I believe that the Money Supply has once again picked-up again. For awhile there back at the end of last year, M3 pretty much had collapsed.
On the topic of "where's the inflation", I thought this http://moneycentral.msn.com/content/P72746.asp was an astute article about how the governement defines reality in its own magical way...that computer you bought might have cost you a third more but it iruns 4 times faster, so you really "saved" money and therefore, adjusted for "value", the cost went down - some sort of fuzzy math. Interesting as this concept is, I suspect the main thing holding down official inflation is the offsetting low labor costs across the economy (read outsourcing etc.) to the rising input prices. Good discussion here so far. I'm waiting for that great short on the US bonds also...rob.
Just said that Bonds are being pushed up by "wrong" positions. ie.) One Strike Price in T-Bond Call Options has a notional value of $22 Billion dollars and is getting squeezed big time! Ouch! :eek:
The volatiltiy in all markets save for the indices is so excessive, it is almost scary. Volatility is supposed to be a trader's best friend but......
This volatility is so amazing....the markets on e-cbot are incredibly deep, 1000 lots can trade in the ten year and not even move the bid or offer. Big things are happening since friday and people are getting squeezed
Anybody watching tonights after session action in bonds? What's up with the strong rally? I don't think Asia is open yet...anything else driving it? EUR/USD falling while bonds rally...uncharacteristic as of late....
You are assuming that i) the bond market is driven only by inflation expectations, and ii) the market's expectation is always correct. Point i) is wrong for the following reasons: 1) the bond market is driven also by huge (several hundred billion per year) central bank purchases by BoJ and China, for currency intervention purposes. These have nothing to do with their expectations for US inflation. 2) the bond market is also influenced by huge dynamic hedging from mortgage financing institutions such as Fannie Mae. Again, these have little if anything to do with inflation expectations. Point ii) is clearly wrong. A quick look at history shows that markets are at times completely and utterly wrong about the future, pricing in the exact opposite of what actually happens. Look at the US bond market from the late 50s until around 1980 - it was wrong for over 2 decades. Then when Volcker started a clear path to break the back of inflation, the bond market didn't believe it and was wrong for another few years, most notably in 1984, where it was anticipating double digit inflation for the next 30 years - one of the worst financial predictions in human history. Markets are most likely to be completely and utterly wrong towards the end of multi-year secular market trends - Nikkei 1990, Nasdaq 2000, dollar 1985/95/2001, commodities 1980/2000. The classic sign is when the fundamentals point to a major secular reversal, yet the market ignores this and stages a final blowoff which catches out all the early birds and pulls in the last suckers at the highs. Note that in the 70s, commodities led bond yields in recognising inflation/stagflation. In the early 80s, commodities turned down years before bonds finally recognised that inflation was dead. Commodities crashed before the 1930s Great Depression really kicked in - whereas bond yields didn't hit lows until 1941. Likewise, in the early 00s, commodities are once again leading bonds by years. Commodities as a group are a relatively "clean" market, driven by pure supply demand and with relatively little government intervention. Bonds are a massively distorted market, driven largely by central bank policy. In the US's case, the bond market is also driven by foreign central banks of Japan, China, and Europe. Thus it should be clear that commodities are a far earlier warning signal on inflation and deflation than the bond market. Anyone relying on the latter over the former is going against 90 years of financial market history.