My IRA has been sitting in cash since August. I put almost all of it back to work today.
August 26, 2010
Sold 1350 TIP @ 107.9001
I expect it to be a losing trade.
It was. TIP now trades at 107.61. That's 29 cents in my favor. I lost 86 cents in distributions though. Sitting in cash therefore cost me 57 cents per share overall. That works out to about 1/2 of 1 percent.
Now for the good news. The 30-Year TIPS bond yielded 1.59% on August 26, 2010. I was able to buy the 29 year TIPS bond today with a yield that was roughly 0.3% higher. Over the course of 30 years, that's about 9% more (0.3% x 29).
Although I lost some purchasing power on the move to cash, the ends justifies the means. I actually feel pretty lucky here. I was planning to wait until the 30-Year TIPS auction in February but this yield was just too tempting. I am very pleased with how this worked out.
97% of my IRA now sits in that one bond and I will be holding it until maturity. I do not want to be forced to ever sell this bond to someone else (a "greater fool" perhaps). I will therefore use the interest it generates over the years to buy TIPS that mature before my minimum required distributions kick in at age 70.
In theory, thanks to compound interest my IRA's purchasing power should grow by about 73% over the next 29 years.
1.019 ^ 29 = 1.73
I really don't care all that much what the market value of the bond does between now and then. The reason I don't care is that I don't intend to sell it to anyone else. I therefore don't care what others think it is worth. I know roughly what it is worth to me.
My IRA planning is now complete. I'm done.
As a side note, my IRA will never find its way back into the stock market. I will be rooting for the stock market though. The better this economy does the more likely that I will actually get paid. That said, I remain bearish long-term. I'm hardly swinging for the fences here.
If this one bond ultimately ends up being a losing trade for me, then I surely will not be alone. It will mean that the US defaulted on its debt and/or the currency completely fell apart. These are not trivial risks. I am simply trying to play the odds as I see them though. I am taking a risk here, but then again everyone is.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
"If this one bond ultimately ends up being a losing trade for me, then I surely will not be alone."
ReplyDeleteWow. A bold move and vote of confidence for our learned leaders at the Fed and in Congress. I am buying the 10 year TIPS auction this week, so I have one foot in your lifeboat, or at least a few toes.
I don't think we face any risk of actual default, but I think we face certain debasement of the dollar.
Two questions are on my mind:
1. What is the spread between the CPI and our personal consumption inflation rates?
2. What happens to the exchange rate value of the dollar as it loses reserve currency status?
I guess the exchange rate won't matter if you only buy Made in the USA products.
I expect a period of high inflation within the next 3-5 years. By high, I mean 10-20% that could last a couple of years. I don't expect hyperinflation unless Congress does something silly. I think the Fed will stop monetizing before that.
It's going to be a wild ride!
Mr Slippery,
ReplyDeleteI have little faith or confidence in any of our leaders. Like you though, I don't see hyperinflation or default being likely. I can weather 10-20% inflation for a few years. However, that may be unlikely too. I don't think Bernanke would be the dove that most think if the CPI started showing those increases. He's an academic and it would make him look very stupid. That doesn't mean he couldn't be blindsided though I suppose. He's shown a knack for that, lol.
I honestly believe that the CPI does a fairly good job representing consumer prices. I've been tracking my expenses for a decade. I'm just not seeing the inflation many seem to see.
Explain electricity. Energy has been in a bull market for a good decade. You'd think we'd see serious inflation in electricity rates. My bills don't show much. The following data doesn't show much either.
Average Retail Price of Electricity to Ultimate Customers: Total by End-Use Sector
A 3.5% increase per year from 2000 to 2010? That's it. I could point to many non-energy purchases that haven't been inflating at all. Progresso soup comes to mind. I'm *still* paying $1 per can on sale. My hoard looks silly (not that I'm complaining).
"I don't think we face any risk of actual default, but I think we face certain debasement of the dollar."
That's been true for a century. I think it's a wise bet long-term. That doesn't necessarily tell me how I should invest though. Many things have worked and then not worked over the years.
