Brian Romanchuk — Brief TIPS Market Comment

The U.S. inflation-linked bond (TIPS) market is in an interesting position right now. Inflation protection seems cheap, but the question always remains: is it cheap for a reason? Unfortunately, I am not able to answer that question, I am going to just briefly outline the debate….

Bond Economics 

Brief TIPS Market Comment
Brian Romanchuk

Zero Hedge — Treasury Yield Curve Crashes To Post-Crisis Flats

Not a good indicator of the business cycle, but it is a pretty fair indicator that inflation expectations are not rising.

Zero Hedge
Recession Red Flag Rears Its Ugly Head - Treasury Yield Curve Crashes To Post-Crisis Flats

Tyler Durden

Carola Binder — The Future is Uncertain, but So Is the Past

What does this tell us? People are just as unsure about inflation in the relatively recent past as they are about inflation in the near to medium-run future. And this says something important for monetary policymakers. A goal of the Federal Reserve is to anchor medium- to long-run inflation expectations at the 2% target. With strongly-anchored expectations, we should see most expectations near 2% with low uncertainty. If people are uncertain about longer-run inflation, it could either be that they are unaware of the Fed's inflation target, or aware but unconvinced that the Fed will actually achieve its target. It is difficult to say which is the case. The former would imply that we need more public informedness about economic concepts and the Fed, while the latter would imply that the Fed needs to improve its credibility among an already-informed public. Since perceptions are about as uncertain as expectations, this lends support to the idea that people are simply uninformed about inflation-- or that memory of economic statistics is relatively poor.

Quantitative Ease

The Future is Uncertain, but So Is the Past

Carola Binder | Assistant Professor of Economics at Haverford College

You can go buy gold, oil and commodities now. The Fed has just raised prices.

The Fed, in its statement (and it's endless wisdom) says that inflation expectations are "well anchored." Well, yeah, maybe they have been, but that's because the Fed itself has been setting prices lower. The cost of money and credit--the interest rate--is a price. A very important price. All other prices tend ot hinge off that price. So if the Fed is so concerned about keeping inflation expectations well anchored why did it just raise prices today?

Totally stupid.

Uh, boys and girls, you can probably start buying gold, oil and commodities now. The Fed has just given you the green light.

FRBSL — How Accurate Are Measures of Inflation Expectations?

Modern theories posit that actual inflation depends importantly on expected inflation. But how accurate are measures of expected inflation? A recent Economic Synopses essay examined the accuracy of measures of long-term inflation expectations....

In his essay, Kliesen looked at a survey-based measure of expected inflation and a market-based measure:

• Survey-based: A monthly survey conducted by the University of Michigan Survey Research Center that asks consumers their expectations for consumer price index (CPI) inflation over the next five to 10 years
• Market-based: Also called the breakeven inflation rate, the difference between the nominal yield on U.S. Treasury securities and inflation-indexed Treasury securities of a comparable maturity....

Kliesen found that households routinely overestimated inflation and also assumed higher expected inflation than financial markets did for the entire period studied. The mean of the survey-based measure was 49 basis points higher than the market-based measure and more than 100 basis points higher than the actual rate of inflation.

Kliesen also showed the root mean squared error (a commonly used statistic to gauge the accuracy of forecasts) for each measure of inflation expectations. He found that the market-based measure was 34 percent more accurate than the survey-based measure.

FRBSL — On the Economy
How Accurate Are Measures of Inflation Expectations?

John Jansen — Doctors and Dentists Flock to TIPS

If what retail investors are doing is a contrarian indicators then what doctors and dentists are doing is a leading contrarian indicator.

Across the Curve
Doctors and Dentists Flock to TIPS

John Jansen

Brian Romanchuk — Primer: What Is Breakeven Inflation?

Is the bond market a better guide to inflation expectations than surveys?

The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.

Since investors' money is on the line, they presumably have an interest in pricing inflation correctly. It is viewed as a more reliable measure of inflation expectations than those measured by surveys. In this article, I explain how this concept is used in bond market economic analysis.

Bond Economics
Primer: What Is Breakeven Inflation?
Brian Romanchuk

What NON Sense! Precisely Calculating The Culmination Of Another Flawed Concept.

Commentary by Roger Erickson

In yet another breathtaking display of clueless cunning, another wit has precisely calculated the culmination of another flawed concept.

"Indeed, the invisible ruler of the Federal Reserve is the market’s future expectations of inflation."

You don't say!

There's a flaw here, of course. What part of FIAT don't these people understand? It's been 80 years now, since fiat currency and inflation fears have been officially & absolutely decoupled even from fiat interest rates. You'd think they'd catch on.

Yes, it may still be a fiat policy to pay an interest rate on our every fiat fiscal policy decision ... but, like all fiat, that swings on a whim. You'd think we'd have more interest in our group survival than in our nominal currency interest rate, but people obviously get confused about these concepts, and refuse to sort them out.

Our bigger fiat problem is our fiat expression of fiat ignorance. Namely, our fiat insistence on fiat NON context-awareness.

This is an oxymoron, of course. To adequately close off all emerging avenues of context awareness denotes an ability to detect said avenues, in order to close them!!!

This is getting interesting, from a pathologists point of view. What do we call pathologists who study and treat cultures, not just individual physiologies? Sentient citizens? Do we have enough of those to matter?

Leaving that issue aside, let's ask some more diagnostic questions, in the interim. How do culture-wide oxymorons propagate? By some inverse cultural-prion disease, where malformed memes act as the prion? Seems backwards, but complicated things happen in complex systems.

However this willful group ignorance occurs, we're left with the curious phenomenon of an entire electorate afraid to acknowledge all aspects of the image bouncing back from it's own operational mirror. Such selective sensory filtration - willfully feigned partial blindness - is called Munchausen by Proxy syndrome in other settings. We have it on a cultural scale.

This is curious beyond rational belief. Being our own bully and stealing our own lunch doesn't sound so bad, in theory. In practice, however, if our lunch currency is only stuffed into bulging cultural-cheek-pouches (purely nominal banking reserves), and never reaches the Middle Class cultural stomach, can we still truthfully tell ourselves that we're even eating our own lunch?

You'd have to ask the Lunch Havers, or their proxies.

Our culture needs MORE than just an advanced semantic immune system (to help select adaptive memes faster). It needs an effective ParadigmAntic immune system, to accelerate discrimination of self-paradigms (that aid survival) and non-self-paradigms (that lead to dead ends, i.e., to us dead).

Without more collective deliberation, we're running around randomly, in the process of dissociating, not coordinating.