Bad Boys of the Bond Market vs Barack: Showdown at the NY Fed Corral

It's a standoff between fiscal responsibility and inflationary insanity in the bond market these days and the "bond vigilantes" aren't buying Obama's game for much longer -- literally.

Before we get into the Showdown at the FRBNY Corral, in looking for incriminating evidence which exposes PIMCO's Bill Gross as remedially qualified to comment on these things at best (hey, it's my job, sorry, just want to make sure we're taking everyone at face value here, kids), I came across a June 2008 article which Gross poetically attacks the problem of inflation that I wanted to share. Were he playing for the right team (I point you once again to LOLFed's thoughts on PIMCO should you care to read further on this), I'd almost say the guy is pretty dead-on.

Gross on fooling some of the people all of the time, inflation, and the global economy:

It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up – physically, intellectually, and institutionally – and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.

I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control. I laid out the case three years ago in an Investment Outlook titled, “Haute Con Job.” I wasn’t an inflationary Paul Revere or anything, but I joined others in arguing that our CPI numbers were not reflecting reality at the checkout counter.

Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S.

Gross' first chart:
Alright so I doctored the damn chart. And?
You know you LOL'd

Gross continues:

This, dear reader, looks a mite suspicious. Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world? Can economists really explain this with their contorted Phillips curve, output gap, multifactor productivity theorizing in an increasingly globalized “one price fits all” commodity driven global economy? I suspect not. Somebody’s been foolin’, perhaps foolin’ themselves – I don’t know. This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference.

So, Bill, are some of the people being fooled all of the time now?

Hell no. And considering the fact that Gross himself heads up the largest bond trading firm in Bizarro World, when he calls bullshit, it is likely that the serfs who make up the remainder of the bond-buying suckers listen. Guess what? They're listening.

Via Bloomberg

For the moment, at least, inflation isn’t a cause for concern. During the past 12 months, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008, according to the Labor Department.

Bill Gross, the co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. and manager of the world’s largest bond fund, said all the cash flooding into the economy means inflation may accelerate to 3 percent to 4 percent in three years. The Fed’s preferred range is 1.7 percent to 2 percent.

“There’s becoming an embedded inflationary premium in the bond market that wasn’t there six months ago,” Gross said yesterday in an interview at a conference in Chicago.

So what the hell does all of this mean? It means that we are in serious doo-doo. Duh.

OK, so the 30 year is looking pathetic - at least we've got TIPS, right? Ha! No, akshully, sry!

Investors who want to hedge against inflation while still earning a decent return on their investment got some unhappy news Friday: The U.S. Treasury announced that buyers of its Series I U.S. Savings Bonds – 30-year bonds whose returns are adjusted for inflation – will earn nothing on I-bonds issued between now and October 31 of this year. That’s right: nada, zilch, zip. This marks the first time that I-bonds have had a zero rate of return for any six-month period since I-bonds were created in 1998.

Blame inflation or the lack of it: Consumer prices have plummeted since the economy ground to a halt last fall and the U.S. remains mired in recession. The Consumer Price Index plunged 5.6% from September through March, according to the Treasury. I-bonds have two components: a fixed rate of return, which is 0.1% on newly issued bonds (down from 0.7%) and an inflation adjustment, which thanks to negative inflation wipes out the fixed return for the next six months.

I repeat: hit the deck, stick a fork in us, we. are. done.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.