Don't Quit Your Day Job…

Time may only move in one direction – but just like a faster than light neutrino, let’s ignore physics for a bit! Inspired by this comment from an anonymous author, we will take you to the years 1976 and 1989 and look at life through the eyes of a recent college graduate.

As we occasionally point out here at Don’t Quit Your Day Job, inflation expectations are an interesting indicator that can be calculated from market data. They become even more interesting when we combine them with other measures. It becomes yet more interesting if you are in the market to refinance a mortgage or purchase a home. Read on for an interactive chart on the 30 year mortgage and the market’s 10-year inflation expectations.

I recently came across Jodi Beggs’s awesome (and tongue in cheek, and that’s a compliment from a site called DQYDJ!) economics site, “Economists Do It With Models“. Perusing her recent history, I came across an article entitled “Adventures in Fact-Checking, GOP Debate Edition” where Jodi fact checked some statements made by Mitt Romney and Newt Gingrich and found them, on the surface, to be false. Fair enough – the candidates both made statements to the effect that Ben Bernanke is the most inflationary Fed Chair ever. Playing fast and loose with the facts is wrong, but I don’t entirely like how Ms. Beggs ranked the Chairmen – by annualized inflation during their term. To explain why I’ll turn to an unlikely (yet, strangely appropriate) place- baseball.

One of the things we like to do here at Don’t Quit Your Day Job is to reveal interesting things hiding in plain sight. One of those things: subtracting the Daily Treasury Real Yield rate from the Daily Treasury Yield rate gives you a good idea of the market’s expectations of inflation. Even though media prognosticators won’t agree on whether we’re in for a deflationary era, hyperinflation, or a whole lot of nothing, you can get a reasonable prediction from market data. Our explanation is below, along with the limitations of this method.

‘Conventional’ knowledge, until the last couple of months, was that home prices bottomed in late 2009.  Recent data on home sales shows a local maximum in 2010 followed by a further decline – leading some economists to believe we are now in a “double dip” where housing prices will continue to decline in the immediate future.  The most recent data point is from Zillow, estimating that (a record) 28.4% of all single family homes are currently underwater – meaning mortgage holders owe more than their house would sell for on the market.  Full disclosure: I’m currently testing the real estate market on the buy side.

The Alternative Minimum Tax, a tax enacted in 1969 to set a minimum level of taxation, has had major mission creep – especially in the last 10 years. The Alternative Minimum Tax is a secondary set of tax brackets which disallow certain deductions which are allowed under the normal tax code. The tax was enacted since 155 rich households avoided paying tax altogether back when the tax was started. Today, even with annual ‘patches’ by congress, the alternative tax bracket is hitting more and more people – 4.5 million tax payers last year. Hope you’re having fun doing your taxes this year!

… the dollar bill, a huge sign of freedom and independence in this country, is not made out of paper. In fact, it is actually made of a blend of cotton and linen, and purchased from Crane & Co. in Dalton, Massachusetts. Why is this relevant? Well, it just so happens that the very commodity used to weave our dollar bills happens to have experienced quite a bit of a price hike lately. The hard numbers? The cost of a dollar bill has increased 50% since 2008.

We haven’t looked at inflation expectations since November 15! Quantitative easing, historically low interest rates, and a rise in consumer spending haven’t been enough to increase inflation past a tame (again, historically low) 0.7% since December of 2009. However, we live in the real world and even if we were spared from inflation’s clutches today, we might not be so lucky in the future. On that note, let’s look at the market’s inflation expectations – which we calculate by subtracting the Treasury’s Daily Real Curve Rates from the Daily Treasury Yield Curve.

…enter grade inflation. This site has recently touched twice on the topic of the spiraling cost of advanced education. Recently the New York Times covered something that the schools are giving back for the increased attendance cost – higher grades. Yes, grade inflation is increasing at a pretty decent clip right along with college costs.

What’s wrong with taxing individuals making over $200,000 and couples making over $250,000? Nothing, if you are honest about what is really going on. The health care plan in the senate would mean new taxes for ‘rich’ folks in these tax brackets. Worse still? It doesn’t account for inflation in this calculation. What follows is a calculated tax which, like the Alternative Minimum Tax, will slowly creep into the middle class as inflation starts to show up again.