I finally got around to reconciling my expenses/budget for June today and see that some of my I-Bonds are now finally experiencing the full effects of the economy's deflation.
I've been buying I-Bonds since 2000 and I thought I'd share how the ones I bought in December of 2003 are doing (as of June). It's been exactly 5 1/2 years.
There's some good news and there's some bad news as it pertains to my personal savings (and not the economy in general).
1. The I-Bonds offered a rate of just 1.1% over inflation. It was not one of my better I-Bond purchases. That's bad news.
2. They are up 26% (4.3% average annual rate over the last 5 1/2 years) compared to the DJIA's roughly 20% decline. That's good news.
3. For the next six months they'll be paying 0.0% interest. That's bad news.
4. Deflation set in over the last six months and there is a lag. The I-Bonds are now behaving just like buried cash behaved. That's good news.
Overall, the good news well overshadows the bad news.
I rode the inflation wave up but I'm not required to ride the deflation wave back down. That combined with the ability to defer taxation makes I-Bonds my favorite "safer" investment of the past decade. In hindsight, 1.1% over inflation with serious deflation protection wasn't all that bad of a plan. I certainly did not predict a rapid rising inflation rate with a hard deflationary crash in 2003. I had more of a stagflationary mindset (and I still do long-term although I only lean that way).
Buried cash is a fool's game long-term (at least as long as I-Bonds are offered). That's my opinion and I'm permanently sticking to it. This is not investment advice though, especially now that the I-Bonds offered today pay just 0.1% over inflation. On the one hand, they are virtually guaranteed to lose money over the long haul after taxes. On the other hand, they are still guaranteed to do at least as well as buried cash (and probably a lot better if there are periods of future inflation at all, even if we continue to toggle between inflation and deflation). And lastly, I-Bonds are one of the most liquid investments known today. I can cash them out anytime I like and I know the exact price I'll be getting. I'm in no great hurry to cash them out though.
The jury is still out on buried rocks (gold and silver) vs. buried cash. I have no idea which is the better bargain right now. In 2004, I leaned toward the former. I'm not so convinced right now. Modern mining equipment is nearly as impressive as modern monetary printing equipment (especially if we can't get out of our deflationary and overcapacity deleveraging spiral). As an investor, both scare the heck out of me long-term. Sigh.
Some financial "experts" say buy and hold is dead. I do not agree. It might be tempting to cash out these 2003 I-Bonds over the next six months now that they pay just 0.0% interest overall. However, I intend to hold the full 30 years (cashing them out in 2033). I'm concerned what might happen next. Since the government only allows me to buy so many I-Bonds in a given year, there's no way I can buy them back if I change my mind (if inflation does pick back up and these 2003 I-Bonds resume paying decent tax deferred interest again).
Sunday, July 12, 2009
Monday, June 29, 2009
The Sarcasm Report v.31
Rising oil, commodity prices pull stocks higher
NEW YORK (AP) -- A jump in oil prices sent investors rushing to put money into the stock market in the final days of the second quarter.
NEW YORK (AP) -- A jump in oil prices sent investors rushing to put money into the stock market in the final days of the second quarter.
Tuesday, June 23, 2009
TIPS News
TIPS Gain in Market’s Worst Year; Validation of Pimco (Update3)
Here is the FOR case.
“The deflation scare has pretty much been taken out of the market,” said Kenneth Volpert, who oversees $180 billion as head of taxable fixed-income at Vanguard Group Inc. in Valley Forge, Pennsylvania. “The inflation scare has not been priced in yet, and we think that’s still to come.”
TIPS are the only long-term U.S. government debt to post gains in what is the worst year for U.S. securities since at least 1978. TIPS have returned 2.98 percent since December, including reinvested interest, while Merrill Lynch & Co.’s U.S. Treasury Master index slumped 5.7 percent.
Here is the AGAINST case.
“I’m in the camp that says this is overdone,” said Wan- Chong Kung, who helps oversee $89 billion in Minneapolis at FAF Advisors, the asset-management arm of U.S. Bancorp. “What we see is a really healthy rise in inflation premium with not much realized inflation behind it. At some point you have to have realized inflation be part of the story to continue to see breakevens perform from here.”
As usual, I am right in the middle. That's much like I am in the inflation vs. deflation debate overall. That being said, I have almost my entire nest egg in TIPS. I'm a believer in the long-term bull market in "safer" havens, and there's really nothing much safer than US Government backed debt that's also inflation protected. Note that I didn't say it was safe. I'm just saying it is safer.
Let's look back nine years. That's when the bull market in safer havens began.
