Time may only move in one direction – but just like a faster than light neutrino, let’s ignore physics for a bit! Inspired by this comment from an anonymous author, we will take you to the years 1976 and 1989 and look at life through the eyes of a recent college graduate.
As we occasionally point out here at Don’t Quit Your Day Job, inflation expectations are an interesting indicator that can be calculated from market data. They become even more interesting when we combine them with other measures. It becomes yet more interesting if you are in the market to refinance a mortgage or purchase a home. Read on for an interactive chart on the 30 year mortgage and the market’s 10-year inflation expectations.
I recently came across Jodi Beggs’s awesome (and tongue in cheek, and that’s a compliment from a site called DQYDJ!) economics site, “Economists Do It With Models“. Perusing her recent history, I came across an article entitled “Adventures in Fact-Checking, GOP Debate Edition” where Jodi fact checked some statements made by Mitt Romney and Newt Gingrich and found them, on the surface, to be false. Fair enough – the candidates both made statements to the effect that Ben Bernanke is the most inflationary Fed Chair ever. Playing fast and loose with the facts is wrong, but I don’t entirely like how Ms. Beggs ranked the Chairmen – by annualized inflation during their term. To explain why I’ll turn to an unlikely (yet, strangely appropriate) place- baseball.
One of the things we like to do here at Don’t Quit Your Day Job is to reveal interesting things hiding in plain sight. One of those things: subtracting the Daily Treasury Real Yield rate from the Daily Treasury Yield rate gives you a good idea of the market’s expectations of inflation. Even though media prognosticators won’t agree on whether we’re in for a deflationary era, hyperinflation, or a whole lot of nothing, you can get a reasonable prediction from market data. Our explanation is below, along with the limitations of this method.
We haven’t looked at inflation expectations since November 15! Quantitative easing, historically low interest rates, and a rise in consumer spending haven’t been enough to increase inflation past a tame (again, historically low) 0.7% since December of 2009. However, we live in the real world and even if we were spared from inflation’s clutches today, we might not be so lucky in the future. On that note, let’s look at the market’s inflation expectations – which we calculate by subtracting the Treasury’s Daily Real Curve Rates from the Daily Treasury Yield Curve.
One pays a dividend, has enterprise value, and has the potential for growth. One is a piece of metal long accepted as a store of value. Which one do you invest in: gold (or silver) mining stocks, or gold (or silver!) itself?
How did you react to the stock market’s (defined, in my mind, as the S&P 500 index) recent precipitous drop? If you’re like many investors, you moved out of ‘risky’ assets such as stocks and into ‘safe’ assets such as money market funds and stable value funds. Unfortunately, the seeming safety of fixed income investments is a mirage… hidden forces, such as the danger of inflation, make ‘safe’ investments less safe than first glance. Paradoxically, the recent movement to safer portfolios has put many people at risk for a reduction in the real value of their money in inflation adjusted dollars.
As noted in a CNN article today, one way to gauge the market’s reading of current conditions is by reading the bond yields. Twice I’ve taken a look at how you can use Treasury Inflation Protected Securities plotted with the Daily Treasury Yield Curve to get a glimpse at the market’s inflation expectations (TIPS adjust their value due to CPI). Some other interesting ratios are presented, the treasury yield curve on its own, and the spread between junk bonds and government debt.
In an earlier article, I detailed how you could check on inflation expectations using information publicly available from the Department of the Treasury. Using the data they provide, it is simple to calculate the market’s expectations for inflation over the next 5, 7, 10, and 20 Year periods. Let’s take another look not at the 2009 inflation rate, but the expected inflation rate of the future viewed through ‘2009’ colored glasses.
There are three ways for a government to pay for debt: issue new debt, collect taxes, and cause inflation. Inflation is a ‘hidden tax’ on a populace- it decreases the value of future money, and allows governments to pay off their current debt with devalued money. The United States dollar, as the world’s reserve currency, gives the United States a unique temptation (opportunity?) to pay off their debts in a currency it can print. What exactly is inflation, though? And if you believe inflation is on the way, how do you set yourself up to counteract it?