Monday, April 16, 2012

Real Yields vs. Inflation

In the past, I have claimed that owning TIPS allows me to be somewhat of an inflation agnostic. I now have a chart to back the theory.

Click to enlarge.

Note that there is *no* correlation between 10-year TIPS real yields and what inflation has done over the previous year.

In my opinion, the story of falling real yields has nothing to do with inflation and everything to do with a long standing theory of mine.

It will be harder and harder to make easy money off of money.

That's what the chart shows. We can try deflation again if we like. We can opt for more inflation too. In the long run, it will not matter. Call me an economic cynic.


They believed that the world belonged equally to everyone, and that suffering was caused by false judgments of what was valuable and by the worthless customs and conventions which surrounded society.

There's certainly been plenty of suffering in the last decade based on what people thought was valuable. In sharp contrast, and as accurately portrayed in the following picture, I honestly believe that the best things in life are free (or nearly free).

There's a story behind our dog Honey. I don't think I've shared it before.

Some people went to an animal shelter and picked out a new dog. They brought it home. Unfortunately, the dog was pregnant and nobody realized it. Upon giving birth to the oddest assortment of puppies one would ever see (multiple fathers?), they called the animal shelter and asked what they should do with the puppies. They were told that it wouldn't be a problem. Just bring the puppies back. How could the puppies be separated from the mother that soon? Once again, not a problem. The puppies would be euthanized.

Needless to say, we ended up with a free puppy (and the other puppies found homes too). Honey's about 8 years old now. As for the couch, it is now in our kitchen and has quite a few claw marks on it. Contrary to "worthless customs and conventions" of most humans, our dog still finds value in it (and we do too apparently).

Source Data:
St. Louis Fed: Custom Chart


fried said...

Love the story of your dog, Honey. I find my own dog provides tremendous value, and yet she has never brought home a nickel.
I am also acting on the theme of your blog...making money from money is going to get harder and harder. I am lining up to buy ebonds next week. i am buying in April,against the chance the Treasury will extend the doubling period to 25 years. I find it hard to believe I am going to do this, but I am not liking the noise about money market funds.

dearieme said...

Two bits of Brit news.

(1) From the Telegraph: an arm of the government speaks -
National Savings & Investments has confirmed that it is "highly unlikely" its popular Inflation-linked Savings Certificates will be returning to the market this year.

(2) The pension fund of the employees of the Bank of England ( a different arm of the government) is reportedly 95% invested in Index-Linked Gilts (the equivalent of your TIPS).

Stagflationary Mark said...


I find it hard to believe I am going to do this...

Welcome to the club. If we were on a plane, I'd hand you one of these, lol.

In all seriousness, hindsight may show that it was a big mistake. Can't claim it isn't risky. Doesn't stop me from doing it each year though, if only for the mispricing compared to nominal treasuries.

Stagflationary Mark said...


Your news reminds me of a quote.

A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. - Mark Twain

We saw something similar with inflation protected I-Bonds. They sure whacked the heck out of them, and in hindsight, rightly so (from the government's perspective anyway).

Fritz_O said...

May I offer an alternative name for the chart?

How about...

"The Tacoma Narrows Bridge to Nowhere"

I'd like to see a re-visit of this chart about a year into the next presidential administration just for kicks.

Also, what is the data point interval? Monthly?

I know I could have simply counted the black diamonds and then divided them into the difference between 2012 and 2003 but I didn't want to count the black diamonds.

Stagflationary Mark said...


I'd like to see a re-visit of this chart about a year into the next presidential administration just for kicks.

Please feel free to remind me, especially if you think it should include a laugh track, lol.

Also, what is the data point interval? Monthly?

Monthly it is!

Stagflationary Mark said...

Bonus thought.

Why limit it to Tacoma when I have one a lot closer to where I live?

"The Lacey V. Murrow Memorial Bridge to the Bottom"

In 1990, while under construction, the original bridge sank because of a series of human errors and decisions.


Troy said...

thanks for the cynicism reference.

while I am relatively well-read about the past, I do have my gaps.

it is truly stunning to me though how widespread abject ignorance is in this country.

Cynicism does have commonality with the rustic simplicity of zen buddhism.

It was only 5-10 years ago that I actually began thinking about what "wealth" really was, that it was foremost the state of being well.

I read that ol' Uncle Warren has prostate cancer now, so I in my reduced footprint in Fresno am arguably wealthier than he at the moment.

Stagflationary Mark said...


It was only 5-10 years ago that I actually began thinking about what "wealth" really was, that it was foremost the state of being well.

I started thinking about it in junior high. I loved my summers off. At least for me...

Free Time = Wealth

I had no desire to work a lifetime for ever increasing quantities of material stuff (especially stuff that would someday end up in a landfill).

I do own a house and does have stuff in it, but that was a secondary priority. Free time came first.

Fritz_O said...

"...thinking about what 'wealth' really was...

I started thinking about it in junior high."

Junior high??

You were thinking about wealth in junior high?

Friend, if I were you I'd be sending my mother and father thank you notes every day of the year acknowledging the special gift of genes you received.

Do you have any idea how many people didn't have what you did? And it wasn't their fault. I know. We'll spend most of our lives dealing with the fact of being brought into the world largely untooled.

How many of the untooled really figure it out for themselves by junior high. I'd guess very few.

Stagflationary Mark said...



My sister gave me a book a few years ago called "Now, Discover Your Strengths". I'm not a fan of self help books but this one is different. It doesn't try to fix your weaknesses. It instead tries to dwell on your strengths.

It claims that there are 34 different strengths. I took the test that comes with it.

It says I am...

* Learner
* Analytical
* Maximizer
* Consistency
* Focus

So let's say that I am basically a lazy person at heart.

The outside world saw an achiever striving to get ahead. The inner me knew I was *not* an achiever though. I was simply trying to maximize a lifetime's worth of laziness. I learned and analyzed what could do it for me and I consistently focused on that.

So yes, at least for me, I think I was blessed. Picture me with the following 5 strengths instead.

* Achiever
* Belief
* Connectedness
* Positivity
* Responsibility

I wonder what life would be like? Can a lazy introvert even have those traits? Probably not.

Would free time equal wealth to people with those traits? Probably not.

Would people with those traits be unhappier than me? Probably not.

I guess it is all relative. One person's hell is another person's bliss.

Stagflationary Mark said...

Bonus thought.

My traits are somewhat working against me now.

I have this need to focus and analyze this stinking mess of an economy, lol.

If not for gallows humor, I think it would drive me insane.

Those with "belief" and "positivity" are often heckled, but there is something to be said for taking the blue pill!

You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe.