Is there a bubble in inflation expectations? In his latest research piece David Rosenberg posts an interesting tidbit – should we view John Q Public’s inflation expectations as a contrarian sign?  Mr. Rosenberg says:

“The chart below depicts…12 month inflation expectation by John and Jane Q Public.  Their forecasting record is a riot – it’s even worse than most economists.  But each time in the past that the Conference Board’s inflation expectation index either approached or crossed above the 6% mark, inflation actually fell in the ensuing year each time, and by an average of more than three-percentage points.  So when did this metric rise above 6% this time around?  Try March.  And what was headline inflation at the time?  Call it roughly 2.5%.  Do the math – think we may be talking about deflati0n again this time in 2012?”

Very interesting.  If there was ever something cyclical it is sentiment.  Parabolic sentiment charts are never a good sign.  If I could short this index I would place a virtual guarantee on my ability to make money in the coming 6 months.  Unfortunately, making money isn’t that simple.  But the chart certainly makes one wonder if there isn’t a bubble in inflation expectations due in large part to QE2 and seasonal trends in commodities?

Source: Gluskin Sheff



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • ducksoup

    What a bunch of hooey. Not the content, the post of the content. PPI got you down, Cullen? Stay tuned, chief, we’re just getting started. Only to a closed-minded MMTr would this drivel be worthy of a post. Let’s see….joe 6pack worse (riot!) than “most” economists… I would think the superior minds that grasp the complex, elegant and sophisticated nuances of MMT would not avail themselves of such tripe. Oh wait, I forgot, the MMT view of the “influence” of QE on inflation is merely psychological thus the tripe. Sure wish I could pay my bills with imagined $.

  • http://www.pragcap.com Cullen Roche

    What a well thought out and superbly argued point. Thank you for this fine contribution to the site. On second thought, thanks for all of your comments. They are always so mature and educational. If every comment was like this we could all learn and work together better. I hope you’ll comment more often for I fear the TPC comment section could devolve into childish banter and nonsensical name calling without you.

    PS – I’ve been calling for inflation for well over a year now. Disinflation in 2010 and higher inflation this year. Try to keep up before you dive into one of these childish rants….

  • Skepticus

    Another fine posting from an excellent site. The graph is simply an exposition of one of our basic human conditions: extrapolation. When Joe Plumber is being beaten up by customers because he tries to pass through rising input costs, he extrapolates this unhappy situation to the future. In the extremes, we always overshoot. So what, would you rather be a goat? Talking of duck soup, are the wontons steamed or fried?

  • paul skinner

    Rosenberg is a perma bear and has been 100% WRONG about the markets for a decade.

    Why do people still listen to him?

  • Brennan

    Wouldn’t shorting SLV/IAU be very similar to shorting this index?

  • Oroboros

    Along the same lines, sort of, Gundlach on CNBC again, stating he believes bond yields are set to fall, not rise:


    Don’t think MMTers will like the interview, however, Gundlach’s results be darned.

  • eatmilos

    Sentiment: FEELING

    Our company is currently re-computing our 2Q fees based on true inflation (food+energy). Now, that’s a economic fact and not a sentiment. When ‘Joe the plumber’ is forced to raise his prices, he’s already behind the curve, sort of speak, and the domino effect of real inflation begins to take effect.

  • Anonymous

    The soup is any way you want it. Perhaps I was a bit harsh. I’m sorry and offer my apology. I’m merely trying to point out that this “data” is not worthy of the otherwise mostly excellent and challenging posts that are prevelant here. My expectations of Mr. Roche are elevated because of his site’s general excellence. I was eagerly anticipating a serious assessment of the PPI.

  • ducksoup

    Sorry, anon is really ducksoup

  • jswede

    chart yields vs periods of QE, and that’s about all you need to know.

    QE1 starts (1/1/09): 2.21%
    QE1 ends (3/31/10): 3.85%

    …a few days later the 10yr touched 4%, then took a near straight line to 2.35% by the late August Jackson Hole “hint” at QE2…

    QE2 starts (11/3/10): 2.55%
    QE2 “ending” (today): 3.42%

    It’s clear (to me) that rates will resume a rally btwn QE2 and QE3. and repeat.

  • http://www.pragcap.com Cullen Roche

    No need to apologize. Let’s just try to keep the discourse somewhat civil. You know I am going to be wrong. I write a ton of stuff. There is no way I could possibly be right all the time. Besides, half the reason I write is because I am using the readers to fill in the holes in my own thinking. So, rather than call me names, tell my why I am wrong. Maybe we can all benefit that way. No one wins when people come here and act like a bunch of kids. There are MUCH better and more entertaining places on the internet to do that.

