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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).
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
11 hours ago
18 comments:
Mark - for some reason I thought you'd get a kick out of this.
Green shoots: new food supply
http://news.yahoo.com/s/ap/20090711/ap_on_sc/us_killer_seaweed
I read it and instantly thought of your blog. I don't know why. Maybe previous food posts?
- jus me
jus me,
"It's not a problem getting smaller in scope, it's getting worse and worse," he said.
No idea why you thought of my blog! ;)
In all seriousness, thanks for the link. I remember watching a documentary about this quite a few years ago. If memory serves, it also had a segment on a European aquarium that accidentally released something into their local waters that was creating unbelievable havoc on their ecosystem. The "weed" was choking off most other underwater life.
I'm also reminded of this every time I travel home from Eastern Washington to Seattle.
There's a sign about half way telling me about "Apple Maggot Quarantine Area" and how I better not be transporting fruit.
Man vs. Nature might someday end like Dinosaur vs. Nature did. All this talk of saving the planet doesn't really concern me much. I think there's a decent chance the planet will still be here long after we're gone! Saving mankind from itself might be a better goal.
Stag,
Per the following link, I-bond fixed rates were pretty juicy at the height of the dot.con mania.
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
Any idea how a yearly maximized investment in I-bonds ($30K/yr, now $5K/year) over the past 20 years would compare to the same amounts invested in equities? It could make for an interesting chapter in the "Greatest Story Never Told" saga.
Hey Mark,
Good to read you again!
Buy and hold strategems are very sensitive to what time period you are setting them to. Any given 10 or 15 year period for any asset may look great or abysmal depending on the start/stop points. Still, given that the stock markets are where they were about 10 years ago, anything that has kep you even or a bit better is pretty good.
mab,
From your link (that I often visit)...
"In certain deflationary situations..."
For example, let's assume people hoard commodities and investment properties as the Fed Chairman promises helicopter drops of freshly printed money and proclaims there is no housing bubble to go bust. That might make a certain deflationary situation possible, especially if investors think everyone with a computer can make big money on the Internet. D'oh!
As for I-Bonds vs. equities, I didn't start investing in them until 2000. I don't know what rates were doing before 1998. I would guess 2000 was roughly peak juiciness though. Fortunately, I was oblivious to I-Bonds 20 years ago. My "risky" investment was made in 1994 (if memory serves).
I can say that I told a friend in 2000 that I would have put my entire nest egg in I-Bonds had it not been for that $30k annual cap. Hindsight shows that 3.4% rate I got would have made it a good plan. 30 years of 3.4% compounding after inflation is insane for what's supposed to be one of the safest investments on the planet. I strongly suspect we won't see that rate again in my lifetime.
I've been doing $30k a year since 2000 and until the $5k cap was introduced. I upped it to $60k just before that point and now strive for $10k (by buying in both paper AND electronic forms, which is still allowed and effectively doubles the cap).
GYSC,
"Buy and hold strategems are very sensitive to what time period you are setting them to."
For what it is worth, time frame never really enters my thoughts. I've never make anything but long-term investments. The primary reason I wouldn't continue to hold long-term would be if its value drops to the point it no longer looks like a decent long-term investment (either by me missing some hidden risk or investors driving the price up).
My favorite example is Gillette. I thought I'd hold it forever when I bought. Shortly thereafter, they introduced the Mach III razor. Stock shot up 75% within 6 months and I dumped it. I joked at the time that investors were nuts. The euphoria would end once some company released a four bladed razor, lol. It was SUPPOSED to be a joke but then Shick came out with the Quatro! Funniest damn thing ever! I swear it is true. I even posted these thoughts along with my entry and exit on Yahoo's Gillette message board at the time (but that's gone now).
Stag,
I just want to re-emphasize how critically important it was/is for the fed and treasury to preserve our "free" markets with $14 trillion in guarantees. Goldman's monster Q2 earnings really underscore the point.
mab,
$14 trillion is only $46k for every man, woman, and child in America.
Fortunately, my children are a dog, cat, bird, and two horses. I just hope none of them get a bill for their portion in the mail. I might be safe anyway. Although they can fog a mirror (which might still get them a home mortgage or a credit card), none have opposable thumbs (to actually pay the bills).
Stag,
and two horses.
Two horses? That's like two second homes.
If I didn't know better, I'd think you were horse trading when the bottom fell out of the market. I'd also think you were a (saddle)bagholder. Of course since you are a hoarder, it's obvious this is a peak oil play. ;}
mab,
Technically speaking, the horses do not belong to us. They belong to a trust. It is a complicated/strange story.
A few years ago a wealthy woman was looking to find someone to look after her horse as she had health issues. She found my (financially poor) girlfriend. She set up a trust to pay for all the horse's expenses for the rest of its life. A few months later, the horse died (no fault of my girlfriend). The woman felt bad so wanted my girlfriend to get another horse and transfer the trust to the new horse.
A week or so ago, the woman died. I don't know all the details but I do know she left my girlfriend yet another horse (of my girlfriend's choosing). The woman left her own family nothing. They were apparently fighting over her money while she was still alive. She was a smart woman though. Had she simply given my girlfriend a gift, they could have gone after the money. However, by setting up trusts to care for the woman's property (the horses), there isn't much they can actually do. My girlfriend is now just the guardian of her property. All expenses (including mileage to visit the horses) are paid by the trust (through the woman's lawyer).
