Posts
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.
32 comments:
Sorry I haven't posted much lately. Would you believe it had been a week since I turned my computer on? Good grief.
The Playstation 3 is an anti-productivity miracle, especially since I can now post comments without ever leaving the comfort of the couch, lol. ;)
I agree that TIPS are not a bad play.
However I think it also needs to be pointed out that you are protected from inflation by TIPS only in so far as the CPI accurately measures inflation. A host of Govt expenditures are linked to the CPI and the Govt has an incentive to lowball the CPI. In a hyper-inflationary environment even a small difference between the CPI and actual inflation could wipe you out if you had a long-term bond.
The Govt has changed the way it calculates the CPI several times. John Williams from Shadow Stats.com has a chart which compares the CPI since 1980 as stated by the Govt with what the CPI would have been if the Govt had continued to use the 1980 calculation method. The difference between the method in 1980 and today now amounts to over 6%.
TIPS are a decent play, but putting almost all of your eggs in one basket is always a dumb play. Sheesh, get some actual gold if you're a permabear.
Every government in history has inflated and understated it. It is to its advantage to do so, and they will continue to do so. When it's .1% it's not much of a concern if the actual rate is .2%; the problem comes when the stated rate is 4% and the real rate is 7%. That's when you lose.
Stag,
The inflation/deflation debate is critical to preserving capital, let alone increasing capital.
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.
Bernanke says he won't allow a deflation. Based on his actions, I think he means business. A deflationary rout would be the death knell of the fed. The system is used to inflation. Deflation would be a Pearl Harbor.
But preventing deflation is not the same as causing high inflation let alone hyper-inflation, at least in my view. My best guess is a Japanese style stagnation - asset deflation, low credit growth with the government as the main driver and small inflation/deflation in CPI. Who knows for sure. Certainly not me.
I agree that TIPS are better than cash. I bought some a few months ago in a tax sheltered account (up a wee bit so far). I thought about buying more, but I don't like the way they are taxed. I just didn't want to be exposed to a negative cash flow position right now - I've got too many current obligations and even bigger bills on the horizon (big for me anyway).
One more thought. I now question all conventional eCONomic wisdom. Contrary to most, I don't think government spending and deficits are the main drivers of inflation. That answer is just too obvious. The obvious is always discounted if not outright wrong.
The way I see it, the underlying driver of inflation is household demand (against business supply of course). Currently, demand is very sick and supply is very healthy. That doesn't add up to high inflation in my book. I'm aware my views have changed, but so has my understanding (I think).
Cannabis and heroin prices in the U.S. fell as demand for the illicit drugs weakened, the United Nations Office on Drugs and Crime said.
http://tinyurl.com/laevm4
Uh-Oh even the drugies are getting hit by deflation.
LOL
Kevin
mark,
I am definitely not in the "Shadow Stats.com" conspiracy theorist camp when it comes to the CPI. I've tracked the changes to the CPI and am comfortable with them.
I've also tracked my own personal expenses to the penny over the last decade. Had inflation been running 6% hotter I would certainly have noticed by now. In fact, as a saver that effect would have ruined me financially. In sharp contrast, my savings have been actually growing faster than my expenses though.
Housing prices were once in the CPI directly. Now rental equivalents are used. That tended to underestimate inflation during the housing boom (since rents did not keep up). It now tends to overestimate inflation as housing prices crashed (since rents did not fall as fast). That's right. I think we're currently in more of a deflationary mess than the CPI implies.
All the conspiracy theorists pointed to rising oil and housing prices as proof that the CPI was understating inflation. When oil crashed 75% and housing prices cratered they still did. Go figure.
Anonymous,
"TIPS are a decent play, but putting almost all of your eggs in one basket is always a dumb play."
Always a dumb play? Always? That's easy enough to refute. By doing it, I outperformed the typical well diversified stock market portfolio by a wide margin.
"Sheesh, get some actual gold if you're a permabear."
I did. From 2004 to 2006 I had 1/3rd of my nest egg in physical gold and silver. I bought it at a much "safer" price and sold all of it for a 50%+ gain. No joke. I'm not even remotely interested in buying at these prices though (especially now that gold advertisements flood the TV). Toilet paper is the far better deal. I have nearly 1000 rolls. No joke!
The Onion just did a spoof of one gold advertisement. If I was a gold bug, that would make me very nervous. Gold has more than tripled in 10 years. Most assets are heckled after they triple in price. Housing didn't manage to triple. It fell apart before that point.
mab,
"The inflation/deflation debate is critical to preserving capital, let alone increasing capital."
I am in 100% agreement.
There are a lot of investors playing at the economy's roulette table right now. Many are betting all they own on inflation (black). Others are betting it all on deflation (red).
