Monday, March 23, 2009

Inflation

I was caught between a rock and a hard place while writing today's column on the bond market. On the one hand, how can we not have inflation given the 25 hour per day printing of money by the government. But on the other had, the Fed buys billions of bucks worth of T-Bonds to reduce supply in an already over-demanded market.

The charts are not clear, either, as short- and long-term technicals still look pretty good - as long as you keep your time frame straight. Basically, that means the bond market can suffer a pretty hefty drop and still be considering in a long-term bull. Obviously, in a short-term frame of reference, prices would plummet and interest rates soar.

But on the third hand (don't worry, that's all the hands I'll borrow), inflation may be a relative term. If long rates go from under 4% today to 5% in a few months that would be a 25% increase in rates. Is that what everyone is talking about in terms of inflation? I see a 1% boost in rates and say - big deal. I paid 4 bucks for a gallon of gas last year and that was real inflation as far as my wallet was concerned.

What would make everything tie up in a neat - yet unfortunate - bundle would be a break below the 124 level on bond futures and then drop to the long-term trendline in the 115 area. Let it futz around a bit and then break down again. Then everyone gets their wish - economic recovery, soaring inflation as we print money like Zimbabwe and the charts would match the fundamentals.

5 comments:

gingersue said...

You bring up a good point. Perhaps when everyone is comparing today to the 1930's, we actually might be starting to enter a period where we see a repeat of 1994, which was when the stock market went sideways and the bond market had it's worst year in the last 50 years before that.

Gmatt234 said...

Isn't the Fed's unsterilized Treasury bond purchases the very vehicle it uses to print money? This seems to be the same hand instead of 2 opposing hands.

Quick Takes Pro said...

Gmatt,

The economic stuff is always a mystery - that's why I stick to the charts. But I do know supply and demand and when the Fed buys bonds it soaks up supply.

You are right, however, they have to get the money from somewhere.

Quick Takes Pro said...

gingersue,

I still use 1994 as a turning point for both stocks and bonds. Stocks ended a "rotational bear market." Bonds ended a true bear.

Steve said...

1929 and today are the only credit-bubble induced recessions in history. 1994 was the "traditional" high-rate induced recession.

Aren't we actually UNDER performing 1929? I thought October 29 thru May 30 was a huge rally that fooled everyone into thinking it was a bull market. So far, this one has been pretty lackluster. The killer low was 1932, so I'd hate to see us under perform that script. But again, the economic backdrop matches 29, not 94.