E-piphany

Then again, perhaps the fact that stocks are going down (-0.5% today) because future earnings are likely to be punk if the Rec/Depr-ession continues…makes sense. Initial Claims today printed at 484k, above the highest estimates and the highest number since February. Over the last 20 weeks, the consensus forecast has been too low 15 times (and two of the five times they were too high, the actual print was later revised to be higher than the consensus). At some point, if the “wisdom of the crowd” means anything, shouldn’t the crowd begin to catch on? Or is the economist crowd just full of slow learners?

The deflation scare has started to gain adherents. I noted yesterday that the prices of inflation-linked bonds suggested slow-growth more than they did deflation; today, the linker market got pounded like the tackling dummy during two-a-days. The inflation swaps market prices 2014 as the first time headline inflation is expected to exceed 2%, and 2019 before it is expected to exceed 3%. (Actually, it’s even worse than that, because presumably there is a longer “tail” to inflation than to deflation. Ergo, the market level, which is more of a mean expectation, is probably higher than the median forecast would be from the same market participants). 10-year inflation swaps are below 2.25%, and 10-year breakevens (which measure the same thing but are generally lower for some technical reasons) are only 1.56%.

Golly. If you’re holding 10-year Treasuries at 2.73% rather than TIPS, you are implicitly betting that compounded inflation will come in below 1.56% for ten years…because otherwise you’ll do better holding TIPS. What is the upside on that bet? It seems to me the downside is worse. Yes, TIPS at a 1% real yield aren’t cheap, but they’re better than nominal bonds.

Speaking of inflation, I want to thank everyone who has already taken the poll at http://poll.fm/25auj , and urge you to take it if you have not. Also, please send the link to friends. The poll is to test a hypothesis for a paper I am writing, and after the poll is closed (about six more days) I will disclose the results and the reason for the poll here. I don’t want to prejudice the results, however, so you’ll have to wait for me to explain the motivation!

In the news: this is the second time this has happened in the last couple of years: California is preparing to issue IOUs instead of paying its employees (link).  Now, technically these are short-term bonds, but they are very close to money. The last time this happened, the IOUs were accepted for goods and services at some stores. It goes from being a rediscounted bond to being scrip when California decides not to pay them off at 100 cents on the dollar. Can it happen? Is there anything about the last couple of years that makes you think it cannot happen?

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Tomorrow’s economic data consists of Retail Sales (Consensus: +0.5%, +0.3% ex-autos), Michigan Sentiment (Consensus: 69.0 vs 67.8 last, but given the last couple of ‘Claims numbers I would take the “under” on that), and CPI.

On CPI, the consensus call is for +0.2% on the headline and +0.1% ex-food-and-energy, which would bring the year-on-year rates to +1.1% and +0.9%, respectively. These numbers look about right to me, with perhaps a smidge of upside risk on core inflation. As usual, I will be calculating year/year core ex-housing, which last month was 2.6% and should drip somewhat on base effects. That doesn’t look even remotely like deflation to me. Sure, M2 money supply is growing an anemic 2.5% over the last 52 weeks, and that won’t scare anyone inflation-wise, but it is up at a 5.3% rate over the last 13 weeks.

And yes, August is almost half over but we are setting up all the mischief for the fall. Today the new EU ambassador to the United States said he will be speaking for Britain on foreign and security policy in America (link). And Ireland and Greece are back in the news as well (link). Europe is vulnerable to a U.S. slowdown; the impressive-sounding but de facto flimsy bet by the EU not so many weeks ago to save Greece was a measure whose best chance of success was if they happened to get lucky and nail the bottom of the economic cycle so that investors could choose to believe the fiction without much risk. It increasingly looks like that is not the case. As Terrell Owens has proven over and over again, teamwork is easiest when the team is winning. When the crowd begins to boo…it’s every man for himself.