4 ms·

When it comes to predicting future inflation, TIPS [1] is the thing to look at [2] - they are inflation-indexed bonds issued by the U.S. Treasury, and should tr

When it comes to predicting future inflation, TIPS [1] is the thing to look at [2] - they are inflation-indexed bonds issued by the U.S. Treasury, and should track closely to what the market believes the average inflation will be over the next 5/7/10/20/30 years. They are accurate, because beating the efficient market hypothesis is really hard; anybody who has a better idea of how inflation will change could speculate on them to make money until the price moved to the better prediction. [1] https://en.wikipedia.org/wiki/United_States_Treasury_security#TIPS https://en.wikipedia.org/wiki/United_States_Treasury_securit... [2] https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE

hogFeast 5y ago
EMH doesn't exist. People interpret a system that is accurate on average (and even then not really, it just reflects marginal expectations) with things like "efficiency" that are totally useless and irrelevant universal statements. But I would be very careful about either saying that a certain market reflects expectations (some markets have structural issues that prevent accurate estimates 100% of the time, TIPS is potentially one of them...markets also don't price binary/multivariate outcomes well at all), or saying that this represents "the future"...expectations about the future, obviously, change more than the future (the future is deterministic but from our perspective it is probabilistic, many things are possible but only one thing will actually happen...that is markets can be so volatile). To say this another way, was the market right in January with 2% and right today with 2.5%? No. The Fed made this mistake over and over earlier this year: expectations are anchored, expectations are anchored, inflation won't rise because the market says X (again, the market is not a point estimate, it is a distribution centered around the breakeven, and doesn't work with multivariate outcomes).
- gruez 5y ago
  >But I would be very careful about either saying that a certain market reflects expectations (some markets have structural issues that prevent accurate estimates 100% of the time, TIPS is potentially one of them...markets also don't price binary/multivariate outcomes well at all), can you elaborate on this? What you said so far is too handwavy to assess. >saying that this represents "the future"...expectations about the future EMH doesn't say "whatever the market predicts is going the future", all it says is "it's the best prediction we have". relevant comment about what EMH is and what isn't: https://news.ycombinator.com/item?id=26636929 https://news.ycombinator.com/item?id=26636929
  - hogFeast 5y ago
    What do you mean? There is no way to make it simpler because that is what it is: markets are not some kind of hyper-intelligent, sentient being. If you put garbage in, garbage comes out (and markets operate within a regulatory/social construct that means they do not accurately predict the future). You will never be able to "assess" it (just as most "proof" of EMH is non-existent, it is as precise as it is wrong). Right, and I am saying the logic used in that link is wrong (it is also circular...everything is always priced in, how do you know? Because the price says so...saying that seasonal patterns reflect risk is also bizarre, there is no fixed notion of risk in financial markets, every investor has a different liability profile). Saying that you cannot make money from doing something (wrong), is not the same thing as saying it is the best prediction or that the market reflects all information or whatever (again, these are inherently unknowable statements). Btw, this is usually obvious when, unlike academics, you have to think forwards rather than backwards...there was lots of information inflation was going to rise, that is why a significant minority of people thought it was going to happen...the market didn't price this in, that is it. What happened is the perfect example of expectations not being well-grounded in reality...but ofc, circular logic of EMH: everyone predicted this, it was in the price all along.
    - gruez 5y ago
      >What do you mean? There is no way to make it simpler because that is what it is: markets are not some kind of hyper-intelligent, sentient being. EMH doesn't claim this. >Right, and I am saying the logic used in that link is wrong (it is also circular...everything is always priced in, how do you know? Because the price says so... No, because if the price isn't priced in then someone can arbitrage the difference. >saying that seasonal patterns reflect risk is also bizarre, there is no fixed notion of risk in financial markets, every investor has a different liability profile no, but sharpe ratio (risk adjusted returns) is a thing, so risk is essentially fungible between different investors. >Saying that you cannot make money from doing something (wrong) what's wrong about not being able to make money from something? >is not the same thing as saying it is the best prediction or that the market reflects all information or whatever Only the strong form of EMH claims that the market price reflects all information on earth. I don't personally believe that, otherwise insider trading wouldn't be a thing. >Btw, this is usually obvious when, unlike academics, you have to think forwards rather than backwards...there was lots of information inflation was going to rise, that is why a significant minority of people thought it was going to happen...the market didn't price this in, that is it. Again, EMH (at least the non-strong forms) doesn't claim that it's accurate 100% of the time. The market can certainly be wrong, that doesn't mean it's the best prediction we have.

