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Some Bonds Predict Inflation as Fed Prepares for Quantitative Easing

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10/30/2010

The government’s most recent auction for Treasury Inflation Protected Securities, or TIPS, received such strong demand on Monday that yields went negative for the first time in the security's history. The auction appears to reflect concerns that inflation -- which has essentially been non-existent since mid-2008 when the financial crisis hit -- could flare up again as the Federal Reserve begins a possible "quantitative easing" strategy in the coming weeks. It's a shift in sentiment in the bond market from only a few weeks ago, when the focus was heavily on the issue of the U.S. economic experiencing deflation similar to Japan. For consumers sitting on the sidelines, traders said the TIPS auction is a sign that inflation is coming – and is already here in the form of higher energy prices and food costs.


   
The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth. The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size. 
      
A 50-state task force investigating U.S. foreclosure practices may meet with lenders as early as this week, less than a month after JPMorgan Chase & Co. and Bank of America Corp. suspended some home seizures. “The 50-state investigation is not seeking a nationwide moratorium on all foreclosures,” said Washington Attorney General Rob McKenna, who is also on the task force’s executive committee. “At the same time, foreclosures done improperly have to be corrected. It’s not permissible to violate state law to expedite a foreclosure.” 
    
Consumer Metrics -- From time to time we have been asked whether we consider the current contraction in consumer demand to be the second "dip" in a "double dip" recession. From a qualitative perspective, we believe that the "Great Recession" is not so much a "double-dip" as a single "big-scoop" that changed character somewhere in the middle. We understand that the NBER says that the recession ended in June 2009. However quantitatively/technically correct that may be by NBER standards, by "Main Street" gut-feeling standards the NBER assertion is somewhere between questionable and ludicrous, depending on the personal circumstances of the observer.

    

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