Friday, December 16, 2011

CPI and EE Savings Bond Thoughts

The following chart shows the month over month change in the seasonally adjusted consumer price index over the last 5 years.


Click to enlarge.

Hyperinflation theories are being poned yet again.

A consistent 0.2 on the chart would yield 2.43% annual inflation. That's pretty much what we've been getting, give or take.

November 2006: 202.000
November 2011: 226.720

(226.720 / 202.000)^(1/5) = 1.0234

Average annual inflation rate over the last 5 years has been 2.34%.

Other than the deflationary event in 2008, there's really not much to see here. Further, three of the last six months were below 0.2% and three were above it.

So what does this mean? Holding EE Savings Bonds still seems okay to me. The
mispricing may be worth the risk. I've been a reluctant buyer for the past two years and will probably be so again in 2012. No complaints so far.

I consider this to be a one-time opportunity based solely on relative value. I will be a buyer this month before rates reset on November 1st. I do not expect to make an EE Savings Bond ladder part of my nest egg. - October 9, 2010

I'm thinking that three purchases in three years qualifies as the beginnings of a bond ladder. Go figure. That said, I still prefer TIPS and I Bonds for their inflation protection. EE Savings Bonds are a very small part of my nest egg.

Source Data:
St. Louis Fed: Custom Chart

8 comments:

Stagflationary Mark said...

This is the current mispricing.

The 20-year treasury has a yield of about 2.60%.

The EE Savings Bond held 20 years is guaranteed to double. That's a yield of 3.53%.

2^(1/20) = 1.0353

If EE Savings Bonds were able to be publicly traded, then you could buy one today and instantly resell it for roughly 20% more than you paid for it. (Since they pay roughly 1% more each year for 20 years.)

Hindsight may show that EE Savings Bonds were not a bargain (if inflation picks op). However, hindsight will show that they were more of a bargain than 20-year nominal treasuries.

It's a relative risk vs. reward situation. Someone is clearly willing to buy 2.6% 20-year nominal treasuries. Only hindsight will show if they were smart to do so. I therefore can't say that buying EE Savings Bonds is smart. All I can say is that it is smarter than at least one alternative.

Stagflationary Mark said...

Bonus thought.

This is not investment advice.

Troy said...

Goddamn but the system needs a big 1970s-sized dose of wage-price inflation.

But to do this they need to get trillions of dollars back into the middle class's grubby little hands.

This doesn't seem to be in the cards, LOL.

Failing that, what we're looking at is The Decline & Fall of the US Middle Class, I guess.

I saw this movie play in Tokyo in the 1990s so I think I know the story.

Things shouldn't be this out of whack, but AFAICT the true nature of the problems we face are kept completely out of public discourse.

lambs to the slaughter, we is.

Mr Slippery said...

EE bonds may be safer than Treasuries because you don't have the same interest rate risk. Uncle Sam is always a willing buyer of EE bonds with only an interest penalty, but you can't lose principal. With Treasuries and runaway interest rates, you could lose a lot of principal selling in the secondary market. I still don't like EE bonds much and don't own any, but who knows.

Stagflationary Mark said...

Troy,

But to do this they need to get trillions of dollars back into the middle class's grubby little hands.

You'd think that the ruling elite would love trickle up economics.

Sarcasm! ;)

Stagflationary Mark said...

Mr Slippery,

It is nice to have the option to cash something out without taking a huge loss. That's certainly an appealing factor to me.

Hindsight may show that I was a fool for buying EE Bonds and I Bonds, but at least I don't require one of these.

tj and the bear said...

What do you suppose the rates were right before the Gold Reserve Act?

Stagflationary Mark said...

tj and the bear,

What do you suppose the rates were right before the Gold Reserve Act?

Sliding down into oblivion.

MeasuringWorth: What Was the Interest Rate Then?

I've visited that site more than a few times out of curiosity.