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The Inflation Trader  

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  • Summary Of My Post-CPI Thoughts [View article]
    There are several sources of this disconnect.

    Part of it is old news and comes because the BLS measures the price of healthcare actually delivered by the hospitals and practitioners, and the proportion of that which is actually paid by consumers. In principle, these numbers should parallel over time - if doctors are charging 2% more this year, then your health care costs should rise about 2%.

    But when there are large changes in the cost of insurance, the pass-through is totally screwed up, and that's what is happening now. In practice people pay wildly different amounts and the massive changes in deductibles have made a difference as well. I pay about the same as I did a couple of years ago for insurance, but my deductible went from $500 to $2.5k, and I don't have the option for a smaller deductible within my budget because the ACA doesn't allow it for a plan that's actually priced somewhat close to what I was paying before. How do you pick up the value of that deductible change in a time of transition? It's really hard to do.

    So you're right, I think, and some people are paying lots more for health care in general. But the overall cost of healthcare hasn't risen a lot - it's just that most of us are being forced to shoulder more of it either directly, or indirectly in the cost of higher premiums. BUT this isn't really a higher cost for EVERYONE, because a bunch of people now pay lots less. It's really a transfer program, after all. Find the guy who now is getting his medical paid for. That guy has seen a 50% or 100% decline in the price of his insurance. You see? It all works out, if you're the guy the government favors.
    Aug 20, 2015. 05:54 PM | 1 Like Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    Well, all that is saying is that the TIPS market responds to energy movements in real time, which are reflected in headline inflation with a lag of about a quarter. It would be really weird if that DIDN'T happen. But what is also weird is the order of magnitude - inflation expectations embedded in 5y and 10y breakevens should have only a very small impact, since a movement in energy prices over the next month or two is almost sure to mean-revert over a 5-year period. But in practice, those moves are very pronounced - evidence the plunging breakevens right now, on the back of energy prices which will have almost no impact on 10-year inflation outturns. This means that when we hedge out the energy component, market expectations of core inflation are very correlated with energy. Which is stupid.

    The market way overreacts to energy movements, and this creates trading opportunities that in fact drive some of our strategies.
    Aug 20, 2015. 05:43 PM | Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    Well, the supply of credit is a function of at least two things from the bank's perspective: one is the spread earned between the interest rate on the loan (which would probably go up if Fed funds went up; assuming we posit that IOER stays at the prior level), and the other is the general quality of credit (reflected in the bank's expected underwriting loss). So if credit quality improves, and spreads increase, both of those should help the transmission. However, credit quality has already improved a fair bit without M2 accelerating. This could mean that the spread is much more important, at least at low default levels, than the expected default risk (or that banks price the loan based on the default risk so that to them there is no added cost, at least perceived).

    But the bottom line is that we don't really know, because we've never been awash in reserves like this before.
    Aug 20, 2015. 05:40 PM | Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    Good questions.

    1. Most economists today are Keynesians, or NK, or some version of that and believe that deflation or inflation is caused by output gaps or negative output gaps. There is not only no empirical support for this notion, but copious evidence that it is completely wrong (e.g., in the worst crisis in 100 years, core prices not only didn't go into deflation but barely slowed, outside of housing)
    2. I assume the focus on PCE is just because they don't want to tighten. Median inflation is 2.3% and has been rising, which is equivalent to about 2% on core PCE. Core PCE (and core CPI) have been influenced lower by one-off declines that pull those measures (which are averages rather than medians) lower. I ASSUME that the Fed knows this, since the better measures (trimmed mean, median) both signal that inflation is at target, and has been at target for a while.
    3. Absolutely no empirical reason. Academic arguments have been made for as little as 0 and in in the early 1990s some argued for "moderate" inflation a bit higher than 2%. It was originally a matter of artistry. Now the problem is that they can't change their official target without major repercussions (another reason the Fed shouldn't tell everyone what it wants to do). Statistically, 1.5% is indistinguishable from 2% but for "credibility" the Fed needs to get their preferred measure there, eventually.
    Aug 20, 2015. 09:20 AM | Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    That's true. But they're both pretty bad forecasting mechanisms.
    Aug 19, 2015. 05:07 PM | Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    I am glad so many people say I am an idiot, wrong, etc. It clearly means we can't be far from the breaking point since being lonely is a sine qua non to there being a turn. Of course in retrospect everyone will claim to have seen it coming and probably to having been positioned correctly.
    Aug 17, 2015. 09:21 AM | 3 Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    An additional thought based on something another reader posted at my own site. He questioned how the functional form of those curves can be right, if they are going vertical in a way that suggests commodities need to be infinite (in 9.8) if commodities are to be where they are. It's a good point and it is a great warning of the danger of just picking functions that give good R-squareds! The problem is that I don't know what the functional form SHOULD be.

