Shifting Inflation Expectations, 2020-2021

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SimpleGift
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Shifting Inflation Expectations, 2020-2021

Post by SimpleGift »

What a difference a year makes in the U.S. bond market's expectations of future inflation. The chart below shows today's breakeven inflation rate curve, from 2 years to 10 years, compared with curves from June and December of 2020. Breakeven rates are simply the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
  • Image
    NOTE: Strictly, breakeven rates and expected inflation are not exactly the same, since the breakeven rates
    do not consider the inflation risk premium (which pushes inflation compensation up) and the TIPS liquidity
    premium (which pushes inflation compensation down) — but are close enough for a general discussion.

    Data source: Breakeven inflation rates from Federal Reserve models.
A year ago, the bond markets were forecasting a very low inflation future, with 2-year inflation below 0.5% and 10-year inflation at 1.2% (in orange above). Today, 2-year inflation is forecast at 3%, with 10-year inflation at 2.5% (in blue).

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.

Thoughts?
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Re: Shifting Inflation Expectations, 2020-2021

Post by NiceUnparticularMan »

SimpleGift wrote: Tue Jun 01, 2021 11:56 am What a difference a year makes in the U.S. bond market's expectations of future inflation. The chart below shows today's breakeven inflation rate curve, from 2 years to 10 years, compared with curves from June and December of 2020. Breakeven rates are simply the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
  • Image
    NOTE: Strictly, breakeven rates and expected inflation are not exactly the same, since the breakeven rates
    do not consider the inflation risk premium (which pushes inflation compensation up) and the TIPS liquidity
    premium (which pushes inflation compensation down) — but are close enough for a general discussion.

    Data source: Breakeven inflation rates from Federal Reserve models.
A year ago, the bond markets were forecasting a very low inflation future, with 2-year inflation below 0.5% and 10-year inflation at 1.2% (in orange above). Today, 2-year inflation is forecast at 3%, with 10-year inflation at 2.5% (in blue).

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.

Thoughts?
I agree that bond markets are not currently expecting much of a long-term inflation problem.

But I think people should look at this chart and realize that what bond markets expect at any given time is not necessarily all that reliable. I mean, those are pretty big swings already in terms of expectations for the same periods of time on the front end. What will be the discrepancy between current expectations for periods long from now, and what expectations look like for the same periods much closer to then?
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Re: Shifting Inflation Expectations, 2020-2021

Post by MishkaWorries »

Sounds good to me but I wonder how accurate the bond market has been in estimating future inflation?

A quick search shows a thread from last year.

viewtopic.php?t=304531
Discussion. Clearly, the bond market can and has had periods when inflation expectations were anchored primarily on past history, rather than an accurate forecast of future inflation. To my mind, this indicates that investors with a significant portfolio allocation to bonds should not fall asleep to the risk of future high inflation — even when yields and market expectations are currently so low.
Strangely enough that thread and this quote is from the OP :D
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
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Re: Shifting Inflation Expectations, 2020-2021

Post by SimpleGift »

MishkaWorries wrote: Tue Jun 01, 2021 12:43 pm Sounds good to me but I wonder how accurate the bond market has been in estimating future inflation?
Ha, a good question. Studies indicate that bond markets are much better at predicting past inflation than future inflation (see this research). In other words, bond investors tend to be more anchored on past history, than accurately forecasting the future.

But that said, I believe it's at least worth considering what millions of U.S. bond investors worldwide, with real money on the table, are collectively thinking about expected inflation in various time frames — if just for discussion.
SimpleGift wrote:To my mind, this indicates that investors with a significant portfolio allocation to bonds should not fall asleep to the risk of future high inflation — even when yields and market expectations are currently so low.
Still believe that this recommendation makes good sense.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Scooter57 »

scout1 wrote: Tue Jun 01, 2021 12:44 pm The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
Last year proved only that the Fed continues to be willing to manipulate markets at an increasing pace, in a way never tried before 2009, using a strategy of interfering in markets by becoming a buyer of trillions of dollars of securities that would otherwise have been priced very differently had anything faintly like Capitalism been allowed to set those prices.

The long-term effect of this strategy will only be known in decades. What we have now is stock and bond markets so artificially inflated by those trillions of dollars of Fed purchases that the very whisper of a hint that the Fed might stop buying billions of dollars of bonds every month causes markets to have fits.

