I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
Schedule for Week of December 22, 2024
-
Happy Holidays and Merry Christmas!
The key economic report this week is November New Home Sales.
*----- Monday, December 23rd -----*
8:30 AM: *Chicago Fe...
Dr. Strange Move or How I Learned to Love the Bill
-
After a couple of years of disinflation, the Fed changed directions and
started lowering rates. By most measures, the economy had been humming
along near a...
NVIDIA Revisited
-
On August 26, 2023, 5 days before it a new closing hi at 493.55, I wrote a
critical post about NVDA - the stock, not the company. After that, the
stoc...
Stay away from popular tech stocks, part II
-
Last August, I wrote a blog post arguing that largest technology and
internet companies -- Amazon, Apple, Facebook, Google, Microsoft -- would
never grow i...
So, Where Have I Been?
-
Well, of course, I have been where I am!
It's been a good few years away from this blog. I do miss some folks
terrible, and I sort of miss things financial...
Those Whom The Gods Wish To Destroy ...
-
they first make mad. Still true!!!
*(Note: this post, and probably several others to follow, are actually
about the US dollar and relative currency trends....
It might just be me, but I think I might see some leftover Halloween candy, Thanksgiving dinner, and Thanksgiving leftovers in the chart.
Click to enlarge.
I said from the beginning that I would not be consciously altering my eating habits. I will not deprive myself of pumpkin pie. Let's just put it that way. :)
The charts therefore are what they are. Winter is brutal (no yard work, fewer outdoor activities, and multiple food related holidays).
Now for the good news.
1. November is probably my worst month for weight loss. It's officially over. Further, I strongly suspect that this year's November wasn't as bad as last year's November. It will be interesting to me to see the seasonal variations as more data is collected.
2. I continue to climb the extra 20 flights of stairs each day. It adds up. That's roughly 36,000 feet of additional climbing since the beginning of June. It is a firmly entrenched permanent habit. I will eventually make progress in the right direction again. It is simply a matter of patience. I originally thought it might take 3-4 years to get down to my goal. Perhaps that's still true.
3. The time needed to comfortably do the 20 flights of stairs continues to fall. I'm generally only taking 4-5 minutes per day now. I can always find time for that. It's no big deal at all (which is important since I am generally a lazy person looking to do the minimum necessary to meet my long-term goals).
4. I've also been doing some additional stair climbing on the side from time to time (although I never feel compelled to do so). On the 7th of November I climbed 200 flights of stairs all out (in addition to the 20 flights I always do). It took me 48 minutes and 47 seconds. That's actually fairly close to a personal best (done many years ago when I was younger and lighter).
"This is the largest year-over-year gain in ShopperTrak's National Retail Sales Estimate for Black Friday since the 8.3 percent increase we saw between 2007 and 2006," ShopperTrak founder Bill Martin said in the statement."
There was an 8.3% year-over-year increase on Black Friday in 2007. The WTI crude oil price was$98.24 on Black Friday in 2007.
The Great Recession began in December 2007.
There was a 6.6% year-over-year increase on Black Friday in 2011. The WTI crude oil futures price is currently$98.48.
So assuming you've decided you'd like to include inflation-protected investments in your portfolio, what's the right amount? At first blush it might appear that you'd want all of your fixed-income portfolio in TIPS; that's the tack embraced by some academics and other investment theorists.
At first blush I determined that I wanted my entire investment portfolio (not just the fixed-income part) in TIPS heading into the great recession (with some cash for liquidity on the side). I guess that puts me in the "other investment theorist" camp.
After all, if there's a bond investment that helps offset the corrosive effects of inflation, why would you want to forgo it for one that doesn't offer that protection?
In my opinion, the article should have ended right there (unless it was willing to explore the risks of owning bonds in general, which it was not).
The key reason is diversification. While some corporate, foreign, and municipal bonds carry inflation protection, TIPS are the most widely available and liquid type of inflation-linked bonds, and most inflation-protected bond funds skew heavily or even entirely toward TIPS. That means an investor in search of an all-inflation-protected fixed-income portfolio would have to go out of his way to avoid a heavy emphasis on government bonds; at the same time, he'd hold relatively less in corporate, asset-backed, and other bond types, which will outperform Treasuries and other government-backed bonds at various points in time.
It has been my intent to go out of my way to embrace government bonds. No diversification was needed nor desired. That's not entirely true I guess. I very nearly backed up the truck on "asset-backed" bonds heading into the great asset crash but I flipped a coin and it came up tails. Whew! Crisis averted, lol.
