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Bloomberg: Government Bonds
5-Year TIPS: -0.3%
Nothing says healthy economy like negative real interest rates. This is *definitely* a recovery we can count on.
Ben Bernanke will raise asset prices while simultaneously hoping oil prices don't choke off our economy... again. Woohoo!
In a very rare moment of genius...
It turns out that inflation-indexed TIPS are highly correlated with the stock market and the economy. Declining investment returns, sinking stocks, and falling economic growth are all captured in declining real TIPS yields. - Larry Kudlow, October 1, 2001
The stock market "definitely" loves it now though. Maybe it is "different this time".
See Also:
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Larry Kudlow on Real Interest Rates
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11 comments:
Nothing says healthy economy like negative real interest rates.
Yep! Negative real interest rates go hand in hand with soaring gold prices.
I just have one question. What happens to the party if the guest of honor (inflation) is really, really late or perhaps never shows?
mab,
You make it sound like higher oil prices for everyone, a lack of "safe" investment income for savers, and rising credit-card rates for debtors won't help prop up owner equivalent rents!
Heresy!!
In all seriousness, we simply need to build more infrastructure.
Oops. That was supposed to be serious. There I go getting "snarky" and "serious" mixed up again. Sigh.
We saw this situation in early 2008, too:
http://www.calculatedriskblog.com/2008/03/tips-inflation-expectations-increasing.html
Wisdom Seeker,
Indeed we did. My "stagflationary" name had 15 minutes of fame, then faded into obscurity as deflation struck.
-0.5% on the 5 year TIPS right now. Amazing!
Nobody willingly locks in a 5 year loss in purchasing power without either being extremely scared (perhaps justifiably) or extremely ignorant (perhaps just as likely).
As for the latter, I can point to anecdotal evidence. Few investors know the true real yield of the TIP fund. Even I am forced to estimate it by analysing the individual bond holdings, and TIPS are my "bread" and butter. Not to be confused with guns and butter of course! That's a completely *similar* concept.
This problem exists in China, too.
The interest rate for a CD in China was around 2.2% last time I was there. Inflation running at 3.1% in China means, I am losing 0.9% if I were to spend the money locally.
(I suppose since my goal will be USD, and the exchange rate is "fixed" I don't really lose the 0.9% a year. In fact I have gained slightly as the Yuan glacially appreciates.)
But that's really not important...what's important is that Chinese people lose money by putting into the bank. And people wonder why home prices are sky rocketing in China. The government should be raising interest rates there, but is scared of a downturn / increased pressure on the RMB as it would become even more attractive.
Last time I was there, the bank was pushing accounts linked to government bonds. They paid more interest than the CDs. Supposedly, you can get on at 3.8% for a year term if you have enough money. I have no idea how safe these are, though you would hope a state-run bank selling state bonds would be safe...cough..cough...
Coba
I agree, I think ignorant ETF and fund buyers are chasing TIPS performance (and are swallowing the notion that "this protects me against inflation"), with no regard for whether there's value in the investment.
I suppose, after fleecing the financially-ignorant Boomers in the dot-com bubble, and fleecing them again in the Housing bubble, the financial folks figure they can go for the trifecta with the bond market?
Perhaps "investors" aren't so much chasing yield as they are desperately chasing momentum and recent total returns?
Coba & Wisdom Seeker,
This negative real interest environment seriously distorts the concept of value.
Is it better to lose 1% guaranteed each year or 50% when bubbles eventually pop? There's no safe way to play it.
Many investors in the 1970s were convinced negative real interest rates were permanent and were wrong. They were similarly wrong in late 2008, if only temporarily.
I wish we knew how long real interest rates will be negative this time. "Permanent" would certainly be good to know. I'd be dumping all dollar denominated assets and bracing for complete economic collapse. It is a non-trivial risk in my opinion.
It is a non-trivial risk in my opinion.
Stag,
I agree.
In many ways, the financial system is more unstable now than ever. When financial "experts" finally figure out that the Fed is not "printing" money and that claims on future output will not be met, all hell is going to break loose.
mab,
In many ways, the financial system is more unstable now than ever.
I think the cause of hyperinflation can be summed up with one simple concept.
Hyperinflation: Investors came to believe that negative real interest rates are permanent and nothing could be done to alter their opinion.
Fortunately, I'm still easily swayed. Commodities are no more "sure things" at these prices than cash and credit are.
The financial system is unstable. It's like balancing a bowling ball on the top of a pin. The slightest breeze can blow us into inflation OR deflation.
That analogy is incomplete. I should also mention that we keep increasing the size and weight of the bowling ball while simultaneously shrinking the size of the pin, lol. Sigh.
In China's case, I don't think its really a market interest rate but the government goosing growth. With 3.1% inflation, strong growth, and a housing bubble, they could afford to have higher interest rates.
I am not sure how they are linked to US monetary policy though - people say they are. In which case, they sort of have to follow our lead even its wrong for their situation.
I would agree losing 1% is better than losing 50%, except for the timing issue, where you could lose 1% per year for 10 years before a bubble bursts. China already had housing bubbles burst before - and they simply re-form in swift procession. I don't get it. Maybe just too much money being made (printed?) and nowhere to put it.
Coba
Coba,
"Maybe just too much money being made (printed?) and nowhere to put it."
A billionaire can only eat so much food. I suspect we'd have more consumer price inflation if the money (and debt) was more evenly distributed.
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