Corporate debt is at unheard of levels, with much of that debt being used for unproductive things, like funding buybacks (at prices far higher than are justified by company earnings), using those buybacks to buy back obscene amounts of executive stock options, and in some cases paying dividends that would not be possible if they had to come from the company's earnings from its business rather than loans. Those loans have to be repaid and if we get any significant inflation repaying them is going to do bad things to corporate earnings. The effect has been to greatly magnify income disparities between the hugely rich and everyone else. The view of how much of a recession was prevented is very different if you are a working class person in America whose wages were stagnant for decades than it is for those who get paid in stock options (a very small group.)

So until we get to a situation where the markets for stocks and bonds go back to functioning without the Fed acting as a major buyer with the balance of what they buy increasing every year it is way too early to declare victory.

Finally, when I see investor post statements like yours that "the US may never have a significant recession ever again," I really start to worry about just how bad that next recession is going to be.
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

Scooter57 wrote: Tue Jun 01, 2021 2:42 pm
scout1 wrote: Tue Jun 01, 2021 12:44 pm The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
Last year proved only that the Fed continues to be willing to manipulate markets at an increasing pace, in a way never tried before 2009, using a strategy of interfering in markets by becoming a buyer of trillions of dollars of securities that would otherwise have been priced very differently had anything faintly like Capitalism been allowed to set those prices.

The long-term effect of this strategy will only be known in decades. What we have now is stock and bond markets so artificially inflated by those trillions of dollars of Fed purchases that the very whisper of a hint that the Fed might stop buying billions of dollars of bonds every month causes markets to have fits.

Corporate debt is at unheard of levels, with much of that debt being used for unproductive things, like funding buybacks (at prices far higher than are justified by company earnings), using those buybacks to buy back obscene amounts of executive stock options, and in some cases paying dividends that would not be possible if they had to come from the company's earnings from its business rather than loans. Those loans have to be repaid and if we get any significant inflation repaying them is going to do bad things to corporate earnings. The effect has been to greatly magnify income disparities between the hugely rich and everyone else. The view of how much of a recession was prevented is very different if you are a working class person in America whose wages were stagnant for decades than it is for those who get paid in stock options (a very small group.)

So until we get to a situation where the markets for stocks and bonds go back to functioning without the Fed acting as a major buyer with the balance of what they buy increasing every year it is way too early to declare victory.

Finally, when I see investor post statements like yours that "the US may never have a significant recession ever again," I really start to worry about just how bad that next recession is going to be.
How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.

Feel free to tell me all about how bad the future will be, predictions of inflation out of control and asset prices collapsing, etc. but we can both agree that the last year could have been so much worse. The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered. The fed and govt did a fantastic job.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Beensabu »

scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

Beensabu wrote: Tue Jun 01, 2021 4:20 pm
scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
Unemployment went to 16%, the highest since the great depression. The fact that it's now 6% a year later is an economic miracle. It's not minimizing the impact to those still unemployed to say that things were handled very very well. Given the circumstances, it's been a great recovery. A global pandemic is by far the worst thing the US as ever experienced on an economic level.
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Re: Shifting Inflation Expectations, 2020-2021

Post by SimpleGift »

As a retired investor with significant exposure to inflation risk, one of the less discussed, but more impactful developments regarding future inflation, to my mind, is the Fed replacing its 2% inflation target commitment, and instead saying it will “seek to achieve inflation that averages 2% over time.” (my bold)

By adopting average inflation targeting, the Fed is communicating that 2% is not a ceiling for inflation, and that it may let inflation exceed 2% modestly and temporarily to make up for past low inflation. Hopefully, this will keep inflation expectations anchored around the 2% level, even if we see higher inflation spikes in the months ahead — and also enable the Fed to avoid prematurely raising interest rates, with damaging impacts on the U.S. equity markets.
Last edited by SimpleGift on Tue Jun 01, 2021 6:08 pm, edited 1 time in total.
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Re: Shifting Inflation Expectations, 2020-2021

Post by nisiprius »

SimpleGift wrote: Tue Jun 01, 2021 11:56 am...An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.
According to the Bureau of Labor Statistics, the CPI was 9.8 in January 1913 and 261.582 in January 2021. That works out to an average (CAGR) rate of inflation of (261.582/9.8)^(1/108)-1 = 3.09% per year.