In all seriousness, I'm a retiree. I don't really care how the other bonds perform relative to TIPS (either better or worse). All I care about is that my investments keep up with inflation if bought in an auction and held to maturity. That's it. In the bond world, only TIPS can offer me that assurance (at least before taxes anyway).
Put another way, if I was looking to maximize gains then I could always just drop the fire insurance on my home and hope for the best. Chances are good that I would be wealthier over the long-term. Unfortunately, hindsight could show that my house burned to the ground instead. The loss of my house through fire is not a risk I am willing to take.
I would also point out that buying government bonds directly from the government means I don't have to pay excessive Wall Street middlemen fees and annual expenses. That really appeals to me.
So the answer to the question about how much retirees should hold in TIPS falls somewhere between 0 and 100%. But where?
Here's another way to put that.
So the answer to the question about how much extra risk retirees should expose themselves to in order to potentially gain some extra reward is somewhere between 100% and 0%.
As a retiree, I have chosen to expose myself to 0% extra risk and am willing to forgo any additional rewards and/or pain. I'm not suggesting that TIPS are completely safe. I'm simply arguing that they are most likely safer than the other options that Christine Benz is pushing.
And finally, this is where the real fun begins.
A version of this article appeared on July 21, 2011.
On July 21, 2011 the 30-year TIPS rate was1.64%. I put myentire IRAinto one non-diversified 29-year TIPS bond at an even higher rate earlier this year. It is money I will be needing about 29 years from now. I wanted to lock in that rate. I did not want to take the extra risk that the rate would drop. I avoided diversification not out of greed, but rather out of safety.
The 30-year TIPS now yields a mere 0.79%. Hindsight has not been at all kind to well-diversified second blushes.
This is not investment advice. I'm simply offering up my thoughts as they relate to my particular portfolio and risk tolerances. Embracing risk in retirement just doesn't seem like a great plan to me (especially given the name of my blog).
The instant classic of the day was a video of an Arkansas melee over a $2 waffle iron. The shaky, 48-second clip shows a mass of squealing and shouting men, women and children climbing over each other, grabbing and tossing boxes, with one woman seemingly unaware that her pants were sliding down her backside.
"Oh my God!" a woman screamed in the only sentence discernible among the high-pitched shrieks. One person commenting on the video wrote: "The pinnacle of Western Civilization has arrived."
A flatlining outcome is fully consistent with a permanentRubiconenvironment. You can pretty much guess that it is my personal favorite, if only to keep the ongoing Rubicon joke alive.
The future's so bright, I gotta wear [rose-colored] shades.
This update was requested by Fritz_O in the comments of the last post.
To even the casual observer of the global economy it is painfully obvious that all is not well economically, both here in Bermuda and abroad.
Daily economic headlines in our local newspapers and websites read almost verbatim with headlines found in overseas publications. News reports of economic dysfunction are rife, with almost daily reports of layoffs, bankruptcies, business relocations to other jurisdictions, intractable government budget deficits, falling asset prices, high levels of private indebtedness, and highly volatile capital markets.
Throughout the western developed economies average middle class people are at a loss to explain what is happening to their living standards (in Greece especially I imagine), having never experienced this level of economic fallout before in their lives.
Even elected political leaders and senior government finance officials in these countries are at loss to explain how their economies have managed to arrive at the precarious position they find themselves at today.
I believe that the best explanation is simply that a great deal of the prosperity experienced since the early 1980s was an economic illusion created by a global credit bubble that burst in 2008. The fallout from that burst is what's driving today's headlines of economic dysfunction.
There's not a rational creature on this planet who would believe this illusion of prosperity theory. It's just crazy talk!
Stagflationary Mark's Dog - Believer Since 2004
That's not proof. My dog Honey irrationally believes everything I tell her. She's overflowing with magical thinking.
We use ritual acts most often when there is little cost to them, when an outcome is uncertain or beyond our control, and when the stakes are high—hence my communion with the fuselage. People who truly trust in their rituals exhibit a phenomenon known as "illusion of control," the belief that they have more influence over the world than they actually do. And it's not a bad delusion to have—a sense of control encourages people to work harder than they might otherwise. In fact, a fully accurate assessment of your powers, a state known as "depressive realism," haunts people with clinical depression, who in general show less magical thinking.
