TIP vs. Stocks
Long time readers of this blog know that I like TIPS (Treasury Inflation Protected Securities). Much of them I bought directly from the government and will be holding until maturity. Some of my money is in TIP (a fund composed solely of TIPS). I'm certainly taking damage lately, just not as much as some.
As I see it, there are three reasons I'm taking collateral damage (pun intended). They are all somewhat related.
1. Real yields are rising dramatically. The Great Depression saw very high real yields. Buried cash yielded a good 10% as prices were falling at that rate. Deflation does that. These days, we're seeing asset prices fall quite dramatically as well. Oil and other commodities are well off their highs. Housing prices are down significantly. The malls are bracing for a horrible Christmas shopping season. The stock market has been seriously deflating lately. Too bad I couldn't have predicted the stock market meltdown. I was very bearish but I wasn't THAT bearish.
2. There's an unprecedented flight to liquidity/safety. Just look at the VIX. Long-term TIPS are not all that liquid. The market price of them also generally tends to be quite volatile, which is especially true these days. No doubt some are being shaken free from the wild ride.
Inflation Expectations: How the Market Speaks
Second, TIPS yields contain a liquidity premium. While the market for TIPS is growing, it is still relatively small compared to the market for conventional Treasuries. Therefore, to the extent that TIPS are less liquid than Treasuries, investors would demand a liquidity premium for holding TIPS over conventional Treasuries.
3. The concept of "buy and hold" died, at least temporarily. I actually agree with some of the bulls on this one. Babies and bathwater are all the same these days. Everything must go! (Sounds like a Linens 'N Things economy to me.)
The U.S. Treasury's Inflation-Protected Securities : market reactions and policy effects - TIPS
In one sense, these securities should not be as liquid as conventional securities, because the Treasury's target market is the "buy and hold" investor.
I am a "buy and hold" investor. As my TIPS mature, I'll be buying more. My next purchase is planned for January's auction. If I liked TIPS with a 2% real yield, you can bet that I'll like them with a 3% real yield (over reported inflation). I'm not holding my breath that I'll be able to keep getting that rate for the rest of my life though. I think that at some point in the future, people will be kicking themselves for not locking in a rate like that (especially if the government's response to the crisis ends up fueling future inflation). I could be wrong of course. If I am, then the American taxpayers will be kicking themselves for paying me an excessive "safe" rate of return. In fact, they should be especially brutal with the kicks if we actually do enter a 0% inflationary environment (think Japan's deflationary mess) and I'm being paid 3% annually for the privilege.
Once again, this is not investment advice. For one thing, my goals are and have been capital preservation. I don't have a job. I can't afford to take on any additional risk. Investing in the full faith and credit of the United States Government through inflation protected securities, especially these days, is just about as much risk as I can stomach. Trust me on this. I can just barely stomach it. It simply seems somewhat better than many alternatives.
I don't have a job. I can't afford to take on any additional risk.
ReplyDeleteMy buddy and I were joking about this the other day.
You may recall I quit back in Aug. So now if I take a big risk and it pays off I get to be some amount richer. If I take a big risk and get it wrong I get to go back to work. (Umm, yeah, about those QPS reports...)
I think that describes deflation: the marginal value of a dollar is suddenly less than a dollar.
AllanF,
ReplyDeleteIt's kind of like watering the lawn. It will appreciate an hour of watering. It won't appreciate it twice as much if you water it for two hours though. At some point you actually risk drowning it in liquidity.
Here's another thing I think about. If you buy a house for $500k what's another $50k to drive a luxury car? I'm thinking about 2 years hard labor if the economy completely falls apart. Of course, that's assuming you haven't lost part of the $500k in a declining real estate market too.
I was once asked why I even bothered to save/invest for the future. Why not spend it now and live in the moment? I'd be way too old to enjoy it anyway. I replied that if I'm way too old to enjoy it, then think how miserable I'll be when I'm forced to work.
As for Office Space...
So I was sitting in my cubicle today, and I realized, ever since I started working, every single day of my life has been worse than the day before it. So that means that every single day that you see me, that's on the worst day of my life. - Peter Gibbons
For me, that started about the time the fraud and layoffs began where I worked. Go figure.
http://en.wikipedia.org/wiki/Cendant
In 1998, Cendant Corporation was accused of fraud after their company's merging of CUC International and HFS Incorporated in 1997. At the time, Vice Chairman E. Kirk Shelton, had inflated the company's revenue by $500 million over a period of three years. When this report was released to the public, the resulting damage to the market value for the company was approximately $14 billion, with their stock tumbling from a high of $41 down to nearly $12. At the time, this fiasco was the largest case of accounting fraud in the country's history. Mr. Shelton is now serving a 10 year prison sentence.
Following the fraud debacle, the entire interactive software branch was sold for $1 billion to Havas Interactive, a subsidiary of Vivendi Universal.
Hello Vivendi! More fraud.
Vivendi settles US fraud charges
http://www.independent.co.uk/news/business/news/fraud-squad-raids-vivendi-offices-610716.html
The investigation follows a complaint from a small French shareholders' association that investors were misled into buying or holding Vivendi shares by false presentations of the company's financial position and prospects while M. Messier was in charge.
M. Messier, who is 46 today, made a series of audacious acquisitions costing €80bn (£52bn) over two years, transforming Vivendi from a water and sewage treatment company into one of the world's largest media and telecommunications empires. However, the company's share price collapsed from €150 to €13.9 after the markets grew alarmed by Vivendi's €20bn mountain of debt.
Come to think of it, that's my entire career, starting with my very first job.
Rax (restaurant)
http://en.wikipedia.org/wiki/Rax_Restaurants
Once a big player in the fast food segment, Rax has extensively scaled down their operations since their peak in the 1980s due to poor marketing decisions and internal corporate problems within the company.
My next job folded when one partner cashed out his 30% stake in the company for a rowboat. I was offered a 5% stake earlier. I never got its equivalent: an oar? Needless to say, I was laid off shortly thereafter.
The entire branch was laid off at my next job. We worked for a Japanese company downtown Seattle. There were just a few of us. I never quite knew why we were needed. There wasn't much to do. I'm thinking we made a nice pushpin on a global map based in Japan though, lol.
Is it any wonder I'm somewhat cynical?