Thursday, May 18, 2006

D’oh! Inflation!

Given the bond market’s shocked—shocked!—reaction to yesterday's “core” inflation news, you’d think nobody on Wall Street does any of the following:

1. Buys gasoline, food or clothing.
2. Rents cars.
3. Buys airline tickets.
4. Stays in hotels.
5. Eats out.
6. Eats in.
7. Pays college tuition.
8. Goes to a doctor, a dentist, or a lawyer.
9. Has life insurance, health insurance, or property and casualty insurance.
10. Pays property taxes.
11. Goes to a psychiatrist.

There are more examples of the bond market participants’ apparent lack of participation in the real world than I can fit here, and this is especially true in the so-called “services” sector of the economy—which, according to the papers, is what particularly freaked-out the bond market’s former vigilantes.

Item Number 11, for example, is just one of those services where the cost is now taking off after years of flat-lining—at least according to a psychiatrist-friend who tells me she has raised her standard hourly fee from $200 to $250, without a problem. (You can do the math on that percentage increase. Hint: it’s more than the thirty-year bond yield.)

Indeed, she may have some new customers soon—if the bond market’s Homer Simpson-esque reaction to what had been visible to anybody with eyes is any indication.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Chlngr said...

Yes, there are signs of inflation everywhere. Thanks for pointing that out.

Perhaps we could get an insightful SHLD post from Mr. Matthews here soon. There hasn't been one in quite some time. I remember the one about the spanish signs in the Sears stores in Hedgefundville, Connecticut. They appear to really be hampering Sears financial progress. :)

Traderneal said...

Personally, I find it more of a joke that everyone got freaked out because the number was 1/10 of a bp higher than what was expected. Everyone knows these numbers are a joke to begin with, so why a freak out over a very slight amount of an overage of a number that is vastly under reported?

tahoe kid said...

I would suggest that fixed income investors actively do items 1 through 10, pay attention to the amounts and don't need number 11. Equity investors actively do items 1 through 10,ignore the amounts and really need number 11.

Hells_Satans said...

Jeff, not sure where you get your figures from.

Last month's CPI report:
Items up less than 1% YoY -
household insurance -2.4%
apparel -1.2%
furnishings -0.4%
new vehicles -0.2%
telephone services - 0.0%
meats, fish 0.9%
dairy prods 0.9%.

I guess nobody buys clothes, or furniture, or cars, or insurance, or meat, or...

This month's:
cars -3.4%
light trucks -2.7%
Apparel -0.4%
Housefurnishgs -0.3%

Your list of 1-11 does not completely fit the actual data. Love to hear why yours is right and the Fed's is wrong, it seems you do not think they can measure national clothing prices correctly.

Chris Fischer said...

Good list! I couldn't agree more. I would also put "utility bills" very high on that list.

It seems as if the cost of essential type things (food, gas, insurance, local taxes) are taking off while the prices of non-essentials (consumer electronics, inflatable kayaks, etc.) maybe not be as much.

Aaron Koral said...

Jeff: Shouldn't yesterday's CPI numbers be a harbinger of what's to come (i.e., higher principal and lower yields) in TIPS - Treasury Inflation Protected Securities? Just wondering - and I could be wrong....

muckdog said...

As satan pointed out, the real risk is deflation Jeff. The economy has slowed due to the Fed raising rates combined with folks sending more money overseas to pay for energy. These things are definitely not inflationary.

bpl1000 said...

In response to Aaron:

CPI is a reflection of what happened and the market reaction is simply a reflection of would should've been.

Some thoughts:
It's difficult to imagine commodity prices going higher, although I believe I thought the same a few weeks ago and it's difficult to imagine the USD weakening futhering, though that too was a passing thought.