Since it has actually averaged 3.09% per year over the last 108 years, it seems to me that we can live with 2.5%.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Beensabu »

SimpleGift wrote: Tue Jun 01, 2021 5:28 pm By adopting average inflation targeting, the Fed is communicating that 2% is not a ceiling for inflation, and that it may let inflation exceed 2% modestly and temporarily to make up for past low inflation.
Are you familiar with Paul Krugman's concept of "managed inflation" (creating inflation expectations as a tool)? It's my current rabbit hole.
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Re: Shifting Inflation Expectations, 2020-2021

Post by rockstar »

The comps against last year are going to cause inflation to spike. What I'm more interested in is what inflation looks like when you compare this year versus next year. If it's inflated, then I'll start to worry.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Walkure »

Beensabu wrote: Tue Jun 01, 2021 4:20 pm
scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
Yes, there are many people who are unbanked, unhoused, etc. But I'm not sure that what they are experiencing has much to do with "recession" in the formal economy, whether that be the result of routine business cycles or exogenous shocks like the pandemic. There is clearly a segment of the population whose "personal economies" have been receding for decades, standing on the outside looking in at the economy as it alternately grows and contracts.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Beensabu »

Walkure wrote: Wed Jun 02, 2021 10:12 pm
Beensabu wrote: Tue Jun 01, 2021 4:20 pm
scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
Yes, there are many people who are unbanked, unhoused, etc. But I'm not sure that what they are experiencing has much to do with "recession" in the formal economy, whether that be the result of routine business cycles or exogenous shocks like the pandemic. There is clearly a segment of the population whose "personal economies" have been receding for decades, standing on the outside looking in at the economy as it alternately grows and contracts.
Not everyone who is unbanked or unhoused is unemployed. And everyone feels the effect of changing economic conditions, whether or not one feels they are participating in the economy (at all or to any great extent). Where we have been for a long time is like a massive crowd pushed up against the edge of a cliff that's eroding slowly over time plus also has sections just give way once in a while. Some of those near the edge are tumbling off all along, but once in a while a whole lot of people go down. And the edge gets closer and closer to everyone else. Everyone who can see the edge is afraid of falling off it. Some are close enough to hear and feel the unease of those who can see it, so they know there's something scary over there. Some are farther away, and not all that concerned. Some are so far away, they doubt the edge exists, if news of it ever reaches them. Hardly anyone knows what happens to the people who fell off -- they're now in a completely different world.
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

Beensabu wrote: Thu Jun 03, 2021 6:40 pm
Walkure wrote: Wed Jun 02, 2021 10:12 pm
Beensabu wrote: Tue Jun 01, 2021 4:20 pm
scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
Yes, there are many people who are unbanked, unhoused, etc. But I'm not sure that what they are experiencing has much to do with "recession" in the formal economy, whether that be the result of routine business cycles or exogenous shocks like the pandemic. There is clearly a segment of the population whose "personal economies" have been receding for decades, standing on the outside looking in at the economy as it alternately grows and contracts.
Not everyone who is unbanked or unhoused is unemployed. And everyone feels the effect of changing economic conditions, whether or not one feels they are participating in the economy (at all or to any great extent). Where we have been for a long time is like a massive crowd pushed up against the edge of a cliff that's eroding slowly over time plus also has sections just give way once in a while. Some of those near the edge are tumbling off all along, but once in a while a whole lot of people go down. And the edge gets closer and closer to everyone else. Everyone who can see the edge is afraid of falling off it. Some are close enough to hear and feel the unease of those who can see it, so they know there's something scary over there. Some are farther away, and not all that concerned. Some are so far away, they doubt the edge exists, if news of it ever reaches them. Hardly anyone knows what happens to the people who fell off -- they're now in a completely different world.

Businesses across a variety of industries are saying they're having trouble hiring right now. That's a good thing for the very people you're talking about. They appear to have more options now than even before the pandemic started. To me, that's an economic miracle and the sign of a great recovery. I thank the Fed for that, and believe they will help mitigate the next recession.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Beensabu »

scout1 wrote: Tue Jun 08, 2021 5:58 pm Businesses across a variety of industries are saying they're having trouble hiring right now.
They need to pay more.
That's a good thing for the very people you're talking about.
Not if they don't get paid more.
They appear to have more options now than even before the pandemic started.
Yes. Crappy Job #1 or Crappy Job #2. Crappy jobs are now easier to come by for those generally considered employable.

