Thursday, June 20, 2013

Trading Update

I bought a 29-year TIPS for my retirement account on January 18, 2011. Other than a very small cash holding, that was the only thing in my account. It yielded roughly 1.9% over inflation. In hindsight, I have absolutely no complaints about that trade.

My IRA planning is now complete. I'm done.

I probably should have said that it was mostly done. That bond accumulated interest over the past 2 1/2 years. I used that interest to buy a 19-year TIPS today. It yields about 1.06% over inflation if held to maturity. That's exactly what I intend to do.

It's been a good 2 1/2 years and it has been an especially good day. My IRA planning is now complete again. I'm also mostly done again.

There were three things I liked about the bond. First, I was concerned that we'd never see 1% real interest rates again in my lifetime. I just don't think our weakened economy can support "normal" real interest rates long-term (which is in sharp contrast to recent stock market euphoria). Second, a 19-year bond is just about perfect for me. I'm 48 years old. It will mature shortly before I am required to start taking minimum distributions from my retirement account. Third, I could afford it. The least TD Ameritrade would allow me to buy was $9,118.51 today. My account had accumulated $9,581.36 of cash. The last few days have been the first real opportunity to put that cash to work in a way that best matches my future needs.

As a side note, I have no idea how high rates will rise from here. I can say this though. I am not bracing for mythical 3.5% real interest rates over the long-term. Not even close.

As for the theory that a U.S. currency crisis will soon be upon us, let's just say that I am far removed from that camp. Investors can't seem to get out of silver fast enough these days. It's down nearly 8% today and roughly 60% from the peak in 2011. Silver treated me well in the past. I owned it from 2004 to 2006. That was good for a 50%+ gain. In hindsight, I missed much of the ride though. That said, there are at least a few "late to the party" investors today who no doubt wish they'd missed the ride entirely.

February 24, 2011
Silver Bubble Construction Set

If these charts have any merit, then silver is either in a bubble or silver has priced in a great deal of future pain for savers. Perhaps hindsight will show that it was a bit of both? It's just one more reason I've been willing to buy 30-year TIPS.

The following was anonymously written in the comments. Note the capitalization of the word silver as if the metal was worthy of our worship at any price.

Very few people on this earth understand Silver
As I write this, Silver is at $45, up $15 bucks since this article was written just eight weeks ago.
The internet is a wonderful thing. You can find articles written over the past few years saying silver was overbought at $12, at $15, at $18, at $20 at $30.. The long awaited correction the "experts" keep warning us about never comes.

None of these "experts" understand the first thing about what is driving silver.

The Internet is indeed a wonderful thing. I'm going to go out on the limb here and once again suggest that the same thing that drove silver was the same thing that drove real estate and the stock market before it (and quite possibly after it). Easy money, sure things, and greater fools!

Just opinions. This is most certainly not investment advice.


Stagflationary Mark said...

And let's not forget leverage. That surely drove something too. Big time.

If today's market is any indicator, the lever is currently pursuing a game of whack-a-mole!

fried said...

I keep checking in here, but I made a special point today...I did not invest in the run-up in equities, and friends have been kidding me about being a perma-bear. I also felt pretty dumb watching everyone else make bank. But, my own concern is ee bonds. i have my ibonds for the year, and I am very happy with them.
Tips make me nervous only because you can lose principal...or can you?
I'd love to hear your thoughts...and yes, anything you might choose to say is not investment advice.
Still like to hear your thoughts, Mark.

Anonymous said...

I cannot predict what will happen to PM prices, but just a look at fleabay tells me that silver prices as quoted by the banksta run COMEX futures market are not accepted by the flea baying public. I understand that fleabay is a sellers market, but last I saw there was nobody holding a gun to fleabay buyers, heads (mouse?).

I'm seeing premiums of 64% for US common silver dollars that look like they have not been buried or fished out of the sewer and 43% premiums for bullion silver eagles (at least). I guess this is pretty good compared to the 250% premium that the US mint is trying to charge online for basically the same.

Again, not predictions, just observations.

Anonymous said...

Above is the link to the really good deal the US mint gives you--buy it at 250% premium to the true silver value. Through June 16 2013, 119,000 of these have been sold. The government would not lie --well maybe just stretch the truth about the true value of the coin.

