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Long-Term TIPS May Prove Attractive
Given the tame inflation outlook near term, Mr. Weinstein said he wouldn't own Treasury inflation-protected securities, or TIPS, due January and April 2011 because they don't provide much upside in prices. But long-term TIPS provide attractive value, especially in the 20-year sector, he said.
Mr. Weinstein said there is a dichotomy between inflation expectations, which have been rising this year, and data that show little inflation pressure.
For what it is worth, that's what I've been saying. The real yield on the 5-Year TIPS is just 0.25% (over CPI) right now. 0% is the floor. There is almost no upside left even if inflation becomes a persistent problem. At best you have an investment that tracks inflation that you also have to pay tax on. Further, there is plenty of downside risk if deflation hits again. Plenty.
The last time deflation struck with a vengeance the real yield on the 5-Year rose to over 4% as people scurried to bury cash in their backyards. It was the day just before Thanksgiving of last year. I'm not counting on that day being special though. I'm simply saying that I don't think short-term TIP bond fund investors of today fully realize the risks involved.
Inflation expectations drove the price of my TIP fund higher. I'm not paid interest based on inflation expectations though. I'm paid on based on actual inflation. If the market is wrong about inflation rising in the near term, watch out below.
My last big purchase was the 20-Year TIPS several years ago. I thought the economy would be very slow to recover at best. For a while it was underwater, but it isn't any longer. Investors today can now buy it for the same price I did. It pays 1.8% right now. I think it is clearly the better bargain for long-term semi-bearish and/or cautious investors, at least when compared to 5-Year TIPS held to maturity and potentially reinvested three times.
It's just an opinion though. Time will tell.
Friday: No Major Economic Releases
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[image: Mortgage Rates] Note: Mortgage rates are from MortgageNewsDaily.com
and are for top tier scenarios.
Friday:
• At 10:00 AM ET, *University of Michig...
4 hours ago
24 comments:
Mark,
What are you going to do with your deflationary Christmas? Investment wise. Thanks for the thoughts on farmland in the last thread (thanks, Stevie b). Got to go, Ed G.
Stag,
Further, there is plenty of downside risk if deflation hits again. Plenty.
That's the way I viewed it too when I sold my TIP fund recently. I figured the risks of a deflationary panic and the volatility that would ensue far outweighed the minimal upside.
I have a hard time envisioning high inflation from here. When we had high inflation during the 1970s, wages weren't constrained by billions of Asians willing to work for a $1/hr. Beyond wages, debt levels were much lower. For inflation to take off from here, we'd have to see increasing wages and a willingness for households to take on more debt. I don't see either. I won't even mention that the main source of collateral for borrowing (real estate) is still declining in the face of weak demand and a glut of supply.
As for a falling dollar, I don't think that's going to play out the way investors expect. Japan's dollar has strengthened during its deflation. And why not? A store of purchasing power has value in a world with a polluted credit system and over-valued assets.
Perhaps Bernanke can keep his promise and keep deflation at bay. I'm not going to fight his heroic efforts. But preventing deflation is NOT the same as causing high inflation let alone hyper-inflation.
In the land of the blind, the one eyed man is king. In the land of the highly indebted, the humble investor with savings is a happy camper. Happiness is not always wanting more than you have, but always having more than you want.
Just my two cents (probably not even worth two cents).
mab
"Happiness is not always wanting more than you have, but always having more than you want."
May I please have more... contentment.
Ed G.
Mark, the "Illusion of Properity" picturegate is awesome. That said, maybe he really did not know where the picture came from, google image searches return all kinds of stuff (mostly NSFW!).
Scientific American is an ok magazine, though like National Geographic, it has become a bit too political. I prefer real journal articles, but then again I am science geek.
With the exapnsion of the FED MBS purchase plan (all your dollars backed by phoenix condo mortgages, wooo hoo!) I think any pull back in gold may be a while in the making. I like silver anyways!
One more,
I keep getting into the same debate with Ilargi of The Automatic Earth, and I cannot see how the dollar gets stronger when the US gave away treasuries to buy back all the crap MBS sold worlwide, and now the dollar gets stronger while underpinned, you guessed it, by the same crap we had to buy back. Circular logic, but it is so freaking dumb it will probably work out that way exactly.
GYSC,
Picturegate! Hahaha!
You will be happy to know that I thought of your search idea before I posted what I wrote. I actually did a search for "Illusion of Prosperity" and looked through the images. My dog was the second search result.
I even looked through the first 20 pages of search results and the only picture of my dog that I could find was located on my blog.