The problem is you need multiple crappy jobs or multiple people with crappy jobs in a household to keep it going.

What is also happening is that the lowest end of wages is being forced up a tiny bit. However, those that were making a little more than the lowest end aren't seeing the bump. Their wages are stagnant, and they're just all of a sudden at or near minimum wage. So Slightly Less Crappy Job has become Crappy Job #3. It's wage compression in the lower range.

The bit of increase for some is swallowed up by the increase in costs of necessities (like food) that are pretty much always subject to inflation. Food isn't something you can wait to buy later. You buy it when you need it. It's the same with housing. When you need a place to live, you need a place to live. If the places to live are all too expensive, then you live in your vehicle or outside or jump around between various friends/family/motels or squat or some combination of those options.

Those that newly find themselves at minimum wage continue to slowly have less and less discretionary income over time, which will also again start affecting those who got pushed up a bit for a moment.
To me, that's an economic miracle and the sign of a great recovery.
There is a limit to the effect of spending by those who have discretionary income simply because there is a limited number of those who actually have discretionary income, and that number is constantly shrinking proportionate to the population.
I thank the Fed for that, and believe they will help mitigate the next recession.
They've done what they had to do. And "government social benefits" provided discretionary income to those who had none. Go look at the real change in personal disposable income over the first four months of this year. That extra discretionary income is running out. This recession hasn't been officially called yet. That means it's not over.

Edit: I used "disposable" instead of "discretionary" :oops: . That was wrong.
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Re: Shifting Inflation Expectations, 2020-2021

Post by bberris »

I think the fed has always had the goal of low stable inflation. One, because it makes negative real rates feasible, where negative nominal rates are a little implausible. Two, because without inflation, defaults would be excessive, and possibly spiral out of control. I think 2 % has been targeted for awhile.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Angst »

SimpleGift wrote: Tue Jun 01, 2021 11:56 am Image

[Snip...]

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.
Thanks for posting and I agree with your summary. Here's a twitter post from Claudia Sahm that highlights what I consider the elephant in the room to be with a nice graphic: https://pbs.twimg.com/media/E3b1GUzWUAY ... me=900x900

(Sorry, I can't seem to just get the image alone to display here. Maybe someone else can?)
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Re: Shifting Inflation Expectations, 2020-2021

Post by watchnerd »

SimpleGift wrote: Tue Jun 01, 2021 11:56 am

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.

Thoughts?
I think it's equally likely that the bond markets are under-estimating *deflation*.

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Re: Shifting Inflation Expectations, 2020-2021

Post by esteen »

Angst wrote: Wed Jun 09, 2021 8:15 pm
SimpleGift wrote: Tue Jun 01, 2021 11:56 am Image

[Snip...]

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.
Thanks for posting and I agree with your summary. Here's a twitter post from Claudia Sahm that highlights what I consider the elephant in the room to be with a nice graphic: https://pbs.twimg.com/media/E3b1GUzWUAY ... me=900x900

(Sorry, I can't seem to just get the image alone to display here. Maybe someone else can?)
I like the summary of inflation expectations too, and am also hoping for 2-3% long term.

I don't know who Claudia Sahm is but reading through her recent Twitter posts she seems quite angry.

Also her graph does not show a correlation of anything that I can tell. In the graph, unemployment was moving in lock step with inflation for the first decade and a half. Also unemployment didn't show any similar hump to inflation in the 70s. Also the two lines are on two separate axes so even if they looked somewhat mirror imaged in the 2nd half of the selected time period, it's because the axis min/max and spacing are different to create the image of a split.

Sorry if this seems like raining on a parade, but I dislike misleading graphics. Comparing data sets on separate axes with differently spaced gridlines is a data no-no.

EDIT: I should clarify, it doesn't mean her proposition is wrong that unemployment and inflation are linked. They very well may be. Misleading graphic though, IMO.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Angst »

esteen wrote: Thu Jun 10, 2021 12:21 am
Angst wrote: Wed Jun 09, 2021 8:15 pm
SimpleGift wrote: Tue Jun 01, 2021 11:56 am Image

[Snip...]

