Ben's Bind

Ben's bind

There are plenty of reasons to stop cutting. Real interest rates are now firmly negative.

TIPS rates are still relatively high by comparison. The 10-Year TIPS is 1.5% over inflation. However, those who are really worried about inflation appear to pick commodities instead. That in turn pushes up inflation eventually and becomes a self-fulfilling prophecy.

Jeff Frankel, a Harvard economist, has long argued that low real interest rates lead to higher commodity prices.

Score one for Harvard economists.

The most recent circumstantial evidence also suggests that the Fed may bear some responsibility for the commodities boom.

Score one for The Economist.

See Also:
Fed Funds Rate vs. Metals

The Sarcasm Report v.23

Stocks mostly advance after payroll report, Fed action

NEW YORK (AP) -- Wall Street gave up sharp gains to trade mixed Friday after a government employment report showed the nation's employers cut far fewer jobs than expected last month, stirring optimism about the buoyancy of the economy.

The ship is still buoyant? Hurray!

The Labor Department's report that employers cut 20,000 jobs in April was a relief to Wall Street, which had been expecting payrolls to decrease by 70,000 jobs. This marked the fourth straight month of job losses, but the data signaled that perhaps the economy might be resisting falling into recession.

I'm feelin' mighty festive after hearing such great news. It makes me want to break into a song.

20,000 gallons of fresh water through the wall
Instead of 70,000 fresh gallons!
If some of the bulkhead happens to fall
Millions of gallons of fresh water through the wall!

You know the words! Sing along!

The Death of I-Bond Rates

The day of death is finally here. The government has just set the new I-Bond rate as of May 1st (it is set every six months).

The old rate was 1.2% over inflation.
The new rate is 0.0% over inflation.

Seriously. You can now lock in a 0.0% rate for up to 30 years. Get out the party hats. *heavy sarcasm*

Well, I have been saying that 1.2% wasn't all that bad in comparison to what I thought was coming next. I never dreamt of 0.0% though. Wow. That makes it absolutely impossible for the I-Bonds you buy today to keep up with inflation unless you can find a way to pay zero taxes once you cash them. Good luck on that one!

The government might just as well put an ad in the paper telling us to begin hoarding hard assets in earnest.

First they stick a fork in the quantity of I-Bonds we can buy (as of January 1st of this year), now they stick a fork in the quality of the I-Bonds we can buy. Go figure. Somebody really doesn't want us saving.



May 1, 2007
Bernanke Advocates More Saving

Federal Reserve Chairman Ben Bernanke said that U.S. lawmakers should aim economic policies at boosting U.S. savings, the lack of which is the primary source of the U.S. trade deficit.

“Saving is critical,” Bernanke said in response to questions after a speech at Montana Tech. He said the trade deficit isn’t a reflection of the quality of U.S. goods and services but rather a result of the fact that the U.S. invests more than it saves and the rest of the world is a “net saver.”

“That saving is sloshing around the world,” Bernanke said, and is one reason that U.S. real long-term interest rates remain “very, very low.” “We won’t always have that,” Bernanke said in reference to the high rates of foreign saving that are coming into the U.S. That’s why it’s important for the U.S. to find ways to boost domestic saving, he said.

If domestic saving is critical, then the patient just flatlined.

See Also:
Extremely Bad News for I-Bonds!
Christmas Shopping Made Easy (An I-Bond Story)
The Death of Real Yields Continues

Source Data:
I Savings Bonds Rates & Terms

FOMC Announcement Through the Eyes of Yoda

The Federal Open Market Committee: Press Release

To lower its target for the federal funds rate 25 basis points to 2 percent the federal open market committee decided today.

Softened further, household and business spending has been subdued and labor markets have.

Be necessary to continue to monitor inflation developments carefully, it will.

I think that pretty much clears up any ambiguity.

Source:
Learn to Talk Like Yoda with The Yoda Speak Generator

Psycho Killers (Musical Tribute)

MAB has pointed out to me that the Cycle Killers in my last post didn't perform all that well as a group.