GYSC,
If the stock market implodes again, I'd expect the dollar to get very strong. That's what the deflationists predicted last time and that's what happened last time.
http://www.bullnotbull.com/archive/dollar-1.html
"HOYE: Yes. And all you need for this recipe to work is a bare majority of all the debt that is floated in the bubble to be contracted in U.S. dollars. Once the party is over, everyone then has to get their hands on U.S. dollars to service their obligations in New York."
Mark, I wonder if Obama is going to kiss you.
LOL
Kevin
Anonymous,
"What are you going to do with your deflationary Christmas?"
I'm sitting in unloved US Dollars, but only with my short-term money.
Some of the money will be earning 1.3% in an ING Direct savings account. I'm waiting a week or two to move it though, just in case Black Friday is a dud and deflation reappears. If it does appear, my window of opportunity to repurchase TIP at a much lower price may be very temporary.
In January, I'll be buying the 10-Year TIPS regardless though. Still working on my TIPS ladder.
TIP doesn't have much deflation protection after its run up in price.
TIPS bought directly from the government in January will though. (Since you are guaranteed to get your original principal back at maturity.)
I was planning to sell some TIP anyway to fund January's purchase. Saw no harm in selling early. Further, my savings account was lower than I'd like. Been spending money out of it to pay expenses and it needed refilling.
I'd buy more 20-Year TIPS in January too, but I've already got a lot of money locked up 20 years out in I-Bonds and a previous 20-Year TIPS purchase.
So here's my take on the risk/reward situation by being out of TIP. Could be wrong of course.
The Risk: Christmas is unexpectedly inflationary. TIP rises in price slightly and I lose maybe 1% in inflation adjustments (3 months of 4% inflation).
The Reward: Christmas is unexpectedly deflationary. TIP falls in price dramatically and I avoid losing 10% in the downdraft.
The Expected: The market expects me to lose 0.5% on the trade near as I can tell. Hard to say. Paying 0.5% as insurance seems okay to me though, even if the market is right.
mab,
"Happiness is not always wanting more than you have, but always having more than you want."
I can't speak for others, but happiness is having a hot water heater and enough prosperity to power it. That allows me a hot shower or bath everyday. Give me that and food and I will always consider myself very fortunate. Anything more than that is a bonus.
http://ipsnews.net/africa/nota.asp?idnews=42537/
"Less than a quarter of the four million people living in Tanzania's financial capital have running water in their homes, city water authorities say. With poor areas typically amongst those lacking piped water, most impoverished city dwellers rely on private vendors to bring them supplies."
Kevin,
"Mark, I wonder if Obama is going to kiss you."
He can kiss my big fat savings goodbye.
No! Hold on! That's not what I meant to say. ;)
Mark,
agree to disagree on the buck.
For me happiness is not having to worry about:
-next meal
-next bill due
-personal health (always a tough one, health anxiety!)
The rest is bonus time.
I went over the last 6 months of trades I have done in tonights post and I think I did ok, nothing spectacular. I hate losing money and on that I have been ok.
GYSC,
Fair enough. I'll sit on your side of the fence for a moment.
Let's assume the dollar is going down. That must mean the euro continues to go up? That's certainly been the trend.
"WORLD FOREX: Euro Touches $1.50 As Riskier Assets Rally"
http://online.wsj.com/article/BT-CO-20091123-709836.html
I'm just having a hard time embracing riskier assets these days. Perhaps we should agree to disagree after all. ;)
I'm just teasing. No point agreeing or disagreeing really. I'm not claiming that the US Dollar will be a powerhouse of strength going forward. I'm simply suggesting that too many people may be trying to price in inflation that may or may not be a given in the short-term.
Here's something I wrote just two months ago.
"The Great Depression vs. Our Recession"
http://illusionofprosperity.blogspot.com/2009/09/great-depression-vs-our-recession.html
It seems we are still trying to match The Great Depression when it comes to unemployment.
It's like boiling a frog alive slowly. Unemployment was 9.7% then. It is now 10.2%. It's only been two months.
What if I told you that my girlfriend is currently owed 5 weeks of back unemployment? It's true. She qualified for the extension but they are swamped. They've had to hire temporary workers to help with data entry. No joke. She did get an apology though. Too bad apologies can't pay bills. Fortunately, I can. I wonder how many others aren't so fortunate though.
Mark,
I think we should get together with Watchtower, Jeff from the Housing Time Bomb, Dave from The Golden Truth someplace and have afew beers and hash this all out!
I am working on an idea that I need some time to figure out about all this "relative currency" stuff and how it relates to the dollar. To bad I have a day job, I might actually finish a complete financial thesis!
One more thought.