Fortunately, the public has access to advanced ritualistic free trading tools that help us in these uncertain times. It gives us a sense of control. It makes the average investor smarter than the average investor. And let's be perfectly clear here. We're talking tens of millions of retail investors doing hundreds of millions of online trades generating billions in revenue for tens of thousands of highly compensated financial executives. The stakes don't get much higher than that.
I searched for "free trading tools" in Google and only got 2.34 million hits. It's one of Wall Street's most closely guarded magical thinking secrets. Everyone can be atrend line master! It doesn't even require any information on the economy. How cool is that?
It's not a coincidence that man's best friend has mastered the art of magical thinking. We stick with what works! Without magical thinking, we'd all be victims of a clinical great depression by now. There's nothing worse than depressive realism to ruin a perfectly good party.
The U.S. economy is improving, albeit at a lower rate, but a sluggish labor market, over-supply of restaurants in the industry, higher gasoline prices, food cost inflation, a still-elevated unemployment level and weak income growth may weigh on industry profitability.
These factors may weigh on industry profitability? How can we know for sure!
That got me to thinking. What actually would hurt industry profitability? Here's a list I just thought up.
1. A slowing economy 2. A sluggish labor market (with high unemployment) 3. A restaurant glut 4. Higher gasoline prices 5. Food cost inflation 6. Weak income growth
The list just sort of popped into my head. There's no explaining the vision that came to me with crystal clarity. I didn't even hold a séance.
I only wish there was a way to match up my list with the Zacks Equity Research's list of current economic conditions which may (or may not) affect industry profitability. Only then could I know if my money was safe parked in a heavily weighted restaurant stock portfolio. Lacking that, I'm not about to do something impulsive based on seemingly well-grounded common sense conjecture though. You know why that is too. It's not like I really need to tell you.
Scientific skeptics and atheists generally consider both religious and secular séances to be scams, or at least a form of pious fraud, citing a lack of empirical evidence.
Nonsense! If there is one thing I know for sure, it is that there has been no fraud in America for at least as long as I have been alive.
The subprime mortgage fiasco played out exactly as nature intended. Money was loaned to people with "no income, no job and no assets" and then we the taxpayers bailed out the banks to support the excessive bonus structure of well-compensated high-level financial executives. See? No fraud. That's just good old fashioned American business.
A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.
The S&P 500 closed below 1200? Again? How is this possible?
Operation Rubicon
November 21, 2011. A date which will live in infamy. The United States of America was repeatedly and deliberately attacked by the same deflationary debt forces as the Empire of Japan.
There is some good news though.
We've also got $97 oil and a massive trade deficit with the world. Unlike Japan, we're therefore in a much better position to achieve sustainable growth and prosperity over the long-term.
I've taken the consumer price index for carbonated drinks and adjusted it by the overall CPI. The chart shows the average real price increases over the previous 5 years.
Here's why I was curious.
I moved to Seattle in 1988. I remember thinking it was a really good sale if I could buy a 6-pack of Coca Cola for $1. When it reached that price, I backed up the truck.
As recently as 2004, I remember thinking it was a really good sale if I could buy a 12-pack of Coca Cola for $2. When it reached that price, I backed up the truck.
16 years had passed but I was still buying Coca Cola at that same price. You can see the effect of that in the chart. Carbonated beverages were not keeping up with inflation.
As seen in the chart, those days are over. My Coca Cola supplies have dwindled to nothing. It might very well stay that way. This week's sale is $3 for a 12-pack. I'll pass. We do have an ample supply of Dr. Pepper though (purchased at Costco recently with one of their in-store coupons).
Coca Cola is reallypushingtheirluck, at least with us.
The company hopes its smaller, cheaper packages will appeal to consumers on tight budgets.
Yeah, well, good luck on that one. Everyone on a tight budget should be thinking in terms of dollars per ounce. Smaller packages are generally not the way to save money.
Stubborn people on tight budgets should look at Coca Cola's27.59%profit margin during a period of high unemployment and decide for themselves if that is something they wish to support.
I find myself drinking more Gatorade lately (Pepsi product). The container costs about $10 (at Costco and/or Sam's Club) and makes 9 gallons (the equivalent of eight 12-packs). It doesn't pack the calories and high-fructose corn syrup rush of a soft drink, but that's actually a good thing.