Get this. The woman also left the horses a truck and trailor, should my girlfriend ever need them. They haven't been purchased yet. My girlfriend would be free to use them on horse related business (once again, all expenses paid by the trust) for as long as they are alive (and then must be given to charity).
I suspect the woman's family is livid right now. She gave away most of the rest of her fortune directly to charity BEFORE she died. There is nothing they can do about that. If they are as greedy as she said, serves them right.
In sharp contrast, my girlfriend feels guilty spending any money on the horses (cheap barn, used equipment). Both the woman and her attorney were both worried that she wasn't visiting the first horse as much as they expected (as seen in the mileage reimbursements). They were both encouraging her to spend more (and that the trust can afford it). It would not surprise me if this is what prompted the woman to leave her a second horse with possible truck and trailor.
Very odd world we live in. In theory, those horses might someday be living better than my girlfriend and me! It would not surprise me if their combined nest eggs were similar to my own. Horses live a LONG time, are not cheap to maintain, and the attorney believes there is very little risk the trusts run dry. Go figure!
As for a peak oil play, there is one horse for each human in this household. If I am someday using a horse to pick up groceries, I might need a secondary "bag" on the horse for a rifle. I suspect we'd put the "wild west" to shame.
Any thoughts on how high the stock market can be stimulated?
It went to 14,000 based on wimpy 2004 style stimulus before it imploded.
140,000 is a ballpark guess assuming we can get unemployment down to say 0.2% as we retrain the workers of the future.
I do love assumptions almost as much as sarcasm!
In all seriousness, I was bearish in 2004. I did watch the market climb to 14,000. I felt kind of silly. I'm feeling kind of silly now. Deja vu. Sitting it out actually worked long-term though. I'm doing it again.
I'll be worried about missing the ride when the stock market can climb without the price of oil climbing too. Still not a believer in commodity driven stock markets.
On the other hand, investing when unemployment is 9.5% makes more sense to me than when we're at full employment. At least things can potentially get better someday.
Stag,
Regarding stocks. I didn't particpate in the recent run-up, but I think my reasoning for staying away is sound. Of course that doesn't mean stocks can't bubble higher.
Check out the following excel file showing Shiller's historical S&P 500 data. Stocks are not cheap, despite what Buffett and other shills are saying.
http://www.econ.yale.edu/~shiller/data.htm
I have a big issue with Shiller's 10 year earnings method too. Mainly, we've had twenty straight years of credit bubble earnings that were well above trend. I use price to sales and dividend yields as sanity checks on the 10 year p/e. If history is a guide, one can expect dismal returns when dividends are < 3%. Currently, the S&P 500 has a 2.3% dividend yield. Beyond that, the last time debt levels were even remotely this high we had a Great Depression. My gut tells me all that debt can't be supported.
I think the recovery in stocks is based on heroic but mis-understood fed actions. QE to keep the financial system from collapsing is not the same has creating high or hyper-inflation. Based on Japan, I don't think QE works beyond keeping the system limping along. Bank credit spends just like fed notes. Bank reserves are piling up. More reserves won't increase the public's appetite for debt imo. The deposit multiplier is maxed out in my view. Main street has lost its appetite for debt. Negative debt demand from households cannot be good for over-valued stocks.
This guy has some interesting insights on QE.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
mab,
Intend to check out your links on my PC next time I'm on it.
Buffett is actually beginning to annoy me a bit. He keeps talking about how Americans of the future will have it better than we do. What ever happened to his "thriftville" vs. "squanderville" analogy describing us as not so thrifty? Why is he investing in railroads? While perhaps a good investment, it isn't exactly an endorsement of this country's massive highway system. If memory serves, there was a train in Mad Max's Beyond Thunderdome too. And buying banking and oil stocks BEFORE they crashed while simultaneously warning us of a housing bubble and frothy oil prices? Head scratchers!
Patriotic duty? Denial? Perhaps his greatest strength WAS investing in a never ending credit bubble expansion. His greatest weakness might just be a never ending credit bubble collapse. It's not like we can backtest his strategies. I can say that I don't eat overpriced See's Candy nor do I have Geico insurance. I do drink some Coca Cola, but am not all that brand loyal if they keep raising prices as those around me lose their jobs.
I am also reminded of playing the horses in college. I was making good money and thought I knew exactly what I was doing. Then the jockey scandal hit and the system never worked again. Fortunately, I stopped at the first sign of trouble or I'd probably be living in a cardboard box in some alley. Based on Madoff's fraud and the fraud I saw in the publicly company where I once worked, horse racing and investing are both similar gambling activities.
mab,
One more thought.
"Bank reserves are piling up. More reserves won't increase the public's appetite for debt imo."
This sure rings a bell. Watch this.
College graduates are piling up. More college graduates won't increase the public company appetite for workers imo.
Hey mark!
Hpope you are enjoying the summer. Miss your sarcasm, but there are more important things than blogging! Any requests for thursday night entertainment?
Best wishes
I meant Friday night. Been a long week at work!
GYSC,
It's Africa HOT in the Northwest right now! An air conditioned workplace doesn't sound so bad right now.
Okay, maybe not THAT hot. At 92+ it's at least Africa moderate though, lol.
"This is like AFRICA HOT"
-Biloxi Blues??
take care
GYSC,
Biloxi Blues is the winner! Well done! :)
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