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.
Thanks for posting and I agree with your summary. Here's a twitter post from Claudia Sahm that highlights what I consider the elephant in the room to be with a nice graphic: https://pbs.twimg.com/media/E3b1GUzWUAY ... me=900x900

(Sorry, I can't seem to just get the image alone to display here. Maybe someone else can?)
I like the summary of inflation expectations too, and am also hoping for 2-3% long term.

I don't know who Claudia Sahm is but reading through her recent Twitter posts she seems quite angry.

I wasn't trying to draw attention to the specific thread, it's the graphic that I referred to. She's an economist who happens to post frequently in Twitter.
esteen wrote: Thu Jun 10, 2021 12:21 am
Also her graph does not show a correlation of anything that I can tell. In the graph, unemployment was moving in lock step with inflation for the first decade and a half. Also unemployment didn't show any similar hump to inflation in the 70s. Also the two lines are on two separate axes so even if they looked somewhat mirror imaged in the 2nd half of the selected time period, it's because the axis min/max and spacing are different to create the image of a split.

Sorry if this seems like raining on a parade, but I dislike misleading graphics. Comparing data sets on separate axes with differently spaced gridlines is a data no-no.

EDIT: I should clarify, it doesn't mean her proposition is wrong that unemployment and inflation are linked. They very well may be. Misleading graphic though, IMO.

I believe the whole point of the graphic is the absence of correlation. There's a long-term deflationary trend that has kept inflation low and employment levels have been (and presumably will continue to be) subsumed by it.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Ramjet »

scout1 wrote: Tue Jun 01, 2021 12:44 pm The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
The other day I simply said that I am hard pressed to see a Great Depression like scenario or 1970's style inflation happening again because the Fed has learned from it's mistakes in the past. You would have thought it was blasphemy. I'm still expecting to see significant recessions at some point but I just think the chances of catastrophic economic issues are a little less likely than the past, but certainly not impossible.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Ramjet »

rockstar wrote: Wed Jun 02, 2021 9:57 pm The comps against last year are going to cause inflation to spike. What I'm more interested in is what inflation looks like when you compare this year versus next year. If it's inflated, then I'll start to worry.
This is what I'm interested in also
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Re: Shifting Inflation Expectations, 2020-2021

Post by Valuethinker »

scout1 wrote: Tue Jun 01, 2021 12:44 pm The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
I've heard that argument re no recessions ever since the mid 1990s, and thru 3 recessions before current one.

The reality is monetary policy is a weak tool for economic stimulus. As the slowness of the post 2009 recovery showed.

Modern recessions are not about the Fed reigning in excess inflation. They come on the supply side eg the economy producing too much fibre optic cable (2000) or too much housing (2008).

I believe you are suffering from the Recency Effect. It's easier to recall more recent events.

The global GDP fall 1929-33 was larger I believe?

The 1870s one was of the scale of the Great Depression.

AFAIK no major financial institution has yet failed in the downturn? Contrast that to 2008 when besides Freddie Fannie and AIG being bailed out, Lehman went and so nearly did RBS (4th largest Bank in world by assets at that moment?) HBOS and a host of other institutions (including Citi, Bank of America etc).

We could argue that strong government intervention restrained Size of catastrophe, but of course that was because of the gravity of a global Bank run ("flight to liquidity") which world faced.

Both the world wars would count as economic crises I think. The fall in GDP of the defeated countries + China plus Eastern Europe must have been more than 50%? Japan it must have been something like 80%.

The downturn at end of WW1 was pretty brutal coinciding w the Spanish Flu & perhaps 50m deaths?

The Black Death took decades to roll round Eurasia but killed up to half of all Europeans in the years post 1346. So did the Plagues of Justinian from ?546 AD from memory.

Let's not mention the Mongol hordes. A century long disaster for everybody in their way.

Covid-19? What you had was a deliberate shutdown of parts of the economy. A bit like a major war but without the corresponding rise in industrial production.