  • blue chip

    always good dialogue here…
    reflective of both intelligence and emotion

  • Kyle F

    Rosenberg, right or wrong, does it matter for someone who attempts to think clearly for himself? Empirical data is empirical data, and at the very least the chart posted highlights a very real and present condition. The question is how it should inform your participation in these markets.

  • El Viejo

    Thanx for at least mentioning the possibility of a QE3. Timothy seems to think there better be one.

    Gary Shilling seems to think we will be dealing with deleveraging for some time to come. He’s been right many times concerning recessions.

    As far as demand side inflation I dunno. I have to follow former presidential advisor Peter Peterson’s assertion that with the baby boomer wave propagating through the population that demand will be down more than a little. Kinda like Japan. No?

  • Johnny

    Cool charts from dshort: http://dshort.com/inflation/inflation-update.html

    Interesting final paragraph:
    “On a personal note, the more I study inflation the more convinced I am that the BLS method of calculating inflation is sound. As a first-wave Boomer who raised a family during the double-digit inflation years of the 1970s and early 1980s, I see nothing today that is remotely like the inflation we endured at that time. The ShadowStats 10.20% for alternate inflation number for this month strikes me as nonsense. Moreover, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I think it best to take the alternate inflation data as a interesting but ultimately misguided.”

  • firts

    When there is no inflation the increase in price in one item will be offset by the decrease in a another but when you exclude the items that move up the most what are you left with ?

    Inflation is dead just stop eating.

  • Dennis

    “Too much money chasing too few goods”. We don’t have that right now. The food area being the outlier, but here the people that need the food don’t have any money. The folks that are fat and happy do have some extra money so there is an up tick that has nothing to do with monetary policy or day trading speculation. Getting back to the Friedman’s quote “Inflation is always and everywhere a monetary phenomenon” (your hyperinflation post already has over 250 comments), did he mean that excess money creation by banks and governments is “always” the cause of inflation?

    In a world where the world’s supply of currency has already filled up the pool, I would agree. When you overfill the pool there will be damage, I see that.

    You pointed out over the last few days the Clinton administration let the pool’s water evaporate in the sun, by reducing deficit spending, and then we had 8 years of speculation pouring borrowed money into the pool, but it never quite started overflowing. When somebody pulled on plug on the speculation bubble (Goldman?), down the drain went a whole LOT of pool water. So at this point I don’t see how Uncle Sam’s deficit spending is going to overflow the pool for many years. Even though the US dollar is already more than 60% of the world’s currency, adding to that some $ trillions of uncovered spending (e.g. Fed QE purchases), into the world’s economy has to be seen as a godsend, not something to obsess about.

    The Fed is working with the Treasury on expanding the world’s money supply. This is something we need but Friedman and the Powers That Be taught American’s, that this is always bad. The most important thing now is to simply inform Americans that our National Debt is actually not so close to the “legal” ceiling number. The calculation is wrong! We know it’s meaningless at this point in time anyway.

  • Burwell

    Rosenberg called the 2008 fall when everyone missed it. He does excellent research….he might turn out to be right again.

  • mad_dom

    Anyone who thinks there isn’t any inflation today, also believed there was no inflation during the 70’s. If inflation were calculated back then, the way it is today, you would’ve had all the deflationists denying there was any inflation in the 70’s as well. The deflationists need the government to tell them whether there’s any inflation. Most people just look at their bills to know whether there’s inflation or not. More and more people are becoming poorer and poorer as they simply can’t afford to eat, drive, or pay for health insurance. But look on the bright side! At least they can buy an Ipad2 for the same price! Well… if they can afford it after spending all their money trying to survive.

    I pray that the deflationists are right. Afterall, who wants to keep paying higher and higher food and energy costs? Can you imagine how unemployed people are supposed to survive? They can’t even afford driving to an interview. But at least they can buy an Ipad2 for the same price. LOL.

  • Robert

    That’s interesting, thanks Cullen. I am expecting deflation after reading Gary Shilling’s most recent book.
    But I notice ECRIs FIG – future inflation gauge is making new highs following last summer’s higher low. Also, it seems to be rising at a rate close to other rallies over the last 20 years.
    No deflation in sight for now?
    I guess expectations could continue to spike up for a while yet.

  • Cowpoke

    Folks, could this “Conference Board’s inflation Indicator” actual be a “Lagging Indicator” and in fact since people think inflation is coming, they actually alter the buying/spending course before the numbers hit?

    Example: Suzy Q public sees that Oscar Mayer BEEF hot dogs are going up in price and instead grabs some cheaper franks made with Turkey and Chicken parts and other “Fillers” The kids complain but it’s cheaper..(Cost/Expenditures Now Shift).

    same for John Q who always put Penzoil in the car on oil changes but now that Oil is up on the name brand, does he shift to the store brand Oil Because his mindset is in an “INFLATIONARY” mode?