hogFeast 5y ago

EMH doesn't exist. People interpret a system that is accurate on average (and even then not really, it just reflects marginal expectations) with things like "efficiency" that are totally useless and irrelevant universal statements. But I would be very careful about either saying that a certain market reflects expectations (some markets have structural issues that prevent accurate estimates 100% of the time, TIPS is potentially one of them...markets also don't price binary/multivariate outcomes well at all), or saying that this represents "the future"...expectations about the future, obviously, change more than the future (the future is deterministic but from our perspective it is probabilistic, many things are possible but only one thing will actually happen...that is markets can be so volatile). To say this another way, was the market right in January with 2% and right today with 2.5%? No. The Fed made this mistake over and over earlier this year: expectations are anchored, expectations are anchored, inflation won't rise because the market says X (again, the market is not a point estimate, it is a distribution centered around the breakeven, and doesn't work with multivariate outcomes).

gruez 5y ago
>But I would be very careful about either saying that a certain market reflects expectations (some markets have structural issues that prevent accurate estimates 100% of the time, TIPS is potentially one of them...markets also don't price binary/multivariate outcomes well at all), can you elaborate on this? What you said so far is too handwavy to assess. >saying that this represents "the future"...expectations about the future EMH doesn't say "whatever the market predicts is going the future", all it says is "it's the best prediction we have". relevant comment about what EMH is and what isn't: https://news.ycombinator.com/item?id=26636929 https://news.ycombinator.com/item?id=26636929
- hogFeast 5y ago
  What do you mean? There is no way to make it simpler because that is what it is: markets are not some kind of hyper-intelligent, sentient being. If you put garbage in, garbage comes out (and markets operate within a regulatory/social construct that means they do not accurately predict the future). You will never be able to "assess" it (just as most "proof" of EMH is non-existent, it is as precise as it is wrong). Right, and I am saying the logic used in that link is wrong (it is also circular...everything is always priced in, how do you know? Because the price says so...saying that seasonal patterns reflect risk is also bizarre, there is no fixed notion of risk in financial markets, every investor has a different liability profile). Saying that you cannot make money from doing something (wrong), is not the same thing as saying it is the best prediction or that the market reflects all information or whatever (again, these are inherently unknowable statements). Btw, this is usually obvious when, unlike academics, you have to think forwards rather than backwards...there was lots of information inflation was going to rise, that is why a significant minority of people thought it was going to happen...the market didn't price this in, that is it. What happened is the perfect example of expectations not being well-grounded in reality...but ofc, circular logic of EMH: everyone predicted this, it was in the price all along.
  - gruez 5y ago
    >What do you mean? There is no way to make it simpler because that is what it is: markets are not some kind of hyper-intelligent, sentient being. EMH doesn't claim this. >Right, and I am saying the logic used in that link is wrong (it is also circular...everything is always priced in, how do you know? Because the price says so... No, because if the price isn't priced in then someone can arbitrage the difference. >saying that seasonal patterns reflect risk is also bizarre, there is no fixed notion of risk in financial markets, every investor has a different liability profile no, but sharpe ratio (risk adjusted returns) is a thing, so risk is essentially fungible between different investors. >Saying that you cannot make money from doing something (wrong) what's wrong about not being able to make money from something? >is not the same thing as saying it is the best prediction or that the market reflects all information or whatever Only the strong form of EMH claims that the market price reflects all information on earth. I don't personally believe that, otherwise insider trading wouldn't be a thing. >Btw, this is usually obvious when, unlike academics, you have to think forwards rather than backwards...there was lots of information inflation was going to rise, that is why a significant minority of people thought it was going to happen...the market didn't price this in, that is it. Again, EMH (at least the non-strong forms) doesn't claim that it's accurate 100% of the time. The market can certainly be wrong, that doesn't mean it's the best prediction we have.