed "rear view mirror" model seems fairly reasonable. Here's another way to look at that same data.
Click to enlarge.
The real yield zone is therefore the difference between the two rates. Let's look directly at that difference in the next chart.
Click to enlarge.
It isn't just interest rates that have fallen since the early 1980s. Real yields have fallen too. It is becoming increasingly difficult to make money off of money. That's been a theme of mine since 2000 (and especially so since 2004).
Source Data:
St. Louis Fed: 10-Year Treasury
St. Louis Fed: CPI-U
6 comments:
Stag,
It is becoming increasingly difficult to make money off of money. That's been a theme of mine since 2000 (and especially so since 2004).
That's the big picture and you nailed it. The short term noise is just that - noise.
How so many can CONtinually and CONsistently attribute so much to so little is beyond me.
mab,
How so many can CONtinually and CONsistently attribute so much to so little is beyond me.
Fiddling while Rome burns
Meaning
To occupy oneself with unimportant matters and neglect priorities during a crisis.
Perhaps people can't figure out which Rome is actually burning.
Is it the one in Italy (literally) or the one here in North America (metaphorically)?
Here's a crazy thought. Perhaps both are burning. There's a bull market in fiddlers!
Perry talks the good talk about stringing up Bernanke, but if he's anything like LBJ and that other guy what he says and what he's going to do are entirely two different things.
"We are not about to send American boys 9 or 10 thousand miles away from home to do what Asian boys ought to be doing for themselves."
The bond market was "wrong" in the early 1980s and I suspect it's "wrong" now.
Of course, being "wrong" in the 1980s was very pleasant if you were long. There's still $14B of money in treasuries making over 10%:
912810DP0 11.250 02/15/85 02/15/15
912810DS4 10.625 08/15/85 08/15/15
I don't know how they're going to "fix" things, but I fully expect the same level of BS that got us into Vietnam and Iraq to work on us internally.
Or maybe it will in fact be a big-ass war with someone that breaks open the piggy bank again.
That's not on my radar but I'd like to think our $800B/yr defense establishment is a use-it or lose-it proposition now.
Troy,
The bond market was "wrong" in the early 1980s and I suspect it's "wrong" now.
As you say, the bond market is not all-knowing and all-powerful. If/when it is wrong again, it could easily be wrong in an epic way.
That said, I do own a very small amount of EE Savings Bonds (just the one purchase) in addition to my I-Bonds. They pay a fixed 1.4% per year and will double in price if held 20 years. That works out to a 3.53% annual rate.
They continue to outperform my online savings account and are currently a much better deal than a 20 year nominal treasury. I bought with the intent to possibly bail early but I'm still comfortable holding them. Go figure.
Troy and Mark -
The Bond Market was also WRONG in the 1960s into 1970s. If you chart the 10 year yield against the SUBSEQUENT 10 years inflation, you find the 1970s famed Certificates of Confiscation - bonds whose owners were locked into negative real yields for the duration. Ouch!
And of course, all the shorter TIPS with negative real yields are now certificates of confiscation as well... especially after taxes crush the "inflation" adjustment!
This being nothing new, here's a link to Floyd Norris on this subject last year:
http://www.nytimes.com/2010/10/29/business/economy/29norris.html
Wisdom Seeker,
And of course, all the shorter TIPS with negative real yields are now certificates of confiscation as well... especially after taxes crush the "inflation" adjustment!
Indeed. The sooner one realized that certificates of confiscation were coming, the better. The concern that they would be coming was enough to entice me into buying TIPS.
That said, most investments have been based on the certificate of confiscation technology over the past decade.
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