    My point is this:

    Suzy and John Q Shopper Have already changed their purchase habits long BEFORE they are asked or “Surveyed” do they think inflation is on it’s way. This in turn is reflected by the change in future index that is only playing catchup to what Suzy and John Q were already aware of.

    JM2CW (Just My 2 Cents Worth)

  • Mark

    Cullen – wealth destruction continues (primarily in RE – which is the vast majority of every American’s net worth). The US Government is not even beginning to compensate for this vast destruction of wealth. Simultaneously the cost of labor in most manufactured goods continues to fall or stay flat due to the massive excess labor pools both here and abroad.

    The very substantial price increases in commodities is nearly 100% due to China at the margins – and that will not end well. A bubble built on a bubble.

    It is these factors that underly Rosenburg’s thesis. The Federal Government’s stimulus efforts have been impotent by comparison. Virtually 100% of the “debt pay-down” by consumers has actually been write-offs by lenders.

    The massive continuing (and actually growing) consumer debt combined with massive deflation of real assets in the presence of government inaction can only result in overall deflation. Do the math!

    The chart merely displays the simple fact that – as in all markets, the majority is always wrong – by definition.

  • http://www.thompsoncreekwealth.com Lance Paddock

    “Rosenberg is a perma bear and has been 100% WRONG about the markets for a decade.”

    That is just not true. In fact, few have gooten it so close to right. Even the premise is wrong. He has not been a perma beart, and even if he had been, that has certainly not been foolish.

    If you had run your portfolio based on his suggested allocation advice over the past ten years, you would have crushed the markets. Maybe you have done better, but that hardly makes his advice worth dismissing. In fact, people who just pick what they want to hear criticize him for the period since the crash, certainly his weakest “relative” period. However, when your worst period is one with very large gains in what you have advised, including hitting some of the hottest areas (commodities, precious metals, energy, credit) after having maneuvered safely through the two of the worst bear markets in history quite well, you don’t have much to apologize for.

    For those with an investment horizon of more than a few weeks, and actually listen closely to what he has said, as opposed to what people want to concentrate on so they can score a point or two (I guess to feel superior to the famous?) he has been one of the most astute and useful commentators out there, even when we disagree with him.

  • Anonymous

    To some extent the chart of consumer inflation expectations matches the price of oil. As oil rises, inflation expectations rise.

    The increase in inflation expectations may force the monetary authorities to react to dampen those expectations. In such an environment, one should not presume that consumers make horrible predictions. Rather once the inflation becomes plain as day, the monetary authorities finally react.

    The situation today is unlike the past in that the Federal Reserve has filled its balance sheet with garbage assets bought at high prices from Wall St.

    Welcome to a location between a rock and hard place.

  • Dennis

    I agree with mad-dom and the cowpoke, but I don’t like the fact that our costs are at the mercy of these oil futures contracts rather than real life. When you add things up, money is getting more valueable these days, not less. The bankers love this, the poor suffer.

    At this point in time, the many with inflationary expectations are betting on the wrong pony. When betting the ponies, the more people that have the same expectation you have, the less you win when you are correct. But, just to be “safe” I doubled down on my Oil stocks and TIPS. Oil, gold, silver etc. are controlled, not by supply and demand, but instead by the supply and demand of puts and calls controlled by the speculator’s computers. As such we have fertile ground for uncontrolled peaks and crashes. Why can’t this be fixed? There is no question that food prices are increasing no matter what the currency. Just about everything else is being controlled by speculation, not reality.

  • anonymous

    Why is it blasphemy to suggest a deflationary trend? I’m betting on deflation. And I’m betting on a well over 3%. Actually, what I’m failing to understand is the MMTrs belief that under the status quo, we can print as much money as we want. In theory, the United States has every right to do so, but under this system we can only borrow money. And considering treasury securities can be used in repo agreements to produce what can be used as cash, the only difference I find between the QE asset swap borrowing against these treasuries is that with cash there’s no risk of a hair cut in the repossession so there’s even more incentive to speculate the shit out of asset prices. And throughout quantitative easing in this ‘balance sheet recession’ (sorry, forgot who coined that term) the overall supply of money plus credit as actually shrank. To keep a long story short, I think this is a well overbought market. And once confidence fails, and the saying ‘don’t fight the fed’ loses its credo, confidence is going to fall off a cliff and we’re stuck rowing up shit creek without a paddle. I hope I’m wrong.

  • Wes

    I’m of the opinion that the precious metals are driven higher and for longer by the fear of inflation that they would be by the real thing.

    This way (no real inflation) the Fed’s not always meddling by raising interest rates and doing other things to interfere with the PM bull.

    You can have the real thing, I’ll take just the fear every time.