The Wall Street core-inflation index

How much of our belief systems are a result of our personal situation?

Barron’s Alan Abelson channels David Rosenberg, Merrill Lynch’s North American economist in looking at that question, via the Bond market. Rosenberg has raised his odds of a recession in the U.S., in part based on his Wall Street core-inflation index:

"Right now [Rosenberg] puts the odds of a recession at 40% and rising. To his credit, he was early in spotting the beginning of the end of the housing boom. And he isn’t blinking the possible consequences of a bust in housing.

On this score, he noted recently that housing accounted for more than a third of overall job growth in the past three years, and that the consumer’s ability and willingness to cash in on his growing home equity made the difference between 2% average annual consumer spending growth and the 3.5% that actually occurred. All things considered, he reckons that the drop in housing will shave as much as two percentage points from normal GDP growth of 3.5% over the next four to six quarters.

And he comments: "Something tells us that sub-2% growth, let alone a recession, would come as quite a surprise to the consensus economic community, who still cling to near-3% forecasts for 2007, and the equity analysts who continue to see 11% EPS growth."

Interestingly, among his achievements is his discovery why all the bond portfolio managers he runs into are so darn bearish on the Treasury market. What provided this epiphany was a Wall Street core-inflation index he created, which concentrates on those precious items that Wall Street types can’t live without. He reports that, at last check, the Wall Street core-inflation index was running at a 4% annual clip, or double Main Street’s comparable inflation index.

That naturally prompted us to inspect with some care the constituent elements in the index. And they are, perhaps in order of importance (although David won’t come right out and say so): alcoholic beverages (consumed, he carefully notes, "away from home"); hotels; housekeeping and lawn-care service; jewelry; airfare; pet services; sporting goods; medical care; recreation (unspecified, we might observe); elementary, high-school and college tuition; personal-care, dry-cleaning, legal (even bond people get sued) and financial services.

What this states loud and clear is that the bearish bond-portfolio managers are talking to their checkbooks, and the more they have to fork over for martinis and the other necessities of life, the greater their sensitivity to inflation and the more intense their bearishness on Treasuries."

Bond portfolio managers are bearish — meaning they see lots of inflation, sending rates higher and bonds lower — because the items on their personal shopping list keep going up in price.

This is a fascinating idea, and very consistent with a concept I’ve had for a long time: I’ve long wondered how bearish someone can be if they were personally flush. Is the parade of perenially bullish, well-compensated fund managers (or strategists/economists) a projection of their own personal situations?

I’ve noticed an example of this phenomenon in automobile purchases. (This is a bit of a leap, but hear me out). Ask someone who is considering the purchase of a car about its virtues and vices before they buy it. they will easily tick off all of the upside as well as downsides to that particular vehicle. They likely spent time and effort researching it, and they enjoy showing off that newfound knowledge.

Ask them again a week after their purchase.

For the most part, they will tell you how terrific the car is and how happy they are with their purchase. Given that a week is hardly enough time to really find out what all the warts and design flaws are on an automobile, this is actually more of a self-esteem issue. By saying how much they like the car, they are affirming their purchase decision.

The same "coincidence" exists with stock purchases. Dick Arms is fond of noting that investors get bullish after they buy stocks — not before. That’s why an excess of sentiment in either direction can be a contrary indicator. It suggests that all of the buying (or selling) has already taken place.

Fascinating stuff . . .


The Missing Imperatives
Barron’s MONDAY, JULY 31, 2006

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  1. trendwatcher commented on Jul 29

    Great stuff.

    I love this new index that Rosenberg created. Makes a lot of sense. Any chance of seeing a chart of the Wall Street Core Inflation Index trends and how they compare to other standard inflation indicators?

    The other inflation index whose trend line I would like to see would be one which only showed those items where the product itself had remained unchanged and had not had its price inflation downgraded due to adjustments for “added value” as is done in the case of things like PC’s.

  2. MASH commented on Jul 29

    BARRY: Never mind The Missing Imperatives I understand Harry’s has reopened go down town and check the joint out!!! Lets have a full report on the down town area, hangout on the floor (NYSE) let us know how the crowd is doing.
    Just hearing about Harry’s makes me feel bullish!!!
    Good paper Good paper I love this joint.

