If we recall the middle of 2009, one of the hottest debates among traders and economists was revolving around the subject of US economy experiencing inflationary or deflationary pressure. Many experts expected that, following the unprecedented central banks’ expansionary money supply policies, the G7 countries would witness a rapid increase in the level of prices. Exactly like the first half of 2009, the US CPI during the 1H10 has hovered near the flat line. Moreover, the all-item inflation numbers shifted into negative territory when oil went through a price correction. The annualized core inflation rate from December 2009 to May 2010 stands at only 0.3%, the tamest five-month annualized rate since early 1960s. If things remain status quo, is US in danger of turning into a Japanese non-inflationary experience?
One school of thoughts thinks so, but the bond market behaves differently. For instance, the Treasury Inflation-Protected Security (TIPS) spread implies longer term inflation of 1.9 percent while the US Treasury ten-year bond trades some 200 basis points above the Japanese benchmark JCB. Despite Federal Reserve’s massive monetary easing programs, consumer credit fell at an annual rate of 4.5 percent in May 2010, making it the fourth consecutive month of declining credit. Once the engine of a fast CPI growth, the housing costs have contributed to a muted core inflation rate. Moreover, a strong productivity rate has kept the unit labor costs under control domestically, while the strong US dollar has made imported goods much cheaper for the American consumer.
If deflation is the short-term threat, inflation could represent the long-run challenge for the US economy. As a result, the long rally in Treasury is not just a simple flight to safety from stocks and European debt crisis. New lows in core inflation could keep the US Treasury yields more grounded than anyone expected a year ago. Early in February, financial guru Nassim Taleb claimed that everyone on earth should short Treasuries, thanks to the exploding US budget deficit and potential elevated inflation. So far, Mr. Taleb’s forecast has been worse than the New York Penn Station shoe shine boy’s prediction. Stocks markets around the world are down for the year, oil is down, while inflation expectations have moderated and UST bond yields are way down. Markets have priced in the probability of a double-dip recession that could wipe out the entire gains of the past year. On June 29 Treasury prices surged, pushing the 10-year bond yield below 3 percent, for the first time since April 2009, and more than 100 basis points under the April 6 yield peak of 4.0 percent.
Taken at face value, today yield would suggest that the constraints on monetary and fiscal policymakers mean that markets are probably more worried about a policy-led rescue from a double-dip recession, even if they do not expect a great depression. According to Morgan Stanley, for 2011, the research team expects a level of 1.75% for the Fed funds rate, 2.6% for headline CPI inflation and a 10-year yield in a range of 4.75-4.90%. As an investor, I would not be that bearish on US Treasury bonds for the next 18 months.
I suppose the Taleb reference is from the February forum in Russia. Taleb also suggesting shorting the S&P500 and going long gold in a ratio of 1.5:1. That prediction is going quite well.
Jim,
I could suggest that one day we all going to die. You cannot say I am not quite good on that one…
Tare articolul, de invatat din el (pt cine are cap sa invete) dar am si eu o mare intrebare : descrie pe scurt (asa ca pt romanii nostri) cum este cu TIPS si tresury yields si bondurile si corelatia cu inflatia.
Si daca se poate o sugestie: daca te-ai intors in tara si ai blogul asta din care avem ce invata si ai atata experienta pe care multi doar o viseaza scrie in romana! Nu ca nu as sti engleza dar daca vreau sa citesc unu de al lor citesc in engleza dar eu vreau sa citesc unul de al meu care vad ca e mai destept decat multi ai lor.
Multumesc si nu ma uita cu cele doua carti
George,
With regard to your suggestion, I should point you in the right direction: please go to the FAQ section and you will find a comprehensive answer there. Don’t worry, you are not the first one asking that childish question. Just for your information, I am still living in US, even though I will always be a proud Romanian. I left that country for a reason and a reason only: complete lack of meritocracy.
To get and answer to your question on TIPS, UST and Inflation, please read the Sep 9th article “Inflation vs. Deflation” and you will have a better understanding then.
Do you need the textbooks for fun, for daytrading or for professional trading?
Toni,
I don’t know about George but I’m interested more in the sense for professional trading or analyst wanna be …
BMM & thx
Bogdan,
Okay. This week I am extremely busy with a business trip but next week I should be able to give you guys a coule of good textbooks.
Toni,
I’m interested in that too … if you could when you have time it would be great !