Let's track Jim Cramer's cycle killers to the dollar and give him every possible benefit of the doubt. Let's say we bought $10,000 of each (to evenly diversify the risk), held all until yesterday (even though he told us to sell when they double, so we're really throwing him a bone here since we really should have sold CAT earlier), AND adjust for dividends and splits. That's $50,000 invested. Let's see how we did.

March 18, 2002 to April 30, 2008:

CAT: $25.95 to $81.88
AA: $34.17 to $34.78
IP: $37.46 to $26.17
DOW: $26.08 to $40.15
TYC: $108.43 to $46.79

Ending Balance:

CAT: $31,553
AA: $10,179
IP: $6,986
DOW: $15,395
TYC: $4,315

Grand Total: $68,428

$50,000 grew to $68,428 in 6 1/8th years.

(68428/50000)^(1/6.125) = 1.0526

That's 5.26% per year. Now let's see how we would have done with a 7-Year Treasury bought in March of 2002.

That's 5.14%.

Woohoo! The cycle killers performed almost exactly the same as a US Treasury Bond. Of course, in order to get that kind of cycle killing performance you had to ignore the advice to sell Caterpillar when it doubled. I wish to point that out again.

This musical tribute is probably the most fitting one I will ever have. Let's sum up why.

Group: Talking Heads
Album: Stop Making Sense
Song: Psycho Killer

That's a frickin' musical tribute miracle in my opinion. They come around maybe once in a million years or so, lol.

Cycle Killers, by James Cramer

March 18, 2002
Cycle Killers

Oh, and one other thing. Don't forget to sell them after they have doubled. Cyclical nirvana never lasted long, even in the golden age of U.S. manufacturing. Don't overstay your welcome.

Caterpillar TRIPLED. What did he tell us to do next?

May 31, 2007


Um, commodity costs, ah, yeah commodities should, um, keep going, uh, you know commodities won't, you know, are all unsustainable, they've moved up, copper is unsustainable, and uh, so therefore, and oil is unsustainable and so therefore you should sell CAT. Again, very, very sound argument but wrong. And when I say wrong I mean I think that will be wrong....

My goal is to be right and there's always going to be a lot wrong when you try to be right.

For what it is worth, I had a relatively large position in Caterpillar from 2000 to 2004. It was very good to me. I bought long before he told us to buy and I did sell after it doubled.

This post inspired by MAB.

There's Always Hope

Opponents carry injured home run hitter around the bases

"In the end, it is not about winning and losing so much," Holtman said. "It was about this girl. She hit it over the fence and was in pain, and she deserved a home run."

More on Potash

Or is it moron potash? Only time will tell.

Why commodity investors better watch their potash

"First, there's plenty of potash -- nearly 300 years of known reserves at current consumption rates, according to the International Fertilizer Association.

"Second, you could hardly have found a worse investment in modern times -- according to the U.S. Geological Survey, real potash prices have fallen 95 per cent from their record (peace-time) peak in 1919 through the recent trough in 2003.

"Third, the current combined market cap of the three large North American producers -- Potash Corp., Agrium Inc. (AGU/T) and Mosaic Co. (MOS/NYSE) -- is bigger than the value of all of the potash ever sold in the history of the world.

"Fourth, and in our view most importantly, we believe that the euphoria in the fertilizer sector reflects a potentially dangerous broader trend across the commodity spectrum -- investors mapping evident short-term supply/demand imbalances into expectations of persistent long-term supply/demand imbalances."

I've decided to move my short-term inflation mood back down to neutral. I've got a very bad feeling about this. It is too easy to get caught up in price appreciation euphoria. Ask any dotcom investor from 2000. Ask any real estate investor from 2005.

I will continue to own TIPS and I-Bonds long-term though. As I have stated previously, I may not do as well relative to others if inflation slows but lower inflation would help us all (TIPS and I-Bond investors included).

I will also keep my name. I am still expecting slower growth AND relatively stubborn inflation long-term. Perhaps we only get slower growth OR relatively stubborn inflation long-term. If so, I'd still be half right (which is good enough for me anyway).

See Also:
Deflation Revisited