James Brumley

Rampant Inflation Paints Fed Into a Corner

I linked an earlier article, but it didn't have the NBER data I wanted. Here's the point I was making about the uselessness of the NBER (this is from the NBER web site)

The November 2001 trough was announced July 17, 2003.
The March 2001 peak was announced November 26, 2001.
The March 1991 trough was announced December 22, 1992.
The July 1990 peak was announced April 25, 1991.
The November 1982 trough was announced July 8, 1983.
The July 1981 peak was announced January 6, 1982.
The July 1980 trough was announced July 8, 1981.
The January 1980 peak was announced June 3, 1980.

Six months to a year late every time. The fact that they haven't said we're in a recession yet means nothing.

Anyway...

One last thing.....you asked for the correlation relationship between long-term (10 year) yields and inflation. I can't show you my math, but I can tell you how to find it and do it for yourself.

Excel has a tool called 'correlation coeffecient', which measures how related or unrelated two data sets are. A 'high' correlation would score in the high 0.90's, while a low correlation would score closer to 0.00.

The correlation cooefficient of the change in 10 year yields and the change in inflation (monthly) is -0.01244....extremely low.

You can find the 10-year yield data here....
finance.yahoo.com/q/hp...

(To do the correlation test yourself, be sure to start them both at the same value - or normalized - and change each one appropriately for each month.)

Or, you could do the easier thing and just look at this chart :)

bigtrends.com/images/0...

BS correctly pointed out the dollar's recent rise should help ease inflation. What he didn't point out was that the dollar is still just slightly above multi-decade lows, and that inflation is still at multi-year highs. The dollar could rise more, and inflation could fall, but we'd still be at almost-unprecedented levels for both. It's a good start, but we need to see about 12 more months of the same before we're healthy again.

On the chart you can also see the correlation between the dollar and the Fed Funds rate.

BS also pointed out that the failure of the bond market to demand higher rates from 10 year bonds meant that they weren't worried about inflation. He may well be right - bond owners may not be worried about inflation. However, what he he failed to point out was that they weren't worried about it in 2006 either, AND THEY WERE WRONG NOT TO HAVE WORRIED ABOUT IT. The 10 year yield didn't even begin to creep higher until after inflation popped above 10 year yields then....right as inflation started to sink - way too late then. (Just because someone does something doesn't mean they're right.)

As for those of you in the 'things aren't that bad' camp....

If you're ok with the fact that inflation is above 10 year yields, and above the Fed Funds rate, for the FIRST TIME EVER IN MODERN HISTORY, well, then we'll have to agree to disagree. I just know when I see things I've never once seen in my lifetime, caution is merited. If you don't think things like that are a problem, then do what you gotta' do.