Archive for the Inflation Category

China continues to reign in loose monetary policy

19. January 2010 by Dan Walkow, CFA, CMT.

China has rattled financial markets by moving faster than expected to tighten its grip on liquidity as a strong recovery and rising asset prices threaten to cause overheating in the world’s third-largest economy.

Societe Generale said in a research note in the wake of Tuesday’s auction that the central bank’s wording of “flexible and targetted” was currently still tightening.

“The hike in the reserve requirement and the draining of liquidity while in fashion with the notion of flexibility and targetting, cannot be dismissed as anything other than tightening no matter how minor at this stage,” SG said.

China is leading again, this time putting the brakes on by raising interest rates and tightening bank reserve requirements to arrest runaway stock market and real estate speculation. Will the rest of the world follow?

Read More here.

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The Coming Interest Rate Tsunami

23. November 2009 by Dan Walkow, CFA, CMT.

Deficit-ridden governments around the world, led by the United States, require massive amounts of funding and they raise money by selling bonds. In particular there is a movement afoot to reduce reliance on selling short term investments like Treasury Bills and increase long term funding like 30 year bonds. It is like locking in your mortgage payments at low interest rates for 30 years as opposed to having a floating rate mortgage.

This is a smart move at this juncture in the economic cycle, for governments, corporations and individuals alike. There is a very strong possibility we are at generational lows in interest rates and the competition for long term funding will ensure that the direction of interest rates will be up, perhaps dramatically so.

The interest rate stage is set and investors who hold bond mutual funds, annuities and longer dated bond maturities could feel the wrath of the coming interest rate tsunami in a very significant way. Buyer beware!

For more read this embedded story by the New York Times on how the massive funding needs by the United States is going to change the interest rate landscape, good for long term borrowers not good for investors. Read the story here.

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THE GREAT REFLATION EXPERIMENT

1. August 2009 by Dan Walkow, CFA, CMT.

The recent Boeckh Investment Newsletter pens my concerns in much more elegant prose than I can. Well written it lays out some history and where we are now.

Read it here at the Pragmatic Capitalist.

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Make Sure You Get This One Right

7. July 2009 by Dan Walkow, CFA, CMT.

The question facing investors which will have the most impact over the next several years is whether deflation or inflation will prevail. Neils Jensen of Absolute Return Partners LLP lays out the deflationary view.

As investors we are faced with the consequences of our decisions every

single day; however, as my old mentor at Goldman Sachs frequently

reminded me, in your life time, you won’t have to get more than a

handful of key decisions correct - everything else is just noise. One of

those defining moments came about in August 1979 when inflation was

out of control and global stock markets were being punished. Paul

Volcker was handed the keys to the executive office at the Fed. The rest

is history.

Now, fast forward to July 2009 and we (and that includes you, dear

reader!) are faced with another one of those ‘make or break’ decisions

which will effectively determine returns over the next many years. The

question is a very simple one:

Are we facing a deflationary spiral1 or will the monetary and fiscalstimulus ultimately create (hyper) inflation?

Read More

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If the Numbers Look Bad - Change the Way You Calculate the Numbers

25. June 2009 by Dan Walkow, CFA, CMT.

Charts courtesy of dshort.com (Click to Enlarge)

As a result of very high inflation numbers emanating from the 1970’s governments were faced with a very big problem. Union settlements forced adjustments to include a “COLA” adjustment to pensions and benefits and tax brackets. This beget a significant increase in employer and government liabilities as they had to “pay up” every year to account for inflation.

Not good. How do you fix the problem? Why you change the way the inflation index is calculated introducing something called “hedonistic delflators”. The Consumer Price Index has been fiddled twice over the last 20 years.

Headline inflation is about zero as reported in recent days according to current day calculations.

What would the rate be if they left the CPI calculation alone? Click the chart above to find out.

You will not be surprised, but if you are a senior with indexed benefits, you are not going to be happy!

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