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 Treasury Inflation Protected Securities, or TIPS, were sold at a yield of 0.99 percent, compared with a forecast of 0.060 percent, the average estimate in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers that are required to bid on U.S. debt auctions.
0.99%? 0.099%? It's all good. At least it wasn't reported as 99% in honor of the Wharton School of Business.
Students at the Wharton School for Business at the University of Pennsylvania mocked Occupy Wall Street protesters...
As for Wharton School of Business mocking, I'm reserving that forJeremy Siegelof the Wharton School of Business andMark Zandiwho gothis Ph.D.at the Wharton School of Business.
PLEASE BRING CAKE AND CANDLES. NO OUTSIDE FOOD ALLOWED
The ultimate fun birthday cake is inedible? It makes sense if you think it through. Nothing says fun like adiamond encrusted birthday cake with solid gold filling!
ALL PACKAGES MINIMUM OF 8 KIDS
It is common knowledge that the ultimate fun can only be achieved by outgoing extroverted kids who have many friends. The staff at the funplex are not miracle workers. If your child is a shy introverted book reading type, sorry about that!
$15.99 PLUS TAX PER CHILD* $25 DEPOSIT (NON REFUNDABLE) GRATITUDE/TIPS ARE WELCOME & APPRECIATED BY SERVING STAFF
The first quote comes from the president of the division where I once worked. I saw it in a magazine. It needs a bit of back-story first though. We'd just gone through one of the biggest frauds in the history of the stock market (it was before Enron and Worldcom). It was on the front page of the Wall Street Journal for a good month. There had been layoffs. Morale was in the toilet. So what was the quote?
We have a fun environment with creativity and fun.
I don't think I have ever laughed so hard. What the heck was "fun" doing in there once, much less twice? Hahaha!
On to the second quote. I'm reminded of it quite often, especially when watching the financial news on TV.
You can discover what your enemy fears most by observing the means he uses to frighten you. - Eric Hoffer
Fun! Creativity and fun! The lack of "fun" is clearly what the president of my division feared most, and for good reason. Dark gallows humor was the only fun we had. I'm reminded of one team walking by my door. They'd just been laid off. One said, "Dead men walking." We all laughed, but nervously.
Report on my local mall: For the holidays, they had some vacancies. They filled two of them with what look like flea market venders. No decorations - cheap jewelry and cheap handbags. Otherwise we have a JCP, Belk's, Beall's and a couple of jewelry stores. Can you spell desperate?
And I had noticed that JCP didn't seem to have anything new since about August in the windows - And just this week I saw that the new CEO is planning to turn the company around by creating an environment where employees are creative and engaged. Please. I've been around the block a time or two - not happening. That is just nonsense. Not that I know what is going to happen.
The JCP CEO also said that sales of basic goods were weak this quarter because of less demand. Not exactly. I bought one item the last quarter - socks for my hubby. They cost the same as the previous socks but were half the quality. I was going to buy him pants too, but when I realized the fabric was half the thickness for the same price(he wears heavy duty cargo pants - construction work), I passed. So if it weren't for customer loyalty/ stupidity/ or something, sales of basic goods wouldn't have even been as high as they were.
I am confident you'll post an appropriate video. Audrey
It would seem that JC Penney's plan is a "cheap" trick. Consumers neither "want" nor "need" overpriced socks at half the quality? Who knew?
I am a complete believer in the "good enough" revolution. I'm a former lead software engineer but I'm running a computer that was built seven years ago. It is still running Windows 2000! How's it working for me? Good enough!
It doesn't just apply to computers though. I'm not seeing much improvement in aluminum foil, ziplock bags, garbage bags, toilet paper, paper towels, t-shirts, sweat pants, underwear, socks, sneakers, bath towels, and anything else I've bothered to hoard based on my ongoing concerns about future prosperity. I figured they are all "good enough", so why risk having to pay more for them in the future if inflation actually does pick up at some point?
For what it is worth, I hoarded a lifetime supply of Gold Toe socks purchased at Wal-Mart a few years ago at prices far, far below what the JC Penneys of the world once charged me for the same product. My local Wal-Mart now no longer carries them. It was definitely one of my better purchases!
Italy has a smaller fiscal deficit than either Ireland or Spain, for example, so it will probably have less cost-cutting—with a less pronounced impact on economic growth.
Here's achartof Italy's stock market since the opportunities appeared.
The government is officially asleep at the EE Savings Bond wheel.
