Wednesday, November 28, 2007

The Return of the Living Dead Real Yields



Dead cat bounce? Or is this the start of something different? I lean heavily towards the former but acknowledge that the latter is certainly possible.

It is very difficult for real yields to fall when oil is tanking and the Dow moves up 500 points (in just two days).


Commodities Follow Oil Prices Lower
"Oil is a catalyst," he said. "It's running the whole show."

They're Back From The Grave and Ready To Party! - Tagline from The Return of the Living Dead, 1985

See Also:
The Death of Real Yields v.5

Source Data:
FRB: Selected Interest Rates
Bloomberg: Rates & Bonds

4 comments:

MAB said...

The richer a society becomes the lower real yields should become. Especially in a global, peaceful and stable market place where alternatives to investing in the U.S. exist. This, paradoxically, requires the fed to ultimately defend positive real yields to prevent a flight of domestic and foreign capital.

Stagflationary Mark said...

MAB,

This, paradoxically, requires the fed to ultimately defend positive real yields to prevent a flight of domestic and foreign capital.

Paradox is right. There's a serious lag between cause and effect.

What causes people to hoard the currency? The Fed creates more money for savers (higher real yields). Creating more money is ultimately inflationary though.

What causes people to flee the currency (and hoard hard assets)? The Fed stops creating more money for savers (lower real yields). Creating less money is ultimately deflationary though.

The problem (and the paradox) is that creating extra money for savers pushes inflation into the future but it also ultimately makes it worse (in theory).

mab said...

Stag, consider that the tips yields are only real when compared to a theoretical basket of goods and only then in a non-taxable account (pension acct or foreign central bank) which ignores money supply growth, hedonics, substituional bias, decline in currency, etc. The U.S. does not offer a true after tax real yield. Apart from the perceived safety of the U.S. tips, far better opportunities must exist abroad. As bad as real yields/returns on U.S. Gov't debt are, the ten year treasury has out performed the S&P 500 for 9 years running. I always thought real returns would be harder to come by the richer our society became, but i never imagined we would be foolish enough to inflate assets as Japan did and pretend we were creating wealth. These are scary times. The best investment has been and may continue to be treasuries which offer negative yields. Surely this signals deflation (falling prices are natural in an increasingly wealthy society). But defation will not be tolerated. Perhaps the "boys in the hood" portfolio is currently the best option: Bling (gold), pit-bulls and guns.

Stagflationary Mark said...

MAB,

Apart from the perceived safety of the U.S. tips, far better opportunities must exist abroad.

Maybe, maybe not. I'm not exactly bullish on China or Europe these days (to name but two). I do know I'm more ignorant of overseas economies/currencies and I am loathe to chase what has worked simply because it has worked (due to our falling dollar if nothing else).

These are scary times. The best investment has been and may continue to be treasuries which offer negative yields.

Scary indeed. I think TIPS are okay even at these levels, but I like I-Bonds better. Even Warren Buffett has stated that TIPS weren't a bad investment a few years ago and we know how picky he can be (and how bearish he was on the dollar).

I'm not nearly as concerned as you are about the CPI. I'm reasonably comfortable with both hedonics and substitution. I substitute a lot based on temporary price changes (sales). For example, if Dreyers Ice Cream is full price and Breyers is half off I might choose Breyers that month. The next month I might choose Dreyers. The government is not suggesting I'd substitute saltine crackers for steak though. If they did, I'd be screaming bloody murder of course.

It is the money supply growth that bothers me and at some point I'd expect some of that to lead to inflation in the CPI. I think it has been avoided so far by the belief that the money can make even more money. That illusion seems to be going away lately though. Further, I think the CPI is also lower than it would normally be because the excess money has gone to the rich. For example, a billionaire doesn't eat more canned soup just because he has a billion dollars. If that same billion dollars was redistributed to all Americans, the price of canned soup might go up a bit though.

Perhaps the "boys in the hood" portfolio is currently the best option: Bling (gold), pit-bulls and guns.

That's the option I used from 2004 to 2006. I owned a considerable amount of gold and silver but sold when they started turning parabolic. Like you, I didn't think we would be this foolish though. They went parabolic twice. Go figure. I'm now riding out the remainder in fiat paper, which may or may not work. I'm hoping we're only foolish, and not absolutely insane. (No proof of that of course, just trying to play the odds.)

I grew up with a .22 rifle (late 70s, early 80s). 2004 also was the year I opted to become a gun owner again (1911 .45). Bling and guns do tend to go together. I may not have the former any longer, but I didn't sell the latter.

These are just my opinions of course. Thanks for your comments.