I'd be more worried about our reserve currency status if I believed in the Chinese miracle story. I just don't. I could be wrong of course.
I'd also be concerned about the Euro I suppose, but they seem as messed up as we are.
China Stocks Plunge Most in Two Months on Bank Reserve Increase
China’s stocks plunged, driving the benchmark index down the most in two months, as the central bank ordered banks to set aside more reserves and rising property prices signaled policy tightening measures may be expanded.
They may tame our inflation dragon out of necessity and it won't be pretty for them.
I'm guessing, but after thinking about it I can't see inflation going too nuts because I believe $4 a gallon gas would put the 'smack down' on things again.
ReplyDeleteI could be wrong though.
watchtower,
ReplyDeleteI don't think you are wrong.
If you think it would put the 'smack down' on us then think what it must do to the typical Chinese consumer.
They do have their currency pegged to ours. What we see they see.
Can you picture a billion Chinese paying $4 per gallon for gasoline? I can't. I'm no Jim Rogers though.
I read an interesting article about a 107-year old man--107!--who's been retired since 1969. How has he survived all these years?
ReplyDeleteWell, he invested in CDs, bonds and real estate. It's all about safety of principal and adequacy of return. Modest but reliable returns are a hell of a lot better than the wild fluctuations of the stock market.
As to real estate, hey, it's a great time to buy a house. Hell of a time to sell one though. It would require a substantial amount of capital to cover maintenance, repairs, utilities, and taxes until price appreciation returns though. But if you have the capital and can weather the storm, you'll make a killing in about 10 years or so.
I'd avoid commercial real estate though. That's not coming back for a long while.
I'll take the Steelers over the Jets and the Packers over the Bears, then the Packers over the Steelers.
GawainsGhost,
ReplyDeleteI've been tempted to buy investment property in the past, but I don't think I'd enjoy being a landlord.
That's a real job. I think I'd rather just stock canned goods in a grocery store if it came to that. I'm not joking either. Canned goods have become somewhat of a hobby to me, lol. ;)
If the CPI shows 20% increases, you can guarantee the calculation will be changed. This is how the government does piecemeal defaults.
ReplyDeleteIs electricity really a good gauge of inflation? The regulation of electric rates is fairly strict. I remember talking to a transplant from Georgia in Illinois (about15 years ago) and he thought the electric rates were staggeringly high in IL. I told him the rate hadn't changed in 10 years.
ReplyDeleteThe price setting forces utilities to play financial games. Maybe not to Enron's extent, but whenever I hear about "our aging electricity infrastructure" I remind myself that it's aging for the same reason public transit infrastructure is slowly rotting - the refusal to allow price discovery.
Charles Kiting,
ReplyDeleteElectricity is no better gauge of overall inflation than gasoline is. I'm just trying to point out something that most people might think would have skyrocketed in price over the last decade but really hasn't.
Gasoline price shock is pointed out to us time and time again. It's the one price that we see over and over again whenever we drive. It is far too easy for some to assume that all prices are rising like that.
As for an electric infrastructure day of reckoning, it was one of the first things I posted on my blog back in 2007. I hear you.
Just a thought...Why not consider adding foreign inflation protected bonds?
ReplyDeleteI think the status of the USD as a reserve currency probably will not change, but I suspect the value of the dollar will change. I think the world will let us get away with it. Like you say, the other choice are:
Euro- also in debt city
Yen - in super debt city and demographic issues to boot.
Yuan - not convertible, not floating, run by commies
Gold standard - snort. like governments will give up the printing presses.
I also think America will get its house in order, eventually.
Political risk -
1) Government forces your IRA to invest in T-bills...not an issue for you. You can claim to be super patriotic in fact.
2) Government messes with CPI - very possible, but I think the politicians will choose an easier route to default if they wanted to do that.
a) Stealth default through inflation - you are covered at least somewhat.
b) Selective default on certain trade surplus countries who happen to not have voting rights anyways. A whole lot of countries are very pissed at China's frozen currency. That may prove to be a very useful cover for something like this unless the dynamic changes. "They won't revalue their currency. So we had to refuse to honor their bonds..." I think inflation will be the preferred method, but who knows.
