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The Inflation Trader

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  • Growling Dogs Sometimes Bite [View article]

    It leaves out the question, though, of the inflationary consequences of the increase in bank reserves. To the extent that these remain sterile excess reserves, they will not cause inflation. However no one, and this includes every single person at the Fed, knows whether it is possible to finely control the level of excess reserves with the blunt policy instruments at the Fed's disposal. And that is the real issue.
    Jun 8, 2014. 08:06 PM | Likes Like |Link to Comment
  • Growling Dogs Sometimes Bite [View article]
    But David, the way it works in practice is that the Fed announces its purchases well in advance, and dealers buy enough securities - often, in auctions - to ensure that they can offer securities to the Fed without shorting them. Because the primary dealers are required to offer the Fed securities, and if they don't own the securities then they have to borrow them (i.e., short them while the Fed is sopping up huge amounts of them, which is a bad trading plan), they bid in the auctions and hold inventory that they specifically plan to offer the Fed. That is, in practice, exactly what happens. As far as I know no one has ever ASKED the primary dealers to buy from the Treasury and sell to the Fed (and it wasn't always the same securities, of course - but if I buy a new Treasury and sell an old Treasury to the Fed, and then do a bond swap with a customer, it's the same result), the incentives are all set up in such a way that that's exactly what happens.
    Jun 8, 2014. 01:24 PM | 1 Like Like |Link to Comment
  • Growling Dogs Sometimes Bite [View article]
    That the Fed can only buy in the open market is a slim distinction. If the Fed is known to be buying Treasuries on a regular schedule, it is clearly the (operational) case that many dealers bid for more than their normal allotment because they intend to re-sell to the Fed. This is mechanically different, but the effect is the same. The statute was intended to make sure that the Treasury isn't able to sell more debt simply because the Fed is buying it, and thereby make it possible to inject unlimited sums into the economy (Treasury issues a quintillion, directly from the Fed) without Congressional approval, but obviously with a debt ceiling that pretty much always increases whenever the Treasury says it's hungry and a Fed who says "by the way, we're buying a trillion over the next year," the actual effect of that statute has been approximately nil.
    Jun 8, 2014. 09:14 AM | 1 Like Like |Link to Comment
  • Growling Dogs Sometimes Bite [View article] does bear noting that inflation in the 1940 averaged about 5.5% and twice spiked over 12% and got to -2.9% in 1949. So the policy and the unwind was not without some turbulence.
    Jun 5, 2014. 11:11 AM | Likes Like |Link to Comment
  • Worried About Not Being Worried [View article]
    It is interesting since Volcker clearly has an ear in the Obama Administration, but I would want to see trial balloons much closer to the central bank policymakers before I got too excited (or scared).

    It is interesting that didn't seem to be more widely reported, and I appreciate you pointing it out. Maybe "Bretton Woods" just doesn't mean very much to most people under about 65.
    Jun 2, 2014. 04:22 PM | Likes Like |Link to Comment
  • Worried About Not Being Worried [View article]
    I guess bonds have potential upside in the same way stocks do, no? There's no reason for bonds to go to 1%, but they COULD. Same as with stocks...there's no reason for the S&P to go to 2100, but it COULD. What's the upside when they're already discounting robust growth rates from all-time earnings highs? I hear the argument but am not sure I really believe it. I think this is an example of the optimist-pessimist thing. :-) Stocks have no more upside than bonds, but buyers of stocks are inveterate optimists while bond buyers are pessimists by nature.
    Jun 2, 2014. 02:20 PM | 1 Like Like |Link to Comment
  • The Boredom Always Ends [View article]
    ...however, maturities and mortgage prepayments are reinvested, so that the notional amount of the holdings does not change.
    May 29, 2014. 12:38 PM | Likes Like |Link to Comment
  • The Boredom Always Ends [View article]
    Thank you for reading!
    May 28, 2014. 08:06 PM | Likes Like |Link to Comment
  • The Boredom Always Ends [View article]
    Yes, that should definitely help (all else equal), but it is a small effect, right? If the dividend yield is 2%, and that is now taxed at 20% rather than 50%, then the MAXIMUM effect is 0.6% per year, and that's discounted so...ballparking 0.6% perpetuity discounted at say 8% would be worth an additional 7.5% in the price of the security. IF you thought the tax law wouldn't change (might need to discount more?). And that's only on the proportion of equities held by individuals in taxable accounts - corporations, funds, IRAs won't care. So I'd cuff the effect at around 5%, max.