Although the government has set the short-term interest rate of EE Savings Bonds at just 0.6% it has not altered the original term (the time needed for the bond to double in price). That's still set at 20 years and if held that long the bond will yield 3.53% per year.
2^(1/20) = 1.0353
Click to enlarge.
The chart above compares the EE Savings Bond rate if held to original term (the time needed for the bond to double in price) to the rate of a treasury bond with the same duration (using interpolation on the treasury yield curve where needed).
Click to enlarge.
The chart above shows the rate markdown of the EE Savings Bond compared to a treasury bond of the same duration. That tends to be about 30%. Put another way, if the treasury bond yields 10% then the savings bond tends to yield about 7%. If the treasury bond yields 5% then the savings bond tends to yield about 3.5%.
The lower rate is due to the tax advantages that EE Savings Bonds offer (deferral of taxation, tax benefits for education).
As of today, the EE Savings Bond has an original term of 20 years. It therefore yields 3.53%. A 20-year treasury bond currently only yields 2.77%. As seen in the second chart, the mispricing between the two is currently at an extreme. What was once a premium to own EE Savings Bonds is now a discount.
So what does this mean?
In theory, if trading fees and taxes were absent then one could make risk-free money for 20 years by shorting $5,000 in 20-year treasury bonds while simultaneously buying $5,000 in EE Savings Bonds. The government would basically be paying you each and and every year for the next 20 years to do the trade (much like what it is doing for our biggest banks).
Or alternatively, I can't say that EE Savings Bonds are a good value to other things one could invest in, but it is clear that they are a good value relative to treasury bonds in general. Since I am generally a fan of relative value, that means I will probably be a buyer of EE Savings Bonds in 2012. That will make the 3rd year in a row. Go figure.
EE Savings bond rates and terms will not be changed again until May 1, 2012. There's no hurry to make the purchase though. In fact, it would probably be best to wait until April to make the decision. If the mispricing is gone in April it would only mean that interest rates on 20-year treasury bonds have risen dramatically. Who knows? It could happen.
Something will eventually fix this mispricing. That's about all I am sure of. I expected at least some of it to be fixed on November 1, 2011.
The government doesn't just set the interest rate. It also has the power to change the time it takes for a given EE savings bond to double in price. Since interest rates have fallen substantially, the odds of a duration change (for new purchases) are increasing substantially.
It would not surprise me to see the original term increase to 22-25 years at some point (perhaps very soon).
The conventional wisdom goes something like this: Obesity rates are skyrocketing among the poorest Americans, therefore fast-food restaurants must be to blame.
But a new study by a professor at UC Davis' medical school has found that it's Americans with salaries at the higher end of the spectrum -- in some cases as high as $80,000 to $90,000 -- who are driving fast-food consumption at the likes of McDonald's and Burger King.
Too bad conventional wisdom isn't traded publicly. There have certainly been times when I wished to short it.
He also noted that, although fast food has a reputation for being cheap, a steady fast-food diet is largely out of financial reach for the truly impoverished, especially those who need food stamps to get by.
I'm once again reminded of the following insanity.
Kelly Brownell, director of Yale's Rudd Center for Food Policy and Obesity, says encouraging more fast-food consumption is not good for people's health. "It's preposterous that a company like Yum! Brands would even be considered for inclusion in a program meant for supplemental nutrition."
I'm all in favor of providing food for people who can't afford it, but do we really need to conveniently prepare unhealthy food for them and pad the profits of corporations too? Is that what the food stamp program should really be doing?
I'm a fairly frugal person. I consider fast food to be a bit of a luxury. It is not cheap food. I have cut back on it as I try to conserve my nest egg's purchasing power. Perhaps most people on food stamps should be doing the same?
Some might argue that homeless people on food stamps don't have an option. They need food prepared for them. All I can say is what I would do in their situation. I would get together with other homeless people and pool resources. One could make quite a feast out of a few loaves of bread, a large jar of peanut butter, a large jar of strawberry jam, a few pounds of bananas, and a gallon of milk. It certainly wouldn't be any less healthy and it would cost far, far less per person.
I'd use the money saved to try to get out of the rut I was in so that it did not become permanent. I can't say that in this economy I would be successful, but at least I'd be trying.
It would require some effort on my part. Unfortunately, effort goes against the ultimate policy of the welfare state.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
This is a continuation of apreviouspost with the data presented in a different way.
Click to enlarge.
The chart compares the yield of the 10-year Treasury to that of the total debt (total credit market debt owed) to GDP ratio.