Considering how much pain has been inflicted in both the stock market (twice!) and the housing market (once!), there really hasn't been a whole lot of deflation so far. We're looking at $70 oil even during one of the biggest downturns this country has ever faced. I am sympathetic to the deflationist arguments though. Don't get me wrong. I could easily see the price of oil drop by half. It would still be more expensive than it was in 2000 though.
As seen in the chart, the CPI ended at roughly the same point it started during the 2001 recession. It flat-lined. Note that while volatile, the CPI is also at roughly the same point it started during this current recession. That's not exactly the sort of deflation that the deflationists would point to as an overwhelming confirmation of their theories, at least so far.
Here's why I think TIPS is much better than buried cash, even if the deflationists seem right. It's certainly possible.
1. No matter how bad deflation gets, if we buy TIPS we still get the face value at maturity. If we buy $1000 worth of 10-Year TIPS during the next auction and hold the full 10 years then we are guaranteed to get at least $1000 in 10 years. That is absolutely no different than burying cash in our backyards for 10 years.
2. Unlike buried cash, TIPS pay interest. Therefore, if we are a believer in the long-term bull market in "safer" havens and we are absolutely convinced massive deflation will be upon us, then TIPS is still a better long-term play than buried cash.
3. What if we are wrong about deflation? What if we enter a stagflationary nightmare instead? That buried cash would be dug up so fast it would make our heads spin. What might we buy with it? I don't know. Maybe something with inflation protection that's reasonably safe. Perhaps TIPS. Of course, if we are digging up our cash to buy inflation protection at that time, chances are we won't be first. That means it will cost us more.
4. Some might argue that cash is safer than TIPS because the government might not pay us the interest it owes us and will quite possibly default on the principal too. I'm not in that camp. We would be owed little pieces of faith based paper (dollars). That's it. Ben Bernanke has a monetary printing press that can print them at "essentially no cost". We'd need brave politicians to explain to us why the government can't print us what it owes us at essentially no cost. There is no promise that the pieces of paper will be worth anything of course. The less they are worth, the easier it will be to print them. And lastly, just exactly where will we find these mythical brave politicians? I sure haven't seen many.
So yeah, I like TIPS. Deflation? Inflation? Stagflation? Whatever! If I am wrong to like them, then the "riskier" havens are going to be absolutely devastated. There's very little I can do to protect myself in that world though, so why even bother trying?
This isn't investment advice of course. It's just the rantings of what would best be described as a permabear I guess. We find ourselves in a hole (debts and deficits) we can't quite get out of. Our solution? Dig deeper.
Here is the FOR case.
“The deflation scare has pretty much been taken out of the market,” said Kenneth Volpert, who oversees $180 billion as head of taxable fixed-income at Vanguard Group Inc. in Valley Forge, Pennsylvania. “The inflation scare has not been priced in yet, and we think that’s still to come.”
TIPS are the only long-term U.S. government debt to post gains in what is the worst year for U.S. securities since at least 1978. TIPS have returned 2.98 percent since December, including reinvested interest, while Merrill Lynch & Co.’s U.S. Treasury Master index slumped 5.7 percent.
Here is the AGAINST case.
“I’m in the camp that says this is overdone,” said Wan- Chong Kung, who helps oversee $89 billion in Minneapolis at FAF Advisors, the asset-management arm of U.S. Bancorp. “What we see is a really healthy rise in inflation premium with not much realized inflation behind it. At some point you have to have realized inflation be part of the story to continue to see breakevens perform from here.”
As usual, I am right in the middle. That's much like I am in the inflation vs. deflation debate overall. That being said, I have almost my entire nest egg in TIPS. I'm a believer in the long-term bull market in "safer" havens, and there's really nothing much safer than US Government backed debt that's also inflation protected. Note that I didn't say it was safe. I'm just saying it is safer.
Let's look back nine years. That's when the bull market in safer havens began.
Considering how much pain has been inflicted in both the stock market (twice!) and the housing market (once!), there really hasn't been a whole lot of deflation so far. We're looking at $70 oil even during one of the biggest downturns this country has ever faced. I am sympathetic to the deflationist arguments though. Don't get me wrong. I could easily see the price of oil drop by half. It would still be more expensive than it was in 2000 though.
As seen in the chart, the CPI ended at roughly the same point it started during the 2001 recession. It flat-lined. Note that while volatile, the CPI is also at roughly the same point it started during this current recession. That's not exactly the sort of deflation that the deflationists would point to as an overwhelming confirmation of their theories, at least so far.
Here's why I think TIPS is much better than buried cash, even if the deflationists seem right. It's certainly possible.
