Wednesday, May 28, 2008

TIPS Fear Mongering Continues

May 22, 2008
Don't Build a Portfolio on Fads and Fears

The dollar is lower than ever against the euro, gas prices are higher than ever, Egyptians are rioting over food shortages and Sam's Club is rationing rice. Such upheaval aside, it's business as usual on Wall Street: Small investors are repeating past mistakes by focusing on the market's short-term troubles rather than on their own long-term objectives.

Business as usual on Wall Street? Yeah, pretty much unfortunately. Short-term troubles? You mean the eight years since 2000? 2000 was the year I first invested in I-Bonds. 2001 was the year I first started investing in TIPS. My long-term objectives are fairly constant. Don't lose money needlessly, but if money must be lost (due to inflation and/or taxes), then at least lose less.

Small investors pumped $10.4 billion into mutual funds and exchange-traded funds specializing in Treasury Inflation-Protected Securities over the last year, driving up the price of TIPS and thereby lowering future returns.

$10.4 billion? That's it? It took an entire year? Wow. Beware the herd apparently. It must be composed of Dachshunds since they're so hard to spot. That's about three or four days worth of trade deficit, about one day's worth of writedowns at a given major investment bank, or one month's worth of Citigroup's lost market cap (over $100 billion missing in the last year). Take your pick. Oh the humanity.

You know the top is in when your taxi cab driver can't get enough TIPS? That's just a pun though! It was never intended to be taken literally.

In January the government issued a ten-year TIPS at $99.14 per $100 with an after-inflation yield of 1.7%. It now sells for $101.05, and the yield is down to 1.5%.

Wow. I did pretty good in January's auction it seems. But is 0.2% less yield really a reason to be alarmed? January's 20-Year TIPS auction went the other direction though (rates went up 0.3%). I'm actually underwater overall since January. I guess that point is conveniently forgotten in the rush to make the TIPS market look so unattractive. However, I can still get a 1.7% 12-month CD at US Bank. No joke. It doesn't even have any pesky inflation protection at all. Instead of getting 1.5% over reported inflation, I'd be getting 1.7% over zero. Decisions, decisions.

Why are retail investors falling all over themselves to buy TIPS? Because they are in a panic. The price of gasoline is going up, and TIPS have the specious appeal of beating the cost of living. They are missing the big picture.

Well, there you have it. I'm in a panic. It says so and I believe everything I read. I'm chasing the specious appeal. I'm missing the big picture. I should have all my money in the stock market since there's no way to get a decent yield anywhere else. Safety be damned even as both Soros and Buffett see problems both behind and ahead of us.

We can't prove it, but we suspect that most of the people buying ten-year Treasurys today aren't buying because they expect terrific returns over the next decade. They are buying because they witnessed great returns over the past year (great compared to stocks, at any rate).

Yeah, I'll bet you can't prove it. Way to berate us "speculators" with idle speculation. I've been buying since 2000 and will continue to do so. It has nothing to do with the returns over the last year. Further, who expects terrific returns anywhere going forward? Not me. How about the government's recent decision to reduce the maximum amount of I-Bonds we could buy from $30k to $5k? How about that I-Bond real rate being lowered to 0.0% to discourage us even further? Perhaps the government "witnessed great returns over the past year" and wanted to put a stop to it too. Just like you are doing.

May 3, 2004

Buffett's Wit and Wisdom

TIPS [Treasury Inflation Protected Securities] are not a bad investment for people worried about inflation heating up, which we're seeing signs of.

Stop panicking Buffett!!! Good grief. That was four years ago. Get with the program. The 10-Year TIPS yielded 1.73% on May 3, 2004. It is now 1.54%. That's a whopping 0.19% difference. That's 1.9 cents in lost opportunity cost on each ten dollar bill each and every year. That's absolutely insane!!! SELL THAT PIG!!! ;)

Since I consider this article fear mongering in an attempt to put our somewhat "safe" money into something far riskier, I offer some fear mongering of my own.

May 8, 2008

Zimbabwe: Money Market Rates Remain Subdued

Rates remained stuck at around 100 percent for most cash investments, with the longer dated 60 to 90 day investments attracting the higher rates of around 150 percent, with inter-bank overnight placements trading at rates below 20 percent, an analyst with Kingdom Stock Brokers (KSB) said.

100% interest rates aren't all that good when you've got million percent inflation.

"All money market investments at the moment are yielding a negative real return of 100 percent, meaning that at maturity of one's fixed income investment, the investor will have gained absolutely nothing," said the analyst.

What fun! Oh, you don't just gain absolutely nothing. That's a bit misleading. You also lose nearly everything you started with. If real returns dip like that here in the mighty USA, and TIPS do best in a falling real yield environment which they do, I'll be buying all of Forbes for worthless pennies on the worthless dollar! Mwuhahaha! Well, either that or buying the last loaf of bread once the government taxes me on my "profits." Tough call.


AllanF said...

the specious appeal of beating the cost of living

OK, now I'm pissed, no dry sarcasm for me the gloves are off...

WTF is wrong with beating the cost of living. What is specious about that? It's called saving.

I refuse to click the link, but unless the author goes into a diatribe about taxing inflation, or a thoughtful warning that your personal exposure to inflation may not match the CPI-U, that is the most ridiculous thing I've read yet. If he wants to talk about specious returns let's talk about the specious returns of the S&P500 for the last decade.

I am starting to see more and more stupid punditry. Yeah, we've always had stupid and always will, but the character of stupid is changing. It's gone from questionable picks (but who could've predicted?) to fundamentally wrong. I think the herd is getting spooked. I think low nominal rates and negative real rates are scaring the crap out of them. In such an environment it is hard to hide 1% fees and index-1.5% returns. Their gravy train is ending and they can sense it.

Stagflationary Mark said...


I refuse to click the link, but unless the author goes into a diatribe about taxing inflation, or a thoughtful warning...

No diatribes, sorry.

I think low nominal rates and negative real rates are scaring the crap out of them. In such an environment it is hard to hide 1% fees and index-1.5% returns. Their gravy train is ending and they can sense it.

Here's a 1970s gravy train style solution to negative real interest rates.

We took big tender juicy chunks, golden nuggets loaded with vitamins, and rich meat broth, we quick dried it....Just add warm water and it comes back again instantly. Rich meat broth, golden nuggets, and red juicy chunks. Big, tender, tempting as ever.

I don't know about you, but I salivate every time I hear Wall Street's closing bell.

The gravy train slowing isn't something we really need to worry about though.

U.S bonus gravy train shows no signs of slowing

Oh wait. That was written in 2006. Nevermind. Here's something more current.

More layoffs expected at financial firms

Analysts estimate that revenue and profit will drop again in the second quarter. Three analysts are predicting that Lehman, whose shares have plunged 45 percent so far this year, will report its first loss since the credit crisis began last summer.

Hopefully the bonus gravy-train will continue though for those who remain. Perhaps in another decade or so we won't be talking about nonfarm payrolls any longer. We'll be talking about nonbank payrolls, nonrestaurant payrolls, nonmall payrolls, and so on. We'll be looking at employment statistics ex-employment statistics to understand the economy.