I'm basically betting it all on anything but green, since TIPS offer some inflation and deflation protection. If the ball lands on 00 we all will end up with nothing though. It's unlikely, but certainly possible.
Kevin,
"Uh-Oh even the drugies are getting hit by deflation."
Well, Obama did promise that healthcare reform would save money, lol. ;)
The toilet paper two ply king has returned! I was getting worried about you mark!
Still hate gold huh? I had a new idea as to gold up last night.
Good to see you back, gotta let go of that playstation!
GYSC,
"Still hate gold huh?"
Don't love it or hate it. I'm more indifferent. I certainly don't think it is particularly safe right now. There are no sure things. I did like it a lot at $425 though.
At $900+, I just see better bargains and less risk elsewhere. For example, I could be tempted to buy the much rarer platinum. It's only slightly more expensive. I'm just not that motivated to ride commodities again right now. In order to ride commodities, I'd need to be fairly convinced China's economy would decouple from ours (and Europe's). I'm not convinced, nor do I even lean that way.
I just don't really get the fascination with gold. History shows over and over again that no asset is good at any price. Those that hoarded toilet paper in 1980 and held until 2000 did a LOT better than those that hoarded gold. Hindsight shows that gold was simply way too expensive compared to toilet paper.
Put another way, I have no great desire to hoard anything that has tripled in price unless all items have tripled in price. Even then I might be wrong to hoard it. Past results do not guarantee future returns.
GYSC,
"Good to see you back, gotta let go of that playstation!"
Like THAT is going to happen! Hahaha!
I'm a game addict.
I grew up playing games. I was a computer game programmer. The investment that retired me was a game. I learned of the investment while playing a card game (Pinochle) with friends. Following the economy is like a game (puzzle) to me.
Game, game, game, game, game! Hahaha!
As of 2004, I no longer wish to play games with my nest egg though. Perhaps there's some hope I'm getting a handle on my addiction, lol.
Mark,
I am so terrible at any video game. I took a ton of heat when i was a lot younger because I could not get past the second level on the old nintendo "Super Mario Brothers" game and never past "Bald Bull" in Punchout. Due to that, I hardly ever play.
Although the new "Star Wars The Old Republic" MMO seems really wild!
GYSC,
I'm old & old school, lol.
There were a lot of arcade games I could play for hours on just one quarter. Won $25 in a Joust game of the month. Made just one attempt. Cost me a quarter. When I came by to pick up the prize I was paid in quarters. That funded my addiction for a good year.
Was also good at pinball, but mostly just the ones with ramps. A friend and I stopped by a video game place in Seattle. There was a pinball game I'd never seen but it had this ramp right in front of the flippers. After a few minutes the machine started cranking out free games. One of the locals heard it and walked over to see what was going on. It was the funniest thing ever.
My friend told him that I kept hitting that ramp. The local said he'd hit the ramp and it never spit out that many free games. My friend asked how many times he'd done it in a row. The local said a few. About then the local realized that I'd been hitting the ramp the entire time they'd been talking. The local asked how many times I've hit it in a row? My friend said ab out 30 so far. The local then helped me break my streak.
He exclaimed (pardon my language)...
JESUS CHRIST! HOLY MOTHER OF GOD!
I'll never forget it. It shocked me. I laughed hard enough that I lost all concentration, lol. :)
Stag,
The following is a bit long and is no doubt biased, but it is well worth the read.
http://www.ritholtz.com/blog/2009/06/goldman-sachs-the-great-american-bubble-machine/
Given the alternatives, TIPS look really good. Somehow, I think investing in TIPS will outperform investing in shams over the long haul. Just a hunch.
mab,
"The following is a bit long and is no doubt biased, but it is well worth the read."
It was too long for the Playstation (ran out of memory). I'll be reading it all on my computer instead soon.
I managed to read a bit of it though. Its tone is darkly lethal!
Japan Slides to Deflation as Prices Fall Record 1.1%
Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan’s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.
Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.
Finance Minister Kaoru Yosano said an “extreme” slump in demand and production are causing the drop. “We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral,” he said.
http://tinyurl.com/m9eab4
LONDON, June 26 (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan said on Friday that inflation poses a major threat to long-term economic recovery and its threat must be confronted.
"If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.
"For the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources," he wrote.
"The alternative of political allocation of resources has been tried; and it failed."
http://tinyurl.com/kswg6x
Arighty then.
Kevin
Kevin,
Central Banking Slogans
Combining the very best of the deflationary Great Depression with the very best of the inflationary 1970s since 2000!
Buy one inflationary economic nightmare at 200% of its regular price and get the second deflationary economic nightmare for free!
There was no housing bubble to go bust but if there was then we're making sure "it" doesn't happen here, again!