1. No matter how bad deflation gets, if we buy TIPS we still get the face value at maturity. If we buy $1000 worth of 10-Year TIPS during the next auction and hold the full 10 years then we are guaranteed to get at least $1000 in 10 years. That is absolutely no different than burying cash in our backyards for 10 years.
2. Unlike buried cash, TIPS pay interest. Therefore, if we are a believer in the long-term bull market in "safer" havens and we are absolutely convinced massive deflation will be upon us, then TIPS is still a better long-term play than buried cash.
3. What if we are wrong about deflation? What if we enter a stagflationary nightmare instead? That buried cash would be dug up so fast it would make our heads spin. What might we buy with it? I don't know. Maybe something with inflation protection that's reasonably safe. Perhaps TIPS. Of course, if we are digging up our cash to buy inflation protection at that time, chances are we won't be first. That means it will cost us more.
4. Some might argue that cash is safer than TIPS because the government might not pay us the interest it owes us and will quite possibly default on the principal too. I'm not in that camp. We would be owed little pieces of faith based paper (dollars). That's it. Ben Bernanke has a monetary printing press that can print them at "essentially no cost". We'd need brave politicians to explain to us why the government can't print us what it owes us at essentially no cost. There is no promise that the pieces of paper will be worth anything of course. The less they are worth, the easier it will be to print them. And lastly, just exactly where will we find these mythical brave politicians? I sure haven't seen many.
So yeah, I like TIPS. Deflation? Inflation? Stagflation? Whatever! If I am wrong to like them, then the "riskier" havens are going to be absolutely devastated. There's very little I can do to protect myself in that world though, so why even bother trying?
This isn't investment advice of course. It's just the rantings of what would best be described as a permabear I guess. We find ourselves in a hole (debts and deficits) we can't quite get out of. Our solution? Dig deeper.
Tuesday, June 16, 2009
Education and Debt
This just makes me sad. I could not read all of the following article without cringing nor could I read even a fraction of the 324 comments.
June 15, 2009
Student Debt, Fool’s Gold?
From the article...
I’m an academic advisor in natural sciences at a 4-year state school; day after weary day I advise students with below average grades who have unrealistic expectations and cannot accept the fact that — contrary to what they’ve been told all of their lives — they cannot be a scientist or doctor.
Virtually every day I advise one or more students with “C” averages in math, chemistry and biology who persist in the belief that they will get into medical school, all the while accumulating debt and wasting time. I don’t even really have the hope that one day they will wake up; I forget who said that “most people can’t stand too much reality.” — Chris Silber
From the comments...
These are heartbreaking stories. I knew from common sense that student debt was undesirable, but reading these comment threads has convinced me that we are in a horrific situation as far as our young (and some not-so-young) people are concerned.
It seems to me that one “root cause” of all this madness is the desire to remain middle-class. That simply may not be possible in these circumstances. Perhaps parents need to teach their children how to be poor - because that’s where it seems a lot of people are headed, if they have been unfortunate enough to fall into the net of usury. — stefanie
February 6, 2007
Bernanke: Education can help with income gap
WASHINGTON - Bolstering education and training — rather than erecting trade barriers — would help narrow the economic gap between low- and high-income workers, Federal Reserve Chairman Ben Bernanke said Tuesday.
How is more education going to help close the gap? I'd really like someone to explain that to me. Americans have embraced higher education over the last few decades in a major way. Has the gap narrowed? No. Note the yellow line in the following chart.
Gini coefficient
(Click to enlarge)
I'd also like someone to explain to me how taking on massive debt helps close the net worth gap, because I'm fairly confident that one is even further out of whack.
And lastly, here's a look at Tomorrow's Jobs.
Note the occupations with the largest numerical increases in employment, projected 2006-2016 (as seen in Chart 8).
1. Registered Nurses - 587,000 (Specialized Degree Needed)
2. Retail Salespersons - 557,000 (No Degree Needed)
3. Customer Service Representatives - 545,000 (No Degree Needed)
4. Combined Food Preparation and Service Workers, Including Fast Food - 452,000 (No Degree Needed)
5. Office Clerks, General - 404,000 (No Degree Needed)
6. Personal and Home Care Aides - 389,000 (No Degree Needed)
7. Home Health Aides - 384,000 (No Degree Needed)
8. Post Secondary Teachers - 382,000 (Doctoral Degree, Master's Degree, and/or Bachelor's Degree depending on the job)
9. Janitors and Cleaners, Except Maids and Housekeeping Cleaners - 345,000 (No Degree Needed)
10. Nursing Aides, Orderlies, and Attendants - 264,000 (Specialized Training Needed)
That's an additional 4.3 million jobs (in theory). A general college degree is not useful for most of the jobs, and mostly insufficient for the rest of them. I started this post with the idea that this makes me sad. I guess I'll end on that note too.