  3. Leisa commented on Jul 29


    This behavior that you note is called rationalization-endemic to our being human and largely responsible for many of our delusional tendencies. It’s how we convince ourselves that we are not idiots even when our choices incontrovertibly demonstrate that our bouts with lunacy are more frequent than any of us cares to admit. YOu list cars and stocks. The list easily expands to anything we make a choice about: significant others, jobs (even careers!), educational institutions, any discretionary purchase (vacation homes, boats, winnebagos. I’d quibble that it’s not a ‘coincidence’ as much as it is well-documented behavior.

  4. SINGER commented on Jul 29

    whats with the recent rise in treasuries????

  5. RW commented on Jul 29

    I’m no bond expert but I read the rise in treasuries primarily as continuing support from global central banks combined with a wager on the probability of a classic cycle turn; i.e., an economic slowdown or even recession with a continuing inversion of the yield curve followed by an overall drop in yields along the entire curve as the economy expands again. Don’t know how much sense this makes (it doesn’t make much to me) but I’ve heard of some players actually leveraging into longer duration t-bond positions. FWIW.

  6. bill commented on Jul 29

    Barry…so are you saying that the bearishness of bond mgrs a contrarian signal? It may be obvious to others; i’m new to this blog. Thanks.

  7. JJ commented on Jul 29

    What is that old saying? Something like,” We see the world as we are, not as it is.”

  8. whipsaw commented on Jul 29

    There is a good argument that other debt instruments do not carry adequate risk premiums which makes treasuries relatively attractive. Also, the return on short to intermediate term treasuries looks pretty good compared to the craziness of the equities market now, so they are a good place to park money until a major trend in one direction or the other is established.

  9. ac commented on Jul 29

    What do all you intelligent sensible people think about the bond market right now? Bad place to be?

    Foreign stocks have been very nice to me recently (past few years), but I’m starting to get nervous. I thought about making some movement toward bonds, but now I don’t know.

    Is there any safe haven in a situation like this?

  10. TS commented on Jul 29

    Fifty years ago, social scientists called this phenomenon — becoming bigger fans of things after we purchase them — the theory of cognitive dissonance.

  11. bill commented on Jul 29

    To bond or not???? Me, too, where is the harbor of security.
    Here are two charts, see below. The first argues for recession and a bullish intermediate bond play. The second one says get out of dodge if long bonds are your game.
    The money mkt for me; cashis king and sitting out rallies is hard stuff.
    Meanwhile, i’m not sure where Barry stands. how did others interpret his post?

  12. bongkingsrus commented on Jul 29

    first of all i’m not sure bond mgrs are bearish..
    many have been calling for a top in rates as the Fed finishes their rate hikes. bill gross has been talking end of bond bear mkt.

    but it’s not unusual to be bearish on bonds when the curve is flat. they present poor relative value v shorter maturities and inflation premiums could rise if the dollar falls when the Fed finishes. foreign central banks have been taking down less at auctions and the BOJ (i think they are the largest holders of treasuries) have been draining a few trillion yen reserves from the banking system.

    the only thing saving 10YR and 30YR notes will be a strong dollar which is unlikely imo unless the fed continues to hike or we get some sort of massive flight to quality on a credit induced liquidation driving asset deflation.. or both

  13. Mike B commented on Jul 29

    Interesting article, but I don’t see much bearishness in the bond market. The 10 year hasn’t gotten much above 5% during the economic boom of the past three years.

    If people were truly worried about future inflation, would they be parking so much money in 5% 10 year bonds?

  14. S commented on Jul 29

    Those bearish fixed income portfolio managers are so concerned about inflation they decided to bid up the 10 year to a sub 5% yield.

    I wonder how many homeowners with ARMs and other exotic mortgages scheduled to reset soon will take advantage of the treasury rally and refinance into a fixed mortgage?

  15. Cherry commented on Jul 29

    Why take advantage of something that will not last? This “Treasury rally” is again, not rational at this time. As they find inflation STILL rising as the economy cools if not contract, well………….I think you know that situation(especially if the spectre of deflation roars in forcing a mass inflationary situation).