We're printing nearly infinite prosperity at essentially no cost!
Stag,
http://research.stlouisfed.org/fred2/series/HOABS?cid=2
We're back to 1996 in terms of hours worked.
As for a prosperous future with lots of free time, another blogger pointed out to me that most are getting the free time, but not the prosperity. That seems to be a key distinction/insight.
Meet George Jetson!
Mark,
What got me about that is those was:
“We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral,”
"The alternative of political allocation of resources has been tried; and it failed."
Now looking at what has gone on in Japan and what is taking place here in the US now does give one pause does it not.
Surging U.S. Savings Reduce Dependence on China as Growth Slows
http://tinyurl.com/m457ez
Maybe old Bucky will soon be a carry trade currency just like the YEN as US soccer mom housewives stretch for yield.
Kevin
U.S. Consumer Spending Rises, Incomes Jump on Stimulus Checks
Under the sheets:
Incomes surged 1.4 percent, the most since May 2008, driving up the savings rate to the highest level in more than 15 years.
Wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses.
Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.
Because the increase in spending was smaller than the gain in incomes, the savings rate surged to 6.9 percent, the highest level since December 1993. The rate is likely to drop back in coming months as the effects of the stimulus wane.
http://tinyurl.com/m9mtlv
The boy's in DC had better get that second stimulus plan ready before all those unemployment checks run out.
Kevin
mab,
"As for a prosperous future with lots of free time, another blogger pointed out to me that most are getting the free time, but not the prosperity. That seems to be a key distinction/insight.
Meet George Jetson!"
What? Cartoon Economics doesn't work any better than Cartoon Physics? That's going to break a few "old school" hedge funds if it is true!
Kevin,
"Maybe old Bucky will soon be a carry trade currency just like the YEN as US soccer mom housewives stretch for yield."
I just had a flashback to an article describing the life of Japanese housewife day traders. It was written about a year ago if memory serves. I kid you not!
Kevin,
"The boy's in DC had better get that second stimulus plan ready before all those unemployment checks run out."
Cunning Plan
1. Convince unemployed to go on massive spending spree with money they don't have.
2. Businesses hire as they see massive consumer spending.
3. Increased hiring causes unemployed to no longer be unemployed. Hurray!
So forget $600 stimulus checks. Let's try $100,000 stimulus loans to unemployed workers! Leverage, that's what I'm talking about. Well, leverage and sarcasm anyway.
The scary part is that if we simply gave $100,000 to 10 million unemployed it would ONLY cost $1 trillion. That's chump change these days.
Mark,
"The scary part is that if we simply gave $100,000 to 10 million unemployed it would ONLY cost $1 trillion. That's chump change these days."
If they would have done that to start with along with a mandate that it could only be used to pay off debt there wouldn't have been a finical crisis, they gave the money to the wrong end of the dog.
Kevin
This concept is the "Debt Chandrasekhar Limit" I have talked about. If there is no limit, due to MAD, then we can make all americans billionaires tommorow!
How can i go wrong??
http://economicdisconnect.blogspot.com/2008/10/does-united-states-have-debt.html
GYSC & Kevin,
Let's monetize the people (instead of the debt, lol) right up to the Debt Chandrasekhar Limit and then stop. That seems safe.
Just one problem. Anyone know how to time travel back to the 1970s? I'm thinking that's probably when the limit was breached as we fell off the gold standard. We've been playing "let's pretend" ever since.
Who am I kidding? We're fine as long as interest rates stay low (or better still, keep dropping). D'oh! That's what subprime borrowers always say!
Stag,
http://www.ft.com/cms/s/0/2cb7a6a8-641a-11de-a818-00144feabdc0.html?nclick_check=1
From the above article:
“We are going to get some serious oomph from the stimulus, there is the inventory cycle and I believe there is some pent-up demand by consumers.” - Chritina Romer, Senior Whitehouse Official
Did I mention that oil was up 3.5% today? Serious oomph! Hooray! It's good to know our national debt is hard at work.
mab,
Behold the earth shaking stimulus!
Watch in amazement as California de-faullt lines of credit buckle!
Cheesy 1970s disaster movie tag lines or our current reality? You make the call!
Stag,
Cheesy 1970s disaster movie tag lines or our current reality? You make the call!
c) both
Back at you:
Enhanced interrogation or torture?
Printing money or printing debt?
Here's a question I'd like to see put to Bernanke: Did you order the code red?
mab,
"Did you order the code red?"
Too bad Ben "There Is No Bubble to Go Bust" Bernanke didn't rig for silent running. He might have avoided the depth (of the) charge implosions!
Then again, the Titanic wasn't actually a submarine come to think of it. Icebergs are the lifeblood of our economy.
Post a Comment