Asset Prices and Inflation

We've seen a lot from the more right-leaning economists over the last few years about how asset prices increases are inflation, because increases in the price of assets represent increases in the price of future consumption. I've been thinking about this, and I think they've got it backwards.

Money is a claim on the future production of society. If the government prints money and mails it to people, those people feel richer, because they can consume more. The money is a claim on future productive capacity of the society, and when more money is printed, the price of the money declines in terms of real goods declines. The claim is debased.

Government bonds, if one thinks about it, are the same way. A government bond is a claim upon the productive resources of society. When the bond price declines in terms of real goods (which is usually the same as it declining in terms of money, since bond prices are so much more volatile than consumer prices), the claim is debased. This is like inflation.

Typically, we think of central banks controlling inflation with the interest rate, which is the price you will be paid to delay consumption if you are holding assets. If you are holding money, however, rather than being paid, you must pay the inflation rate to delay consumption.

Rising interest rates, which depress bond prices, are therefore essentially equivalent to inflation. To this way of looking at it, when the Fed raises rates, it is simply channeling inflation into debasing bond prices rather than money.

This is a new idea, at least to me. I'll have to explore it further.

Initial Claims Forecast

I forecast that initial claims will rise this week to 454,000, well above consensus which is expecting a fall to 440,000.

Deflation on the Way

Today saw the release of inflation numbers for December, and something weird is afoot. Despite the housing bust and widespread price declines of housing nationwide, rent (and owner's equivalent rent) in the CPI has barely declined at all!

Here's the price index for urban rents, which is off only 0.3% from the peak in June:

The story for owner's equivalent rent is identical.

But according to Reis, asking apartment rents were down 2.3% nationwide in 2009, and 0.7% in the fourth quarter. That hasn't shown up in the CPI at all yet.

Given that rent and OER together are about 30% of the CPI, and have so far shown almost no price declines, it would appear that there is some significant reported deflation on the way. This isn't exactly a prediction -- the events have already happened, it just hasn't shown up in the data yet.

Interesting Note on the US Trade Report

One interesting tid-bit in the US trade data, which came in worse than expected today.
The trade deficit widened $3.2 billion in November from October. Of this, $0.5 billion was in nonmonetary gold and $0.7 billion was in artwork, antiques and collectibles. So Americans are importing more things that are stores of value, meaning the trade deficit change is somewhat overstating the borrowing we are doing for consumption.

Are Holiday Sales Really So Good?

The holiday sales numbers, +2.9% for chain stores, are being touted as evidence of a recovery. But this is off of last year's extremely depressed levels, and actually represents a significant drop in real demand since inflation for non-durable goods y-o-y was 4% in November and possibly as much as 7% in December.

No doubt the price increases are good news for corporates and show declining economic slack, but we're making and selling fewer products.

Luxury Values Meet the Developing World

This morning's Wall Street Journal has one of the most incongruous images I've seen in a long time, here it is:



For those who don't know, this is an auto-rickshaw, in this case, a hybrid auto-rickshaw. Auto-rickshaws are used ubiquitously as taxis in warm countries in the developing world, especially India. Typically, they are pretty beat up, and they have a taxi meter which is "broken." They usually look like this:



At the time I was in India about 10 years ago, you could take a moderate length ride for about 30 cents or so, assuming you rejected the driver's pleas of medicine for his sick mother/wife/daughter.

Will TVS Motors succeed in marketing this higher-end product, or will Indians want windows, radio and air conditioning before doing their part for the environment? Of course, if you have good air quality, you don't need windows. Mmm... smell that cooking.

Oops

My model had some end of year issues. Updated Initial Claims forecast is 428,000.

Initial Claims

Welcome back and Happy New Year!

I forecast initial jobless claims of 405,000 this week, well below consensus of 440,000.

Good luck!