The Price of Cheese

A few nibbles from the efficient frontier.

June 29, 2010

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cheese_ballsEconomist and blogger Mark Thomas points to an interesting contradiction between what putative (and former) economic policy advisors recommend, and which way the market winds are blowing.  That is, assuming that markets price in every iota of relevant information (and of course that collectively investors are rational).

In this instance, highly regarded former Reagan (and current Obama) administration advisor Martin Feldstein is puzzled that bond markets – remember those vicious vigilantes who prompted Clinton administration official James Carville to quip that if he were reincarnated he wanted to come back as the bond market – are not pricing in inflation.

Feldstein writes: “while inflation is very likely to remain low for the next few years, I am puzzled that bond prices show that investors apparently expect inflation to remain low for ten years and beyond, and that they also do not require higher interest rates as compensation for the risk that the fiscal deficit will cause real interest rates to rise in the future.”

In response, Thoma asks: “So my question for the deficit and inflation hawks, who are generally those who believe markets to outperform humans in every conceivable way, is this. When do we abandon what markets are actually telling us and instead react to what we — the less capable humans — think markets ought to be telling us?”

It probably depends on what goes into the market. It has an insatiable maw, this time for cheese, writes 24/7 Wall Street blogger Jon Ogg.

“Some have said that if it moves, it can be taxed. But based upon what we have seen over the last decade, if it moves you can also create a financial futures contract around it. Today was supposed to mark the introduction of cheese futures at the CME.”

But it’s also a case of incomplete markets. Stilton and brie fanciers, among others, will be left out, since the futures contract is for cheddar, with a tick size of 20,000 lbs.

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