It would seem to be a good idea to stay below the red trend line whenever possible. We had no problem doing that before the 1980s. It was trivial. It has been more difficult in recent years. Here's some good news. If Japan is any indicator, it is amazing how much we can borrow if the interest rates are low enough. As of today, the 10-year Treasury yields just2.00%. That's well below the trend line.
It would also seem to be a good idea to stop moving to the right on the chart. We've actually done that and it is giving us some breathing room. Let's just hope we don't have another recession shortly that would undo some of this good work.
It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.
Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.
Knowing all we know now about the deflationary events (two major stock market crashes and one major housing market crash) over the past decade which do you think would have been the better investment in 2001? Treasuries with inflation protection or treasuries without?
And the winner was... inflation protected treasuries (by a wide margin).
I guess long-term inflation has a way of creeping up on us, even during deflationary times. It also means that TIPS investors were actually paid to take the inflation insurance. Go figure.
That said, I am bracing for more deflation over the short-term and that mindset very nearly enticed me to alter myinflation protected investments. As last seen in August, it's not the first time.
I've been giving some thought to locking in some profits on long-term TIPS but after thinking about these charts (the first two in particular) I'm content to hold them. Even today's 0.93% real rate on 30 year TIPS could look pretty good in hindsight if we experience 2 or more lost decades of real GDP growth. That's my theory and I'm sticking to it.
I thought long and hard about it again this morning. I even went so far as to place a sell order on the one long-term TIPS bond filling my IRA. Rates are down even more since I wrote that (prices are up). I placed the order an hour or so before the markets opened. I had a change of heart and cancelled the order though.
I think it is the first time in my life that I felt greedy for thinking about taking profits (as opposed to feeling greedy for not taking profits). We may get another round of deflation and part of me wants to sell that one bond now and buy that very same one back later. That felt greedy. I decided it was and instead opted to continue with my original plan to hold it to maturity.
Some would argue that moving to cash is the least greedy thing one can do. I'm not sure that is true. If one is moving to cash with anxious anticipation of a market crash while simultaneously having a plan to redeploy capital during the carnage then that would seem to be fairly greedy to me. In my opinion, that's market timing and casino mentality. I had it this morning. No doubt about it.
It eventually all came down to this for me. If I am still willing to buy 0.0% I-Bonds for the long-term (and I am) then I should be willing to hold a long-term TIPS bond of similar maturity within my IRA that has an even higher rate.
The black line is the GDP to total credit market debt owed ratio. The red line is the yield of the 10-year treasury note.
Who thinks the similar movements in both lines since 1980 are just a coincidence? Check out where the red line was compared to the black line in 2006/2007. How did that work out in hindsight? Oops!
As seen in the chart, there was plenty of untapped ability to pay higher interest rates before 1980. We no longer have that luxury.
"In our view, 7% is a 'tipping point' for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance," Rod Smyth of Riverfront Investment Group told clients in a note this week titled "Europe's attention turns to Italy."
If you told me what the 5-year nominal treasury yield is then I would use the following chart to guess what the 10-year nominal treasury yield is. That said, things will get a bit muddy if we keep trying to fall off of the chart.
Click to enlarge.
For example, if you were to tell me that the 5-year treasury yield was 0.0% then I would guess that the 10-year treasury yield would be 0.78% (see the formula in bright red).
Or would I?
Click to enlarge.
Using only the nominal treasury data from 2003 to today, I might be tempted to guess 1.95% instead (see the formula in bright red).
Let's continue the guessing games. Using similar short-term data on TIPS (as seen in the chart above), if you told me that the real yield of the 5-year TIPS is 0.0% then I might guess that the 10-year TIPS would be 1.0% (see the formula in dark red).
Said mostly tongue-in-cheek, when can we expect to return to such a prosperous era? Can't you just picture a world where a guaranteed 0.0% pre-tax 5-year return on capital was once again possible?
Now let's turn our attention to the spreads directly.
Click to enlarge.
As seen in the chart, the spread between the 10-year treasury and the 5-year treasury is currently extremely high and was recently in record setting territory. Banks love a large spread. Borrow short, lend long. Will it continue? If it does not continue then how will it change?
1. Short-term rates could rise. That's not going to happen any time soon. Bernanke has all but promised that. 2. Long-term rates could fall as investors eventually capitulate and accept lower yields. Think of it as aninfectionon spreads that spreads. Pun intended. It's a fun game! ThinkJapan!