In East Asia, where the original quarantine was much more severe, the downturns in GDP have been muted. It us Europe and North America who have taken the pain.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Valuethinker »

scout1 wrote: Tue Jun 01, 2021 4:27 pm
Beensabu wrote: Tue Jun 01, 2021 4:20 pm
scout1 wrote: Tue Jun 01, 2021 3:09 pm How many investors have you seen post a statement like "the US may never have a significant recession ever again"? I read a good amount of Bogleheads and have never seen anyone say anything close to that. In fact, I mostly see pessimism.
It is implied every time someone says "TINA" or "don't fight the Fed" or "buying the dip" or "backing up the truck".
The last year was economically fantastic given a global pandemic basically had the worlds economies shuttered.
This may not have been a significant recession for you, but it sure has been for a whole lot of people. People who don't have bank accounts. People who don't have permanent or long-term addresses. People who were unable to navigate the system to attempt to collect benefits. People who had their unemployment garnished by the state. People whose client base disappeared. People whose businesses went under. People whose jobs didn't come back. People whose scheduled hours got cut. They're people. They exist. They are not an insignificant percentage of the population. There are millions of them. They have been experiencing a significant recession. There will be more of them next time. One day, I might be one of them. One day, you might be.
Unemployment went to 16%, the highest since the great depression. The fact that it's now 6% a year later is an economic miracle. It's not minimizing the impact to those still unemployed to say that things were handled very very well. Given the circumstances, it's been a great recovery. A global pandemic is by far the worst thing the US as ever experienced on an economic level.
Unemployment of employed men (I don't think women or domestic servants were included in the stats) reached 25% by 1932?

33% in Canada. Australia something as bad.

The global pandemic hurt, for sure. But it was very much like wartime. Government shuts down large part of civilian economy but distributes cash to many of hardest hit.
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

Valuethinker wrote: Thu Jun 10, 2021 9:49 am
scout1 wrote: Tue Jun 01, 2021 12:44 pm The Fed moving from an inflation target to an average inflation targeting is a huge deal, implicit NGPD targeting is next. Also the last year proved the Fed it had the solution to the problem of recessions. The pandemic was by far the largest global economic catastrophe in history, and the Fed was able to aptly handle it. The US may never have a significant recession ever again, yes I'm serious.
I've heard that argument re no recessions ever since the mid 1990s, and thru 3 recessions before current one.

The reality is monetary policy is a weak tool for economic stimulus. As the slowness of the post 2009 recovery showed.

Modern recessions are not about the Fed reigning in excess inflation. They come on the supply side eg the economy producing too much fibre optic cable (2000) or too much housing (2008).

I believe you are suffering from the Recency Effect. It's easier to recall more recent events.

The global GDP fall 1929-33 was larger I believe?

The 1870s one was of the scale of the Great Depression.

AFAIK no major financial institution has yet failed in the downturn? Contrast that to 2008 when besides Freddie Fannie and AIG being bailed out, Lehman went and so nearly did RBS (4th largest Bank in world by assets at that moment?) HBOS and a host of other institutions (including Citi, Bank of America etc).

We could argue that strong government intervention restrained Size of catastrophe, but of course that was because of the gravity of a global Bank run ("flight to liquidity") which world faced.

Both the world wars would count as economic crises I think. The fall in GDP of the defeated countries + China plus Eastern Europe must have been more than 50%? Japan it must have been something like 80%.

The downturn at end of WW1 was pretty brutal coinciding w the Spanish Flu & perhaps 50m deaths?

The Black Death took decades to roll round Eurasia but killed up to half of all Europeans in the years post 1346. So did the Plagues of Justinian from ?546 AD from memory.

Let's not mention the Mongol hordes. A century long disaster for everybody in their way.

Covid-19? What you had was a deliberate shutdown of parts of the economy. A bit like a major war but without the corresponding rise in industrial production.