It's probably worth every percent in numismatic terms :)

Charles Kiting said...

That was good for a 50%+ gain.

I'd get out of any investment after a 50% gain, certainly I'd sell a significant portion. Paper profits are nice but nothing beats profits realized.

Stagflationary Mark said...


I also felt pretty dumb watching everyone else make bank.

Let's see how much bank remains after the next recession. Most seem very confident that the Fed has put a permanent end to the business cycle. I'm definitely not in that camp. I can't say when it will happen, but in my opinion we're within a year or two. Things will get real ugly then. Sigh.

Tips make me nervous only because you can lose principal...or can you?

1. If bought in an initial auction and held to maturity then you cannot lose principal even if sustained deflation hits. You are guaranteed at least face value at maturity. That said, if negative real yield TIPS are purchased then I believe that would mean that you paid above face value to get them. That will lose purchasing power for sure.

2. Taxes are the main source of pain for TIPS investors, but only if inflation really picks up. Taxes must be paid each year on the inflationary gains (if held outside of a tax-deferred retirement account). More inflation equals more taxes.

Stagflationary Mark said...

Charles Kiting,

I sold at about $10 for a 50% profit.

In theory, the next guy sold at about $15 for a 50% profit.

The next guy sold at about $23 for a 50% profit.

The next guy sold at about $35 for a 50% profit.

That last guy is still waiting to sell at about $53 to someone else. I bet he's wishing he'd sold at $45. He also is starting to feel like a silver bagholder. D'oh!

It was my thinking back in 2004 that it would be better to be in early and out early than in late and out late. It was also my plan to only buy and sell once no matter how bad things got. Had I been a silver investor in the 70s, I would have held way too long. I did not want to repeat that theoretical mistake.

For a variety of reasons, I'm done as a silver investor (unless substantially cheaper prices appear relative to the price of toilet paper or aluminum). I may regret my decision. I have very little hyperinflation insurance. That said, I'm not in the hyperinflation camp (within my lifetime anyway).

I can't afford to insure against every bad outcome, especially for those things where the insurance is so costly. In hindsight, $45+ for an ounce of silver insurance was costly indeed.

Stagflationary Mark said...


I have/had no desire whatsoever to own numismatic silver.

I chose "junk silver" at roughly spot prices. I sold it back to the same mint I bought it from. There was no haggling over the supposed numismatic value of the coins.

Stagflationary Mark said...

As a side note, silver insurance in 2004 was exceedingly cheap. The mint even tried to talk me out of it. Couldn't understand why I was bearish. Well, I'm still bearish. The name of my blog wasn't based on short-term cyclical problems.

In my opinion, we're in a cyclical economic boom (not a very strong one at that) within a long-term structural bust (starting in 2000).

I'd be better off in the long-term if I'm wrong. I therefore hope I am wrong. I don't believe I am though and I'm therefore not willing to take big risks with my nest egg.

TJandTheBear said...

Silver is a wild ride for sure, but despite the crazy journey the destination remains the same. Cherry-picking lows or highs to make a point will seem quite laughable in the end.

Stagflationary Mark said...


That same argument could have just as easily been used by the National Association of Realtors. Dollars will ultimately become worthless, therefore it is always a good time to buy real estate at any price.

In order to determine the extent of any bubble it is common to cherry-pick the peak and compare it to where we are now. And as of right now, silver is down nearly 60%. That's far worse than the average drop in real estate prices in the aftermath of the housing bubble.

Mr Slippery said...

Since your post, the 10 year rose another 11 bps to 2.54. It's nearly impossible to pick a bottom or top.

I am tempted to buy TIPS in my own IRA now, but I want the interest rate bleeding to stop (against my previous comment on picking a bottom!).

Can the Fed stop rates on the long end without buying everything for sale? I don't know.

The Fed wants to stop buying, and might be forced to stop buying if their losses get too big. They pass losses and gains back to the Treasury, and they are sitting on 3 trillion in assets. How much have they lost on their portfolio this month? Maybe $100 billion? The Treasury gets to eat that and cover it by issuing more debt the Fed must buy to control rates. Circle, meet jerk.

Troy said...