    It is a good point that we have to ask "what is different this time," because there's always something. But most of the things that are different this time are worse - e.g., there is more policy uncertainty than there has been in the past, and probably much more tax risk for people in upper brackets.
    May 28, 2014. 08:04 PM | Likes Like |Link to Comment
  • The Boredom Always Ends [View article]
    The BLS has done a retiree price index, but I have never seen a cost-of-child-rearing one. I like that. It shouldn't be TERRIBLY hard to construct. I will take a look.

    My company has a hedge for College Tuition inflation, so this is right up our alley. We just haven't been able to convince any big fund company to distribute it. We had one big company (you've heard of them) say "who would want to hedge college tuition inflation??" It was incredible. But I digress.

    Thanks for the suggestion!
    May 28, 2014. 07:59 PM | 4 Likes Like |Link to Comment
  • The Boredom Always Ends [View article] know that the Fed has nothing to do with the CPI, right? That's a wholly different branch of government. That's the BLS, within the Labor Department.

    I don't disagree that they are incompetent, and I am sure that some central bankers are corrupt...but we are talking about why the CPI does what it does, and the question it is supposed to answer. This may not be the question you want answered, but it IS the question the CPI claims to answer (and, I believe, answers quite well): what is happening to the cost of an equivalent standard of living compared with the base year.

    It may irk you that the CPI wasn't designed to answer the question you want answered, but that surely isn't the BLS's fault because they built this long before you were born. And it surely isn't the Fed's fault, because they have nothing to do with the number.
    May 28, 2014. 07:54 PM | 1 Like Like |Link to Comment
  • The Boredom Always Ends [View article]
    Well...not really. And it's only a very small number of categories where hedonics is used. Generally, it's for technology which has increased in price but which has increased in usefulness FAR more. A desktop computer in 1984 cost a couple of thousand dollars. A mid-range server today costs about the same. So, have prices stagnated in computing? Hardly, because you can do so much more with the server.

    It's more like this analogy: a pocketknife in 1984 had one blade. Now, the same price brings you a model with 6 blades, a saw, can opener, needle, and built-in drone. What has happened to the cost of an equal standard of living? Because that is the standard. The problem is that you simply can't buy today what was a normal standard of living in 1984, because they don't manufacture 8-track tapes any more. So you have to adopt methods to account for product replacement (8-track tapes to cassettes to CDs to ipods), improvement, and so on.

    You can dislike the methods the BLS has employed to correct for these things so that they can answer the question that has been posed to them, but you can't avoid those issues. So if you don't like hedonic adjustment...propose an alternative! How can you adjust the price of computers today to make them "equal" to the 1984 computer? Give it a shot.
    May 28, 2014. 10:07 AM | Likes Like |Link to Comment
  • The Boredom Always Ends [View article]
    Actually, my concern is that boredom leads to people overtrading and increasing bet sizes. Basically, as the expected risk (in terms of volatility) lessens, the bet sizes increase - which means people are really out over their skis when any kind of break happens. That's what made the 2008 crisis so bad...too much leverage on too many bets because everything had been too quiet for too long and the Fed was promising to keep everyone safe, happy, and warm. Until they didn't.
    May 28, 2014. 09:06 AM | 4 Likes Like |Link to Comment
  • The Boredom Always Ends [View article]
    Folks, remember that hedonics doesn't have any net effect on the CPI. It lowers the calculated price increase of some goods (most notably computers), and raises the calculated price increase of housing (because the quality of the housing stock deteriorates over time). So, keep hedonics in or pull them out, you get the same inflation rate plus or minus 0.1%.
    May 28, 2014. 09:03 AM | 1 Like Like |Link to Comment
  • Hot Button Issue: Rant Warning [View article]
    Well, perhaps, but be careful not to mistake relative real price changes with absolute price changes. That is, low interest rates will lower the relative price of capital compared to labor, but that doesn't necessarily mean that the absolute price of either one will decline. If they are both increasing, but labor increases less, then you have the same effect. I wrote about this a while back, I think. But at very low inflation rates, you're probably right - you could take a zero inflation rate and make it marginally negative if you made capital cheap enough (and for long enough).
    May 21, 2014. 06:23 PM | Likes Like |Link to Comment