In East Asia, where the original quarantine was much more severe, the downturns in GDP have been muted. It us Europe and North America who have taken the pain.
A question I ask myself is: why was the financial crisis so much worse (on an economic level) than the global pandemic? A time when economies around the world just stopped producing for an indefinite amount of time should have resulted in higher and longer lasting unemployment and much more economic pain than a few midsized banks failing. The answer, I believe, is the response of the Fed and the rest of government. If the Fed and policymakers can help make a global economic shutdown only a modest blip in people's economic livelihood, than it should have no problem addressing any smaller problems. And I believe most causes of recession are smaller than a global economic shutdown.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Valuethinker »

scout1 wrote: Thu Jun 10, 2021 10:16 am

A question I ask myself is: why was the financial crisis so much worse (on an economic level) than the global pandemic? A time when economies around the world just stopped producing for an indefinite amount of time should have resulted in higher and longer lasting unemployment and much more economic pain than a few midsized banks failing. The answer, I believe, is the response of the Fed and the rest of government. If the Fed and policymakers can help make a global economic shutdown only a modest blip in people's economic livelihood, than it should have no problem addressing any smaller problems. And I believe most causes of recession are smaller than a global economic shutdown.
An obscure Austrian bank, CreditAnstalt, brought down the world trade and finance system (1931). Countries literally stopped being able to pay each other.

A mid sized investment bank, Lehman Brothers, nearly caused a chain reaction of defaults across the planet.

Think about what economic activity would have been 3-4 weeks later had Royal Bank of Scotland failed? And there were plenty of political pressures not to bail it.

But the actual liquidity freeze was well entrenched by then. If you were a company, and you went to your bank, you could not borrow money. Companies were in fact prevented from drawing down their Revolving Credit Facilities - previously agreed, legal contracts between banks and their clients. Read up on the dreaded Material Adverse Condition/ Change clauses. Companies like GE & Ford were ringing the US Treasury and telling them they could not meet their payroll at the end of the month.

There's an argument of about the legality of what the US Treasury actually did. I think a subsequent court decision ruled that it could not do so in the future.

The real saving action, though, was the NY Fed providing swap lines (liquidity facilities) for Eurodollars - the banking system in Europe runs a permanent dollar deficit (the banks always have fewer dollar depositors than they have need for dollars to finance the global trade of European clients). So in fact the entire European banking system was in trouble.

Banks create money by the business of loaning deposits. That's called the money multiplier. It works in reverse if loans are called in due to deposits flowing out. An explosive collapse of money supply will lead to a severe drop in real economic activity (think Argentina when it de-dollarized).

So the link between the money markets and the real world was there, and the threat. It was the British government's decision to stand very publicly behind its banks which turned it. That and the NY Fed acting behind the scenes to keep the Eurodollar system liquid. Gordon Brown's speech was no great shakes but could be summarised as "Things are bad. They may get worse. We shall do what is necessary [to preserve the banks]. If that is insufficient, we shall do more". You could almost hear the Spitfire engines thrumming into life on those summer mornings in Kent... or to quote one NY columnist "Did Gordon Brown just save the world?"

I must admit the downturn of 1980-81 felt worse, and certainly unemployment was c 12% from memory (Canadian unemployment was quite a bit higher than US unemployment, though, so memory conflates). I just happened to be looking for a job, so, to quote Walter Matthau (looking for a job in the movie "Survivors"): "Am I veteran? Yes. The Big One. Korea.... well, it was big for me".

And the Oil Crisis (1973-74) also felt pretty bad - fist fights at gas stations etc. But there was a lot going on then, Watergate etc. Stagflation. A general sense of things unravelling.

The current recession is a strange one. GDP fell not because people didn't want to spend money, but because there wasn't money to spend things on. Savings rates soared. In varying amounts and with uneven dispersion, people who were forcibly idled received compensation from their governments, ditto corporations. There wasn't a huge wave of insolvencies - either of people or of companies.

Whilst this was a huge test of our political systems, our medical and public health resilience, our social safety nets, it has not been like an ordinary recession.
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Re: Shifting Inflation Expectations, 2020-2021

Post by scout1 »

Valuethinker wrote: Thu Jun 10, 2021 10:34 am
scout1 wrote: Thu Jun 10, 2021 10:16 am

A question I ask myself is: why was the financial crisis so much worse (on an economic level) than the global pandemic? A time when economies around the world just stopped producing for an indefinite amount of time should have resulted in higher and longer lasting unemployment and much more economic pain than a few midsized banks failing. The answer, I believe, is the response of the Fed and the rest of government. If the Fed and policymakers can help make a global economic shutdown only a modest blip in people's economic livelihood, than it should have no problem addressing any smaller problems. And I believe most causes of recession are smaller than a global economic shutdown.