I looked at the 30 year TIPS, and I just could not commit to 1.9% even with inflation protection. I am sticking with non-US dividend paying stocks. Since I buy them based on their dividend %, I too am not too worried if they lose a bit of value as long as they pay the dividend. And some of these stocks are pretty steady - selling electricity is probably not going to do poorly. Same with running pipelines for natgas in Canada. Or liquor stores. Or school buses. I bought a large basket, because individual companies can screw up, and I have one of those, but you also get some serendipity of a company doing well.
I also have my RMB bank accounts...which are losing money in local terms, but make some gains in USD terms. I think there will be one or two more big revaluations of the Yuan. Without the financial crisis, one of those would already have happened. Now, I think it will take a few years longer, and possibly not happen at all. I already reduced some of that.
I am not a China Bear, per se, though. They definitely have major malinvestment that will need to be corrected, but they do have a lot of talented people producing for the global marketplace. Once the bullshit real estate stuff blows up some wealth and they have to really compete, there still will be tons of production there. I suspect that when the hammer falls, they will have to do many positive reforms that they have been able to avoid doing with the boom.
Coba
p.s. The best investment for those who are still working, is to invest in your own money making skills. Best ROI I ever had was starting my own business. Maybe I should stop rambling here and get back to work...
"As a side note, my IRA will never find its way back into the stock market. I will be rooting for the stock market though."
ReplyDeleteI assume that this means there is still some chance that you would invest some of your taxable money in the stock market?
I recall a few months ago you said something about seriously considering some consumer staples companies as stock investments. I was looking forward to reading your analysis on these.
I owned VDC (Vanguard consumer staples ETF) until January 2008. It was very stable even during the summer '06 drop in the market. It showed high resistance to price drops. I'd own it again if I could ever get past my belief that the stock market is legalized larceny. (insert sigh here)
g?????
ReplyDeleteMy mistake, that was supposed to be G.H.
Mark,
ReplyDeleteIronically, the cost of gasoline is up in part because we aren't allowed to build gasoline refinery infrastructure anymore.
If we relaxed the rules on refinery construction but fixed the price of gasoline, we'd still get no refinery construction.
Coba,
ReplyDeleteNice commentary. Enjoyed your ramblings. :)
Euro- also in debt city
Yen - in super debt city and demographic issues to boot.
Yuan - not convertible, not floating, run by commies
Gold standard - snort. like governments will give up the printing presses.
I do feel like I am sticking with the known evil. Further, the US inflation rate is by far the inflation rate that will affect me most so I have opted to tie myself directly to it.
As for messing with the CPI, I do expect to see more tinkering. Some of it may even be justified. As I have said in the past, I would guess that I "substitute" far more than the government thinks I do.
There are some who are far better at it than I am though. I was watching a documentary recently about coupon enthusiasts who make out like bandits in the grocery stores.
G.H.,
ReplyDeleteI assume that this means there is still some chance that you would invest some of your taxable money in the stock market?
TIPS in the IRA made the most sense due to the deferral of taxes which stocks mostly do anyway.
So if I was to buy stocks again, it would be outside of my IRA.
That said, it is looking less and less likely. I'm locking in even more 30 year TIPS in February's auction. Once I do that there won't be a whole lot left that I can invest back into stocks without actually selling previous TIPS purchases to others.
It could happen though.
Charles Kiting,
ReplyDeleteIronically, the cost of gasoline is up in part because we aren't allowed to build gasoline refinery infrastructure anymore.
Here's ironic.
The sun was out. There wasn't a cloud in the sky. There was no wind.
We discussed our aging electricity infrastructure yesterday.
For several hours today I had no electricity. I was not alone.
Maywood continues on normal schedule despite power outage
PSE attributed the outage to substation issues.
We had substation issues. Perhaps our substations need their own reality TV show.
Substation Rehab