For what it is worth, I bet big on the latter earlier this year. No complaints so far.
Here's a closer look at recent years. I've included the TIPS spread as well.
Click to enlarge.
That huge downward spike in the TIPS spread was due to the deflationary event in 2008. It could happen again (perhaps this very Christmas season). If so, I plan to ride it out again.
Please note the nearly perfectly anchored inflation expectations of the red and black lines heading into the deflationary event of 2008. The lines do not directly represent inflation expectations but consider this. If the difference between 5-year TIPS and 10-year TIPS is identical to the difference between 5-year nominal treasuries and 10-year treasuries then none of the extra yield in longer term maturities was probably due to inflation expectations. None of it. It must therefore be other things, such as opportunity cost and liquidity risks.
This chart also proves that the bond market is not omniscient. It was completely and utterly blindsided by deflation, much like the stock market was. Trust it to predict the future inflation rate at your own peril.
Disclosure: The vast majority of my nest egg sits in TIPS and I-Bond ladders bought directly from the government, held to maturity, and with a decidedly long-term bias (to hopefully meet my long-term needs).
As economic growth recovers and real rates rise, the price of Tips will fall leaving Tips investors with large losses in the face of accelerating inflation. - Jeremy Siegel, February 2, 2011
WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke on Wednesday acknowledged that the pace of economic growth is likely to be "frustratingly slow," after the Fed downgraded its forecast for the next two years.
Something is wrong when keeping cash in the kitchen cookie jar seems a reasonable substitute for your bank.
Agreed. Something is wrong.
It may feel rebellious -- your own little Occupy Wall Street act of defiance -- and even a bit savvy, given those checking-account fees, ATM fees, and monthly debit-account fees.
Agreed. It does seem a bit rebellious and savvy to avoid fees by cutting out the middleman. In fact, I get that same feeling each time I buy TIPS and I-Bonds directly from the government for free. What a rush!
That little depository institution atop your kitchen counter has big drawbacks, however, including a lack of federal deposit insurance, zero interest, and ease of access that could prove dangerous to your financial health.
Agreed. One must carefully consider the drawbacks. Let's tackle them one at a time.
1. Lack of Federal Deposit Insurance
We absolutely need the deposit insurance because there may come a time when we go to cookie jar and the cash isn't there. Without some sort of insurance, what would happen if we loaned out the money to questionable relatives as part of a "sure thing" get rich quick scheme? What would we do if they can't pay us back?
I'm assuming of course that we are offeringNINJA loansbased on our love of action movies. Ninjas rock!
I'm also assuming that we aren't too big to fail of course. We clearly wouldn't need the insurance if the money was missing from the cookie jar but the government took it from other peoples' cookie jars to refill ours.
2. Zero Interest
This is a huge deal. My bank currently pays me 0.05% interest on my checking account. That means that if I keep $10,000 in the bank then I will earn a whopping $5 per year. I can use this $5 to fill my gas tank so that I can visit the bank any time I like, presumably to use its drive-through ATM to get some of my cash. How cool is that?
In sharp contrast, my cookie jar pays no interest though. I therefore can't use the money it generates to fill my gas tank. I'm also forced to walk to the cookie jar. Forced I tell you! This is America! At51 cents per mile, we should be driving everywhere!
And lastly, I have the privilege and right to hoard paper money promises in my bank so I can earn 0.05% interest. It is not something I take lightly. I'm fairly certain it is part of the Constitution, and if it isn't then it should be!
3. Ease of Access
It's just way too easy to get money out of the cookie jar. What I really need are hurdles between me and my money. I've tried rat traps put in there with it but apparently my greedy fingers can outsmart them. That's why I keep money in a bank. What I really need though is the ultimate hurdle. Picture a note affixed to all the branches of my bank. I'm not talking one of those impersonal form-letter bank closure notes. I demand something more cryptic!
`Twas brillig, and the slithy toves Did gyre and gimble in the wabe: All mimsy were the borogoves, And the mome raths outgrabe.
What the @#$% does that mean? Why is it in fine print like that? Is this legal? Is my money okay? Does anyone really care?
Imagine the joy as I push the door of my darkened local branch and it does not budge. The note says it all. Something really good must have happened. I no longer have easy access to my money! O frabjous day! Callooh! Callay! Like the mome raths, I am indeed most outgrabed!
Posts