June 15, 2009
Student Debt, Fool’s Gold?
From the article...
I’m an academic advisor in natural sciences at a 4-year state school; day after weary day I advise students with below average grades who have unrealistic expectations and cannot accept the fact that — contrary to what they’ve been told all of their lives — they cannot be a scientist or doctor.
Virtually every day I advise one or more students with “C” averages in math, chemistry and biology who persist in the belief that they will get into medical school, all the while accumulating debt and wasting time. I don’t even really have the hope that one day they will wake up; I forget who said that “most people can’t stand too much reality.” — Chris Silber
From the comments...
These are heartbreaking stories. I knew from common sense that student debt was undesirable, but reading these comment threads has convinced me that we are in a horrific situation as far as our young (and some not-so-young) people are concerned.
It seems to me that one “root cause” of all this madness is the desire to remain middle-class. That simply may not be possible in these circumstances. Perhaps parents need to teach their children how to be poor - because that’s where it seems a lot of people are headed, if they have been unfortunate enough to fall into the net of usury. — stefanie
February 6, 2007
Bernanke: Education can help with income gap
WASHINGTON - Bolstering education and training — rather than erecting trade barriers — would help narrow the economic gap between low- and high-income workers, Federal Reserve Chairman Ben Bernanke said Tuesday.
How is more education going to help close the gap? I'd really like someone to explain that to me. Americans have embraced higher education over the last few decades in a major way. Has the gap narrowed? No. Note the yellow line in the following chart.
Gini coefficient
(Click to enlarge)
I'd also like someone to explain to me how taking on massive debt helps close the net worth gap, because I'm fairly confident that one is even further out of whack.
And lastly, here's a look at Tomorrow's Jobs.
Note the occupations with the largest numerical increases in employment, projected 2006-2016 (as seen in Chart 8).
1. Registered Nurses - 587,000 (Specialized Degree Needed)
2. Retail Salespersons - 557,000 (No Degree Needed)
3. Customer Service Representatives - 545,000 (No Degree Needed)
4. Combined Food Preparation and Service Workers, Including Fast Food - 452,000 (No Degree Needed)
5. Office Clerks, General - 404,000 (No Degree Needed)
6. Personal and Home Care Aides - 389,000 (No Degree Needed)
7. Home Health Aides - 384,000 (No Degree Needed)
8. Post Secondary Teachers - 382,000 (Doctoral Degree, Master's Degree, and/or Bachelor's Degree depending on the job)
9. Janitors and Cleaners, Except Maids and Housekeeping Cleaners - 345,000 (No Degree Needed)
10. Nursing Aides, Orderlies, and Attendants - 264,000 (Specialized Training Needed)
That's an additional 4.3 million jobs (in theory). A general college degree is not useful for most of the jobs, and mostly insufficient for the rest of them. I started this post with the idea that this makes me sad. I guess I'll end on that note too.
What Does the U.S. Need?
U.S. needs more bankruptcy judges: judicial group
WASHINGTON (Reuters) - A judicial body is urging Congress to authorize new bankruptcy judgeships to cope with a surge in bankruptcy filings that has tracked weakness in the U.S. economy.
Well, there you have it. I knew we needed something.
WASHINGTON (Reuters) - A judicial body is urging Congress to authorize new bankruptcy judgeships to cope with a surge in bankruptcy filings that has tracked weakness in the U.S. economy.
Well, there you have it. I knew we needed something.
Andy Xie!
Andy Xie's thoughts often closely match that of my own. We've had another sighting over at Naked Capitalism. Must read!
Guest Post: Andy Xie - "Markets Are Trading On Imagination"
Here's a quote to wet your appetite, but the entire article is well worth a read.
Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.
Here's a previous link that's a modest summary of his previous predictions.
May 7, 2009
More from Andy Xie
Guest Post: Andy Xie - "Markets Are Trading On Imagination"
Here's a quote to wet your appetite, but the entire article is well worth a read.
Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.
Here's a previous link that's a modest summary of his previous predictions.
May 7, 2009
More from Andy Xie
My Least Worst Enemy (Musical Tribute)
PRACTICE MANAGEMENT: Charities Turn To Wealth Managers
NEW YORK (Dow Jones)--Wealth managers are seeing increased interest from charities and private foundations that, hit by endowment declines and shaken by prominent fraud cases, are seeking more professional help with investment decisions and due diligence.
Good luck on that one!