Karl
Karl,
It is past already. Instead, we could have a more intelligent conversation about the future. Right?
Toni,
Yes you are right … but I would still find very helpful if you could give us some book titles for financial analysis/fundamental analysis …
Appreciate,
Karl
Karl,
I do apologize, but the last month or so has been extremely hectic for me. I have not forgotten your request.
Toni,
Thank you … plenty of time for me … just when you have a chance I (others maybe too) would be grateful.
Karl
Salut
In primul rand imi cer scuze pt raspunsul cu intarziere dar am fost foarte prins la compania unde lucrez si seara nu am mai intrat pe internet.
-Sunt socat sa aud ca oameni buni pleaca din tara , iar, cand avem nevoie atat de mult de asemenea oameni in special ca invatamantul superior economic este paralel total cu economia si viata , si nu prea inteleg cum un manager sa lase sa-i scape un asemenea angajat. Era roman sigur managerul comapniei! Daca tie ti s-a intamplat asa ceva ia gandeste-te cum este pt angajatul de rand din multinationale. Pot sa spun ca la compania care lucrez eu, Petrom SA, avem oameni care au CFA level 1 si 2 si nimeni nu este interesat de cunostintele lor. Tampenia si pupincurismul rules!!!!
-Eu imi doresc sa dobandesc cunostinte temeinice , deoarece in facultate am facut doar un semestru si cursul cu seminar era o data la 2 saptamani deci 2 ori pe luna. Pt distractie in nici un caz!! As vrea sa lucrez ca tine dar deocamdata mai vedem))))))
Multumesc
George,
If you fight for the meritocracy, make sure first that you are in the top 5% in what are you doing. Among the things that I value the most, knowing your native language is paramount. Consequently, next time I will refrain myself from fixing your errors. If you are all-in for meritocracy, then make sure you are demanding with youself first and foremost!
With regard to the reason I left RO many years ago, it has nothing to do with my boss. Believe it or not, I had bad experiences in New York too. Management is not for everyone.
As far as CFA 1/2 is concerned, I don’t thing those guys could add too much value to Petrom, to begin with. Since the equity analysts lost their edge 10 years ago, CFA has become a joke even on Wall Street.
Toni,
What’s not a joke then ? A good MBA program and then try to get inside somewhere ?
BMM
Bogdan,
A good MBA could be definitely a good headstart. But, more important is where you land afterwards
Toni,
“even on Wall Street” even on ? … I don’t get it … what’s higher above than Wall Street in terms of finance/economy ?
BMM
Bogdan,
Wall Street by definition is the pinnacle of the world of finance. However, you would be shocked to meet under-par people within this space.
Toni,
How comes you’ve always been a proud Romanian? Expand that a bit please because it is quite sensitive …
Raul
Raul,
Back in 1998, when I landed my first job on Wall Street, there were not that many fellow Romanians. Even now, our presence is not that significant, but it is much better than 12 years ago. I have always kept my little RO flag on my desk, I have always talked about my country in the nicest possible way and I have never thrown my origin under the bus. It is more than that, but I could expand it later on.
Toni,
1. “always talked about my country in the nicest possible way” … why is that the case since it may not be the case actually ?
2. “shocked to meet under-par people within this space” … honestly, I never assumed that whatsoever … interesting.
3. “A good MBA could be definitely a good headstart.”
Would you favor an MBA in finance at 27-28 or a masters in finance at 23-24 ? I know a lot of other things differ but as an idea pro and cons what would be ?
Thx,
BMM
Bogdan,
In your order:
#1: you are right but I don’t like throwing my native country under ther bus, after becoming an American…Still proud of my origin
#2: keep in mind that you have scores of quality people on Wall Street…but exceptions are present too
#3: definitely go for an MBA after you have worked full-time at least 3 years (ideally in banking)
Toni,
1. What is behind “defintely go for an MBA after … ” and not masters at 23 ? Is it because you will get more from an MBA after having hands-on experience than a masters right after college gradtuation ?
2. An MBA stands for a masters programme after all right ?
3. Ideally in banking … I guess being a teller or similar is out of the equation right ?
Karl
Karl,
#1: Yes
#2: Yes
#3: After and MBA, if you end-up working as a teller, then it all becomes a bad joke…
Toni,
Thx. At 3 i was refering to the ” after you have worked full-time at least 3 years (ideally in banking)” like if you were a teller in those 3 years pre MBA I guess it doesn’t count, right ?