The current recession is a strange one. GDP fell not because people didn't want to spend money, but because there wasn't money to spend things on. Savings rates soared. In varying amounts and with uneven dispersion, people who were forcibly idled received compensation from their governments, ditto corporations. There wasn't a huge wave of insolvencies - either of people or of companies.

Whilst this was a huge test of our political systems, our medical and public health resilience, our social safety nets, it has not been like an ordinary recession.

Right, it was a lot worse than an ordinary recession. A global pandemic is so much worse than a few random banks failing. The fact that it was handled so well indicates to me that policymakers should be able to handle future recessions without problem.

I adhere to the Scott Sumner belief that recession are caused by tight monetary policy. I believe this recession is evidence of that. IMO better monetary policy can alleviate significant recessions.
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Re: Shifting Inflation Expectations, 2020-2021

Post by Valuethinker »

scout1 wrote: Thu Jun 10, 2021 10:53 am
Valuethinker wrote: Thu Jun 10, 2021 10:34 am
scout1 wrote: Thu Jun 10, 2021 10:16 am

A question I ask myself is: why was the financial crisis so much worse (on an economic level) than the global pandemic? A time when economies around the world just stopped producing for an indefinite amount of time should have resulted in higher and longer lasting unemployment and much more economic pain than a few midsized banks failing. The answer, I believe, is the response of the Fed and the rest of government. If the Fed and policymakers can help make a global economic shutdown only a modest blip in people's economic livelihood, than it should have no problem addressing any smaller problems. And I believe most causes of recession are smaller than a global economic shutdown.

The current recession is a strange one. GDP fell not because people didn't want to spend money, but because there wasn't money to spend things on. Savings rates soared. In varying amounts and with uneven dispersion, people who were forcibly idled received compensation from their governments, ditto corporations. There wasn't a huge wave of insolvencies - either of people or of companies.

Whilst this was a huge test of our political systems, our medical and public health resilience, our social safety nets, it has not been like an ordinary recession.

Right, it was a lot worse than an ordinary recession. A global pandemic is so much worse than a few random banks failing. The fact that it was handled so well indicates to me that policymakers should be able to handle future recessions without problem.

I adhere to the Scott Sumner belief that recession are caused by tight monetary policy. I believe this recession is evidence of that. IMO better monetary policy can alleviate significant recessions.
I don't think there is evidence of tight monetary policy in 2000-01 nor in the lead up to 2008. Nor for that matter in 1973: that was an adverse supply side shocks.

Nor in fact now. The Covid-19 recession is entirely structural. Best analogy is like a war.

The reality is Central Banks can't do much when asset prices are falling rapidly. See Scsndinavia in early 90s. See Canada sometime in next few years

Even Quantitative Easing. It hasn't solved Italy's problems, has it? Eurozone government bond yields are *negative* and that has not caused much recovery in Italy, has it?

The Eurozone in fact looks very much like Keynes' Liquidity Trap. So does Japan.

In fact we haven't mentioned Japan, but radical monetary policy, down to inflation targeting, has not made Japam recover?

Recessions are often caused by real shocks. Globally that was true of Saddam's Kuwait invasion in 1990. Although the US had an asset pricing shock (the S&L debacle).

1979-80 was another real shock. Oil prices tripling in about 5 months. You get a move like that on the supply curve -- in major economies then as much as 25% of electricity generation could be oil fired, oil fired furnaces were common, average might below 20mpg etc -- and its going to take a while to work through.
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Re: Shifting Inflation Expectations, 2020-2021

Post by alpine_boglehead »

scout1 wrote: Thu Jun 10, 2021 10:53 am
Right, it was a lot worse than an ordinary recession. A global pandemic is so much worse than a few random banks failing. The fact that it was handled so well indicates to me that policymakers should be able to handle future recessions without problem.
If enough people believe that policymakers will compensate for any bump in the road, this creates a risk of it's own by people taking on too much risk due to the perception of safety, see Minsky moment.
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Re: Shifting Inflation Expectations, 2020-2021

Post by esteen »

Angst wrote: Thu Jun 10, 2021 5:33 am I believe the whole point of the graphic is the absence of correlation. There's a long-term deflationary trend that has kept inflation low and employment levels have been (and presumably will continue to be) subsumed by it.
Then I think I totally misinterpreted her text accompanying the graphic. My apologies for that. But I can't interpret much from that chart either way.
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