    With 9.7 my suspicion is that it is linear, with commodities prices being too high when the S&P was 500-1000. Then the 1000-1500 area, which looks pretty linear to me, is probably roughly right, and the 500-1000 area shows commodities too high for the level of stocks. Which would make sense when stocks were out of favor in an environment still prone to worry a lot about inflation. Similar answer for 9.8, except that the x axis probably ought to be M/Q, rather than M, which would flatten out the chart.

    I might make some adjustments to the charts in the actual book.
    Aug 14, 2015. 08:43 AM | 1 Like Like |Link to Comment
  • Little Trouble In Big China [View article] the same logic, those commodities became cheaper for US so we should import MORE. And since our economy is substantially larger, using your reasoning that should be a net POSITIVE for commodities.

    Hmmm...I think you're confusing real and nominal quantities!
    Aug 12, 2015. 02:41 PM | Likes Like |Link to Comment
  • Little Trouble In Big China [View article]
    No one, of course. But the point I made above is that if it's 10x as much devaluation, it would still be close to rounding error. And I am doubtful they want to devalue by 20%.
    Aug 12, 2015. 10:30 AM | Likes Like |Link to Comment
  • Little Trouble In Big China [View article]
    yeah, i just don't know how anyone can look at 2% and get all excited.

    Last night Goldman came out with a piece where they called the inflation effect in the US "a couple basis points." And they had a super fancy model. (I am saying that tongue-in-cheek because of the usual success of their fancy inflation models. But they have a similar order of magnitude to my back-of-the-envelope calculation.)
    Aug 12, 2015. 09:03 AM | Likes Like |Link to Comment
  • Little Trouble In Big China [View article]
    Yes, I corrected this in the original but SA had already picked it up I guess. It still works out to being only 0.006%, not 0.005%, because I apparently used the annual figure when I did my division. Or something. I was only joking with the math - ironic that was exactly when I screwed something up!

    China is slowing, as is the entire world - including the US. That's where I think people get hyperventilated here. The US dollar isn't going to double. It isn't going to go up 50%. It is unlikely to go up another 10% from here...but if it does, it STILL isn't going to matter much to us because we have a closed economy! I think European economists, used to thinking of very large export sectors, probably lead the erroneous thinking.

    I agree if China absolutely collapses that the consequences for the world would be dire. That collapse is already mostly priced into commodities, but nowhere else. But it's a command economy. I don't think they'll collapse; they'll just nationalize all of the FDI and they'll be okay, just not the China growth we've been accustomed to. But that was ALWAYS going to happen - it is too big to keep growing at 7%, whatever their plan says.

    I just think we all need to take a breath! Stocks are in trouble - but they are so overvalued, that too was just a matter of time. They don't need a China collapse to be in trouble.
    Aug 12, 2015. 09:02 AM | 1 Like Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    Uh, that's simply false. Friedman wanted to replace the Fed with a computer, and he said that the only reason he even made THAT suggestion was that the Fed already existed; his preference was for the Fed to have never existed at all. Honestly, you haven't the faintest idea what you're talking about.

    If you're going to bash Friedman you should at least read him first. But I guess can't help with problems on the receiving end.
    Jul 22, 2015. 08:06 AM | 2 Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    You're right. Thirty-five years of Fed-watching clearly has given me absolutely no grounds to be able to understand what these wise people are saying. I concede the point.
    Jul 22, 2015. 08:02 AM | 1 Like Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    To be fair, they have been saying they would raise rates when circumstances permit for about five years, and for most of that time they have been firmly easing even though, for most of the past five years, circumstances were consistent with at least neutral, if not rising above-neutral interest rates.

    I really have no reason to write a textbook to repeat what anyone who knows how to READ a textbook would already know.
    Jul 20, 2015. 08:26 AM | Likes Like |Link to Comment
  • Whither Bonds? Arnott Answers [View article]
    They most certainly have NOT said that they will raise interest rates at the end of the year. Some Fed officials have spoken in favor of that, some have spoken against it, and almost all of them feel that it is "data dependent." The official statement requires them to think that inflation is going to return to target, which is (I think intentionally) squishy.

    They have been trying to sound hawkish for the last three years, but have always behaved dovishly. I doubt that there is any serious consideration being given to raising interest rates although there is lots of talk as they want to seem like sober central bankers and that is what sober central bankers are supposed to do.

    All that being said, if markets start to demand higher interest rates (e.g., inflation expectations rise sharply - no sign of that yet), they may hike nominally just to say they've done it. But the difference between the current target and 0.50% is immaterial. The real question is how soon do they get to 2-3%? Answer to that is: years. Years and years.
    Jun 28, 2015. 09:05 PM | 2 Likes Like |Link to Comment