Inflation: One Worry to Cross Off the List 19 comments
James Picerno
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It's no surprise to learn that inflation expectations have been pounded downward in the wake of the financial crisis, although the magnitude of the drop may still turn a few heads.
Consider the outlook for consumer prices embedded in the spread between the nominal and inflation-indexed Treasury, as per our chart below. Mr. Market is now anticipating that consumer prices will rise a mere 1% a year for the next decade, down from nearly 2.6% as recently as this past July.
The source of this massive and sudden change of heart needs no explanation other than to point to the events of the past two months. Meanwhile, amid all the turmoil and fading of inflation worries an investor can, as of last night's close, buy a 10-year inflation-indexed Treasury at a real yield of 2.59%, as our second chart below shows. That's shy of the October 14 close of 3.05%, although it's still high by recent standards. At one point during this past March, the 10-year TIPS yielded a scant 90 basis points.
The opportunity to lock in a real yield of 3%, or something close to it, shouldn't be dismissed lightly. Indeed, a nominal 10-year Treasury currently yields 3.65%, a mere 106 basis points over its TIPS counterpart.
Inflation, of course, is a dead issue at the moment, or so the crowd believes. No wonder, since there's a persuasive case for thinking that it'll probably be some time, perhaps several years, before pricing pressures return with any great force. Disinflation, or worse, is upon us, courtesy of the economic challenges that await.
All of which only goes to remind that the best deals in the investing game typically come joined at the hip with frightening headlines and gloomy expectations for the assets in question. Some things never change.
Prices, by contrast, are always in flux. The only task, then, is figuring out if the going rate is attractive, and that starts by comparing it with what the crowd was accepting in the past.
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This article has 19 comments:
Couldn't be. It must be inflation expectations.
Conclusion: The US should root for INFLATION. Deflation will be a massacre to this country.
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The U.S. is already technically bankrupt, as pointed out by the St. Louis Federal Reserve bank in 2006. Deflation would eliminate our ability to even service our debt. How much would a dollar be worth then?
The only solution is to inflate, as then at least the devaluation of the currency will be more gradual. Either way, the government's seeming goal of destroying America's position as a superpower will be accomplished.
User 12 whatever - ignorant nonsense. Americans are not net debtors, why does everyone repeat this insane slander? The US household sector holds assets worth more than $70 trillion vs. debts of only $14 trillion.
"More disturbing still, Stephanie goes on, is that the households with the cash (and assets) "are not the ones with the debt." Rather, alas, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt."
A huge proportion of Americans are net debtors.
Total assets vs. debt not so useful. How much of those assets are tied up in housing? Can't be accessed without borrowing against or selling the house, making that portion of assets highly inaccesable.
MONETARY INFLATION, especially HYPERINFLATION is the big concern. The United States has added TRILLIONS OF DOLLARS to the debt side of the balance sheet as it bails out reckless and irresponsible banks and financial firms. This will result in monetary inflation, very possible hyperinflation.
As far as you saying "Mr. Market is now anticipating that consumer prices will rise a mere 1% a year for the next decade..." this is just nonsense. I'm sure "Mr. Market" didn't anticipate this CURRENT
DECIMATION happening to the stock market !
Inflation may be a "dead issue" at the moment, but for you to say that prices will rise 1% per year for the next decade is foolish. I surely won't accept that at face value.
You have no idea what inflation or deflation is I think. The deflation downward spiral will make the 1929 like a picnic. Those $70trillion assets you claimed were numbers at the end of 2007, now it has been reduce by 1/3 and counting. In a deflationary environment, only cash and T-bills will survive. All others will get close to ZERO. How much are your $70trillion portoflio left with then?