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The Inflation Trader

 
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  • Deflation, Indeed! [View article]
    In principle, the interest rate paid on reserves can be increased to keep those reserves from pushing rates below zero. But consider that to raise rates to, say, 1% in this manner the Fed will need to transfer $20 billion per year to the banks (1% * 2 trillion in excess reserves). I suspect that is politically harder to do than it sounds!
    May 16 12:43 PM | 1 Like Like |Link to Comment
  • Patience Is A Pain [View article]
    Okay, after today's figure of 237.163, we have a one-month increase of 0.236%.

    A push is 240.626, eleven months from now. So Mr. de los Angeles needs aggregate core inflation of less than 1.46% for the next 11 months (1.59% annualized), I need the over. The Inflation Trader has a small lead (1.7% is 0.14% per month, compounded).
    May 15 03:17 PM | 1 Like Like |Link to Comment
  • Evaluating The New Kid [View article]
    That's interesting, although note that the inflation for this month is only known by the middle of next month, so the model isn't investible.

    It is well known that equity multiples are highest when inflation is low and stable, and lower when inflation rises or falls from there. So the lion's share of returns is going from low multiples to high multiples as you go from high inflation to stable inflation (e.g., the 1980s-1990s). But we are currently at low and stable inflation, and multiples are expected to decline from these levels. Interestingly, a model that takes ONLY that fact into account also vastly outperforms buy and hold (that is, buy the market when there is deflation or high inflation, and sell when it is low and stable).

    One curious thing about the study as you quoted it - and I haven't read the article - is whether he means y/y inflation or m/m inflation. If month-on-month inflation, it is not only not investible but it's not clear why it SHOULD work, since monthly inflation has almost no persistence.

    But I agree, Yellen would not be concerned with inflation at 3% - even though she claims she would be!
    May 8 02:28 PM | Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    Ah, I see! Interestingly, I agree. :-)
    May 8 02:20 PM | Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    A dolly?
    May 8 07:14 AM | Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    right. The figure you gave is the March Seasonally-Adjusted figure. I predict that March 2015 will be higher than 240.626. You say lower. Fair?
    May 7 10:19 PM | 1 Like Like |Link to Comment
  • Evaluating The New Kid [View article]
    Yes, although I don't know if the fault is mine or Yellen's that she makes me so nervous. I am not sure I have any sense that she is up to the task of managing a crisis, especially when there isn't a very strong Treasury secretary...and Jack Lew doesn't give me great confidence.
    May 7 05:50 PM | 4 Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    I will take whichever of the following indices you prefer:

    core CPI
    core PCE
    trimmed mean CPI
    median CPI
    May 7 01:28 PM | 1 Like Like |Link to Comment
  • Patience Is A Pain [View article]
    I think the curve will flatten substantially further later in the year, along with higher rates. Because THIS move was driven by long rates coming down, rather than short rates going up (that is, flattening in a rally rather than flattening in a selloff), I don't think it has much staying power and I'd expect the curve to steepen back out fairly soon. Either the market will become uncomfortable with low 10-year rates when headline inflation is about to pop up to 2% y/y, or shorter rates will come down due to stock market troubles...but either way, I'd think we steepen out before we get lots flatter later in the year.
    May 7 07:56 AM | 1 Like Like |Link to Comment
  • Patience Is A Pain [View article]
    Now that's a very interesting thought, and I will say that while I wouldn't have worried about this very much prior to 2008, I think there's a very good chance that the "rules have changed" in terms of how the various components of M2 are used and behave since the Fed decided to dramatically swell its balance sheet. It is good to remember that velocity is mathematically just a "plug" number, and nothing we can measure directly.

    However, every conventional measure of money is up smartly since the crisis began, and all corresponding velocities have fallen. What are we missing in our measures of money? This is an interesting conundrum and I'm interested in your view since you're thinking about this a different way than I've seen others do.
    May 6 03:32 PM | Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    Tell you what - since we disagree, and you seem to think that the mathematical identity is the same as explaining why it happens. Why don't we just bet? I will bet that core CPI is higher than it currently is right now (1.7%) at year-end, and you bet that it's lower. Okay?
    May 6 03:29 PM | 2 Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    Velocity is by definition the inverse of the demand for real cash balances. When market interest rates rise (and interest rates are up considerably from the lows), the demand to hold cash declines - which is the same as saying money velocity rises.

    This isn't my theory...it's Friedman's.

    And we're not talking about economic growth. Economic growth has nothing to do with inflation.
    May 6 12:59 PM | 1 Like Like |Link to Comment
  • Patience Is A Pain [View article]
    Because I don't think money velocity is going to keep falling when interest rates are rising! By my models, money velocity is already overdue to begin rising - and again, all you need is for it to stop falling. I think we've gotten just about the lowest money velocity we can feasibly have in the modern financial system. And if velocity has nowhere to go but up, it follows that so does inflation (unless money supply growth itself, implausibly, collapses).
    May 6 10:57 AM | Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    Yes, and you should read my articles where I discuss velocity and the reasons that it fell (hint: velocity is driven by interest rates, since velocity is the inverse of the demand for real cash balances) and why it is likely to rise going forward. However, even if velocity merely goes sideways, money growth is more than sufficient to push inflation higher than the 1-2% range we have recently enjoyed.

    It's a pretty well-understood phenomenon, although seemingly forgotten by many economists today who are essentially Keynesians. Also read the article by Samuel Reynard of the SNB, which I reference here: http://bit.ly/1ihlBxZ
    May 6 07:43 AM | 1 Like Like |Link to Comment
  • Patience Is A Pain [View article]
    The odds historically favor a break to higher equity prices, but the payoff is hugely in favor of the downside. (That is, if we get higher prices it's likely to be nominal, but there is much more room on the downside if we have a bad break).
    May 5 03:30 PM | 1 Like Like |Link to Comment
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