I'm fairly sure our government is bailing out the "professional help" as we speak. It seems the professionals came up somewhat lacking in toxic asset risk management and toxic asset due diligence. Other than that, I'm sure the professionals provide great wealth management in general though, lol.
Wealth managers shaken by an exodus of clients
UBS, the world's largest wealth fund manager, saw an outflow of $95billion as clients left because of the bank's exposure to toxic assets and its spat with the US government over offshore accounts it set up for American citizens.
Let's summarize. Wealth managers are seeing renewed interest by those who have not used wealth managers in the past. Meanwhile, existing clients of wealth managers are leaving in droves. Doesn't that just figure?
How Do I Know You're Not Bernie Madoff?
Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.
Here's a crazy thought. Be your own wealth manager. You certainly couldn't do much worse. Even if you lost it all, at least you'd have the satisfaction of knowing you didn't pay yourself excessive wealth management fees for the privilege.
My Least Worst Enemy
I remember, there was a time
We were told to invest in almost anything
As the lies came and the pain
One day wealth just went away
Yeah I remember, we lost most everything
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
In the gutters, in the graves, sit the nest eggs
There is no place, where wealth can just hide away
As all those taxes take their tolls
There is nowhere cash can grow
So we keep running, running from our destiny
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
Say I bought on margin
Say stocks go to the moon
That greed's never enough
No greed's never enough, no greed's never enough
Say it's illusion
It's all in my head
That greed's never enough
No greed's never enough, no greed's never enough
So why is it that we believe the lies?
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
...
NEW YORK (Dow Jones)--Wealth managers are seeing increased interest from charities and private foundations that, hit by endowment declines and shaken by prominent fraud cases, are seeking more professional help with investment decisions and due diligence.
Good luck on that one!
I'm fairly sure our government is bailing out the "professional help" as we speak. It seems the professionals came up somewhat lacking in toxic asset risk management and toxic asset due diligence. Other than that, I'm sure the professionals provide great wealth management in general though, lol.
Wealth managers shaken by an exodus of clients
UBS, the world's largest wealth fund manager, saw an outflow of $95billion as clients left because of the bank's exposure to toxic assets and its spat with the US government over offshore accounts it set up for American citizens.
Let's summarize. Wealth managers are seeing renewed interest by those who have not used wealth managers in the past. Meanwhile, existing clients of wealth managers are leaving in droves. Doesn't that just figure?
How Do I Know You're Not Bernie Madoff?
Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.
Here's a crazy thought. Be your own wealth manager. You certainly couldn't do much worse. Even if you lost it all, at least you'd have the satisfaction of knowing you didn't pay yourself excessive wealth management fees for the privilege.
My Least Worst Enemy
I remember, there was a time
We were told to invest in almost anything
As the lies came and the pain
One day wealth just went away
Yeah I remember, we lost most everything
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
In the gutters, in the graves, sit the nest eggs
There is no place, where wealth can just hide away
As all those taxes take their tolls
There is nowhere cash can grow
So we keep running, running from our destiny
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
Say I bought on margin
Say stocks go to the moon
That greed's never enough
No greed's never enough, no greed's never enough
Say it's illusion
It's all in my head
That greed's never enough
No greed's never enough, no greed's never enough
So why is it that we believe the lies?
That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy
...
Monday, June 15, 2009
The Wisdom of Pandit (Musical Tribute)
January 15, 2008
Citigroup's $9.8bn sub-prime loss
Mr Pandit has pledged to turn around Citigroup's fortunes.
Citigroup's Adjusted Close: $25.47
June 15, 2009
"Something went wrong over the last few years"
Citigroup's Adjusted Close: $3.37 (87% loss)
Something went wrong over the last few years? Sage wisdom from the man who ought to know. I now present you with the musical genius of yet another Pandit.
Oh yes! I can feel Citigroup's stock price healing as we speak. Look into Pandit's eyes and let Miserlou consume you!
Source Data:
Yahoo: Citigroup Historical Stock Prices
Thanks to Kevin for inspiring the post.
Citigroup's $9.8bn sub-prime loss
Mr Pandit has pledged to turn around Citigroup's fortunes.
Citigroup's Adjusted Close: $25.47
June 15, 2009
"Something went wrong over the last few years"
Citigroup's Adjusted Close: $3.37 (87% loss)
Something went wrong over the last few years? Sage wisdom from the man who ought to know. I now present you with the musical genius of yet another Pandit.
Oh yes! I can feel Citigroup's stock price healing as we speak. Look into Pandit's eyes and let Miserlou consume you!
Source Data:
Yahoo: Citigroup Historical Stock Prices
Thanks to Kevin for inspiring the post.
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