Karl
Karl,
That is correct. If you are a teller why do you want to go for an MBA? Maybe to head 100 tellers…
Toni,
Regarding the “complete lack of meritocracy” … is it better in the US or any other country that you or your friends experienced ?
Thx Raul
Raul,
Since I left RO, I have been working in US and in UK. In both cases it is way better than back home. It is far from being perfect, but in RO it is far from being normal. Every single guy I know has plenty of examples…
Senator Dodd with his financial reform: “never again the american taxpayer should be asked to write a check because of an implicit guarantee … ” etc “Our nation’s financial regulators are supposed to be the cops on the beat protecting working Americans from scrupulous financial actors … ”
All right, then I say the “implicit guarantee” is also the $1.175.133 worth discounted loans from Countrywide he got and all the good stuff being a friend of Angelo from Countrywide; while the “scrupulous financial actors” were the ones who actually gave him the $1.175.133 … ain’t “scrupulous” anymore in that case, right ?
The Senate and Banking Committee were supposed to be the watchdogs for the mortgage industry and senator Dodd is the chairman of this committee where he served on for more than 28 years …
I guess Dodd’s voice pontificating about predatory lending and how bad it is and the need to put an end to it does not make much sense with his discounts, but does instead a lot with his 28 years “in service” with the Senate and Banking Committee right ?
BogdanC
BogdanC,
You are spot on. We all find it normal to hear about a third-world country with corruption in power. You will be surprised how many cases we do have in US. Your example is amazing and it points out the hypocrisy in DC.
Toni,
What is your input on Jim Rogers’ view: the today’s farmers will be the tomorrow’s bankers (or something extremely similar” ?
And related the MBA:
“While you’re at it, teach your children to speak Mandarin, the coming language of the 21st century. And don’t encourage them to do an MBA: “Tell them to be a farmer and do a real job.”
When attending a good MBA do you have by any chance time to work too ? (part-time or some hours at least)
BogdanC
BogdanC,
As long as people purchase GM food, the agricultural commodity prices will vary around the long-term mean. When that wall will fall, then food will become the main currency.
The first claim on the MBA is a total brain-wash. My advice on MBA & work: try to study 100% for the first year and maybe a max of 10-hours/week job in the 2nd.
Toni,
NFP came out … that the case I expected DOW lower than this … the economy is just not creating jobs and the stimulus it seems to run out so cannot say it’s not there yet to act … What is your view on this NFP and DOW level ?
Have a good one,
BogdanC
BogdanC,
It took an hour for the NFP news to kick-in. It is definitely bad news and gloomy days ahead. Listen to this one: today report showed that the number of temporary workers fell for the first time since Sep ’09. That proves that US economy is not creating any kind of job (perm or temp), as it should. Logic action: short the retail index [XRT]!
Toni,
Why is it ~200k the desired number looked for in regards with the NFP job creation ?
BogdanC
BogdanC,
Very simple: have a look at the weekly (released on Thursdays) First-Time Unemployment Claim number. You will figure out.
Toni,
Off topic … how could I find how much did the price of paper (celuloza / hartie / industria topografica) rose in 2010 ? I mean some sort of international price … I know it is out of the topic but I got nothing to lose.
Thank you !
Maria
Maria,
Exactly. You have no downside there. I recall somebody was talking a year ago about the price of the pulp going up. This is a good start: http://www.paperage.com/foex/pulp.html
Toni,
Why do people say about the 0.25% fed’s interest rate that is “virtually zero” ?
Karl
Karl,
Simple…The 0.25% is a target rate, so many times you will see the Fed Funds below a quarter point. That is practically zero…
Toni,
1 more … the consensus for NFP, home sales or any other indicator by who is made ? by what economists/traders/investment bankers or whoever ? basically, “who is the consensus” ?
Karl
Karl,
Every economic indicator has two numbers: consensus and whisper. Consensus is an average of a bunch of paricipants within the main financial houses around. Those could be economists, strategists or a combination.
Toni,
What’s the so strong reasoning behind David Twibell’s ( president of wealth management at Colorado Capital Bank in Denver ) statement regarding the US treasuries : ” It’s awfully hard to make a compelling argument to invest in Treasurys unless you think we’re Japan.” ?
BogdanC
BogdanC,
It makes sense. US and Japan will not go through the same scenario. UST-10Y yield @ 2.5% is way out of proportions.