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Guest Post: Black Swan Meets White Swan
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GS is coming to market witha bond deal..is it FDIC backed?
Errrm, so WHAT, exactly, is being said here?
DavidC
Deflation vs inflation, with the odds on favorite going to deflation.
So is VXX one way to play the "Black Swan?"
Investors are confusing the risk of nominal inflation with relative inflation. 5% inflation isn't much, unless equivalent short rates are 3%. Would the FED allow inflation to run ahead of short term rates, you bet your Bernanke they would, any policy which punishes savers and encourages credit expansion, and puts a bid under Treasury auctions, is their policy. (And buy forcing bond buyers out to the long end they accomplish this) The benefit of buying TIPs is therefore negated, as market prices in this inverted spread, and the etfs only reflect the yield at the most recent auction. Owning TIPS is appropriate, buying TIPS is not. The only prudent policy is to put these positions in place when they were selling at par, or even a discount to par. Those days seems to be over. However the Pimco STPZ targets the inflation and the short end of the curve, and allows you to profit from directly from the seismic shift. The government is essentially immunized from selling effective inflation protection at that point, which we are rapidly approaching, that's what Gross is telling us.
The inflationary genie always gets out of the bottle when Uncle decides to subsidize something, unless government continue with price controls, and greater interventions. That ultimately leads to shortages, lack of investment, etc, until new technologies replace the old ones.
"5% inflation isn't much"
What?! 5% annual inflation is a doubling time of 14 years, not a long time! Irrespective of whether it is relative or nominal.
DavidC
I think that you need to get out more. 5% inflation is not much. Especially when they want to have a depreciated dollar - and enough that the inflation increases tax receipts to cover unfunded liabilities. Underreport/massage the CPI number and presto - you got more revenue without a straight increase on demands by using inflation to reduce standards (Soc Sec, medicare/caid, etc) and with a 50% reduction in dollar buying power you have almost gotten there. With a 5% rate the amount of yearly inflation is 'manageable' without everyone freaking out to a unwarranted degree.
not sure what shadowstats has but betting it is close to 5%. (and while the incline during the housing bubble favored asset inflation versus non core, on the other side it should do just the opposite) how it affects investors perceptions is another matter. 5% relative to 3% is a 66% depreciation, and that's brutal. Until rates go nominally to say 10% the investing public remains fat dumb and happy.
Total Idiot Poverty Scheme
Here's a tip just buy forever stamps or a tank of gasoline.
i heard somewhere:
"Deflation is the midwife of hyperinflation."
Get ready for the mulatto swan.
We already have a mulato swan.
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