Neither of us are all that crazy about Krugman, but what if he is right about one thing?
http://krugman.blogs.nytimes.com/2009/01/17/zero-lower-bound-blogging/
"But looking forward, the Taylor rule says that the Fed should cut rates a lot from here — in fact, to negative 6%. That’s not surprising: we’re clearly opening up a huge output gap, inflation is turning into deflation."
Keep in mind that like you I think his "cure" is at least as bad as the "disease". I'm just saying that if he is right and interest rates need to be -6% in order to fend off deflation, then we're a bit shy of the mark. 0% isn't good enough.
Mark,
"Too bad apologies can't pay bills. Fortunately, I can. I wonder how many others aren't so fortunate though."
When Geithner is out on TV saying everything is pretty good I think about that 10.2% UE and how infuriated they must feel knowing that the banks can now pay record bonus money while they have to tighten belts. Somethings gonna give.
GYSC,
"I think we should get together with Watchtower, Jeff from the Housing Time Bomb, Dave from The Golden Truth someplace and have afew beers and hash this all out!"
I predict that 2 minutes after we hash it out there will be a major deflationary crash followed up by an emergency inflationary helicopter drop.
We'll never actually be able to leave. The discussion will keep going until either the economy has fully rebounded or the economy completely slides into the abyss. Bring plenty of No Doze! ;)
Mark,
LOL! Who needs NO Doze when the taps are open!
As far as Krugman et all the whole output gap is what is known as a false baseline and as long as they fight to get back to something that was not correct to begin with, it is a losing battle.
GYSC,
My favorite losing battle is the household formation argument. We will always need more houses because the population is growing! Right?
When I left college and got my first job I shared an apartment with two friends. I'm picturing out of work college students right now. If three people can't pay the rent, then four people surely can. If four people can't pay the rent, then five people surely can. And so on, and so on. That would have been my solution at the time.
These days, the better question might be... how many can you fit in a van?
http://www.heavy.com/video/illegal-immigrant-clown-car-12463/
Bit late on this happiness/contentment debate, but for me happiness is a good sense of perspective of one's own position relative to the overall scheme of things, & neighbours who are not a PITA.
Mark "Let's assume the dollar is going down. That must mean the euro continues to go up?"
That's the problem with all this "relative currency stuff" as gysc puts it. It is a race to the bottom for most major currencies, including the Euro. I'm not smart enough to know just which one is going to catch-up when. When the Euro falls, I'm not smart enough to know if European gold buying will at some point offset possible American selling at that time and leave the gold price where it is now or wherever it is when this happens. All I know is that it seems to me that they're all going down over the next 5 years or so and that's why I've got some base gold. If gold goes down for whatever reason maybe I'll add to it if I feel the same.
Basically I hope to hell I'm wrong and currencies all go "up", in which case the pension I'll be on in a year's time will do nothing but increase in real value and i'll be a happy( older) puppy.
Stevie b.,
"I'm not smart enough to know..."
I hear you on that. I certainly wouldn't claim to be smarter. It's all I can do to just figure out one control knob to this crazy global economy of ours. There are probably an infinite number of knobs I don't even see.
Is the economy headed for a double dip?
http://voices.kansascity.com/node/6616
"The chances have dropped from 50 percent to 2.2 percent."
Somebody out there thinks they can predict the future to an accuracy in the tenths of a percent. Good luck on that one.
Mark - nicely put....but...this 2.2% seemed so fatuous that I had to have a look and in fact the Kansas City Star was referring to the following from the Carpe Diem blog:
"Last summer the odds for a federal government-run health insurance plan to be approved before the end of the year were around 50%, according to futures contracts traded on Intrade.com. Those odds have now fallen to a contract-low of only 2.2%."
Maybe we should leave the predictions on the economy to the greater-mortal likes of Roubini and Meredith Whitney, who had their respective moments in the sun and now everyone seems to think there can be no clouds in their respective skies - hmmmm, maybe they didn't take the effects of global warming into account...
Stevie b.,
"Maybe we should leave the predictions on the economy to the greater-mortal likes of..."
Of course, I cringe at the thought of what my nest egg would have looked like had I left the predictions of the economy to the experts.
First there was no dotcom bubble. Then there was no housing bubble. Now we're mostly told that everything is looking better.
When they tell you not to panic... that's when you run! - Jackson Curtis (John Cusack), 2012
I've been running since 2000. That's when I first started backing the truck up on I-Bonds. I don't try to look back too much either, for fear of tripping. Maybe I've seen to many horror movies, lol. ;)
Stevie b.,
One more thought that relates to the 2.2% chance.
"Meetings"
http://despair.com/meetings.html
"None of us are as dumb as all of us."
Too funny and too true! I think of that every time Congress is in session.
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