I just don't think our weakened economy can support "normal" real interest rates long-term

I made a chart for DeLong's that fits here:

and might be forced to stop buying if their losses get too big

I don't know anything but it's my understanding that the Fed's balance sheet does not actually mean anything other than a scorecard of how much intervention they've done.

If their MBS portfolio went to $0 they'd just shrug and keep printing.

Note that the Fed is "making money" on its treasury holdings.,MBST,

That red line is neither here nor there. AFAICT the Fed wants to run it off to zero, to get that crap off their balance sheet.

Troy said...

via mish:

and now DC is going to open the H-1B.

I just wanted to program for a living . . . f*%# me, right??

Troy said...

Since your post, the 10 year rose another 11 bps to 2.54

Troy said...

blue is systemic debt leverage, debt / income (left).

red is the 10 year (right).

This is an important chart to understand.

Stagflationary Mark said...

The economy is barely flying faster than stall speed. The Fed wishes to experiment with easing back on the throttle and tipping the plane's nose up a few degrees.

At best, we won't stall much. At worst, well, you know.

Just opinions!

Stagflationary Mark said...


From your link...

Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed.

There seems to be a neverending supply of future global unemployed workers. Sigh.

Stagflationary Mark said...

Mr Slippery,

It's nearly impossible to pick a bottom or top.

For what it is worth, I made no attempt. Just saw a yield that looked good to me and locked it in.

I am still a believer that Jeremy Siegel's 3.5% real yields are about as likely as me catching not one, but two magical unicorns with nothing more than 3' of rope and a pogo stick, lol. Sigh.

GreenWorld Investments said...

1% real rturn is pretty good in this environment. As I am British, wondering if there are any inflation protected bonds in the UK or Europe that are worth considering?

Troy said...

I call this chart, "Whee!"

Stagflationary Mark said...

GreenWorld Investments,

I wouldn't be the one to ask. I know there are inflation protected bonds in the UK but I don't know all that much about them (other than what readers have said in the past).

Stagflationary Mark said...


I call this chart, "Whee!"

You could also call it "Wheel!"

As in, it fell off, lol. Sigh.

Parker Bohn said...

I'm at a loss here.
I pop in to read your blog every now and then, and you seem fairly sophisticated about financial stuff.

But then you buy bonds at 1% over inflation to held to maturity for 19 years?

Why not just buy shares in some decent companies, and get closer to 5% over inflation?

Stagflationary Mark said...

Parker Bohn,

Why not just buy shares in some decent companies, and get closer to 5% over inflation?

I guess I'm one of the last people on the planet who doesn't expect the average company to earn anywhere near 5% over inflation well into the distant future.

Did the typical Japanese stock market investor earn 5% over inflation in the 20 years following their housing bubble?

Sony was thought to be one of the best of the best back in 1990. It is now trading at 1990 levels.

I am in the camp that thinks that our economy changed in 2000, and not for the better. If I am right then we are simply in a cyclical bull market within a secular bear market. There is no company that can even remotely guarantee 5% real yields well into the distant future.

I will give you that the period from 1932 to 2000 was extraordinarily good for US stock market investors, but I would bet all I own that the period from 2000 to 2068 will not be similarly extraordinarily good. The party ended in 2000. I just don't think everyone has figured that out yet.

Anonymous said...

A Dollar, from the word Thaler, is a silver coin.
A Banknote (Which I believe is what you are referring to when you use the symbol $) is a Promissory note, and if it bears no redemption date, it is to be redeemed on-demand upon its presentation to the emitter.
Call me backwards, I'm just giving you the facts.

So Federal Reserve Dollars, even with their recent up-valuation to species(The actual metal), are still valued at about one twentieth of their Face Value (One dollar, or about 3/4 of a Troy Ounce of Fine Silver).

Your TIPS might do well for a while, but I would suggest you exchange them for Species before they expire, or invest the proceeds into something else than a criminal organization (Emitter of fraudulent Bank Notes, the value of which is maintained using compulsion).


Stagflationary Mark said...

Olivier Francoeur,

For what it is worth, I owned gold and silver from 2004 to 2006. They treated me well. I have no desire to speculate on them at these prices though. That's especially true relative to the price of physical toilet paper and canned goods (both of which I see excellent value).