  16. m3 commented on Jul 29

    interesting index, but it’s not saying anything new… it’s saying the same thing that all the other inflation figures produced by the fed have been saying: inflation is rising.

    the real question is why the TIPS market hasn’t been rallying, if in fact bond managers are anticipating inflation? it’s been tracking intermediate term bonds closely for awhile.

    the flattened/inverted yield curve, dollar bearishness, foreign investors parking their cash elsewhere, and the BOJ are enough reasons to stay away for awhile….

  17. Craig H commented on Jul 29

    My favorite sentiment indicator remains the market itself as it shows what people are really doing with their money and not what they told a pollster conducting a survey.

    % of NYSE stocks above their 40 day moving average has risen from a low of 13% in June to 66%. This is a moderately high overbought reading indicating that bearishness surveys may be overstated or out-of-date.

    For reference, this indicator stood at 64% at the May top of the market and at 67% a the September top before last October’s swoon.

    Chart at:

    The % of NYSE stocks above their 200 day moving averages has risen from 34% in June to 54% today. It was at 68% in May when the market peaked, and 71% last September. I would characterize the current reading as moderately oversold.

    Chart at:

  18. Bob A commented on Jul 29

    You see the same thing with Rev Shark since he became a manager of other people’s money. There is a whole lot more wishin and hopin in the Rev’s dialog than when he was trading just his own money and was from my view much more nimble (and for my purposes relevant).

  19. Bob A commented on Jul 29

    Saturday WSJ front page article. ‘Inflation plus slowing economy”. Isn’t that what they used to call Stagflation? Why the heck don’t they just say it?

  20. OldProf commented on Jul 29

    Bob –
    With all due respect, you should check out what stagflation looks like. You have a lot of money at stake in this decision.

    When everyone knows that the economy is growing too fast and needs to slow to a reasonable pace, that is not stagnation. The period of stagflation had bond yields of 15% or so. Let’s get real.

    We have some inflation and some slowing of growth, both expected under the circumstances. The bond market is telling you that the inflation expectations are not severe. The stock market is at a low forward PE.

    Normal periods of growth do not show every company advancing in lockstep and announcing a bright future.

    An old Street trick is to give a price target with no time frame. I suggest that those predicting a recession — which some have been doing for two years already — should put a time frame on the prediction. A recession is two quarters of negative growth, not a slowdown to 2% growth. A slowdown is a normal part of a normal growth path averaging 3% or so in real terms.

  21. Tom in Indy commented on Jul 29

    Thank you OldProf for reminding me what the definition of a recession actually is. Some of the stuff I read here scares the bejesus out of me. Yes, housing is slowing but will it really drag us all down with it? What I vividly remember of the late 70’s was watching mortgage rates climb up with the bond yields and being pissed because rates went up a whole percent in the approval period of 4 weeks while I was waiting to buy my first house.

  22. alan commented on Jul 30

    Old Prof:

    Chuck Butler at The Daily Pfennig states that on July 26th, indirect bidders purchased 69% of the inflation linked 20 year notes, the highest on public record. Indirect bidders are usually a proxy for foreign buyers including central bankers. Unfortunately, this money is coming from areas where inflation is picking up steam. Yes the economy is slowing, but inflation in the US hasn’t. This is what you call STAGFLATION.

  23. RW commented on Jul 30

    The 70’s was an extremely stagflationary environment but extremes are only partially useful in defining complex socioeconomic scenarios. This interview of Stephanie Pomboy in Barron’s ( over a year ago makes a case that we have in fact been in a mild stagflationary environment for some time now; e.g., stagnant wages, weak pricing power in the face of a continuing rise in gold and other commodities, counterintuitively stubborn long bond prices, etc. I won’t say it totally convinced me but I took it seriously enough to do some more homework and continued to hold rather than exit commodity and precious metal plays I had started some years earlier as well as avoid unduly shortening duration in my bond ladders.

    That has worked well, better than most of my equity plays to tell the truth, but the screw always turns and, like many investors I suspect, I wait to see if we come out of this business cycle fairly normally or whether larger secular forces are going to muck up the works. One thing for sure, I’m not flipping my commodity and bond profits into what I hope will be a beginning cycle equity position until the situation is a great deal more clear than it is now. If there’s an opportunity cost to that well then so be it; e.g., I’ve already got a few of the right names but only because I’ve owned them for practically forever, I’ll only add more if a broad trend is established.

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