Thursday, January 10, 2008

Thank You Stock Market Bulls!

I participated in the 10-Year TIPS auction today. I expected a real yield of ~1.56% (the range was 1.56% to 1.59% over the past week).

Today's Auction Results
High Yield: 1.655%

At the very least, I offer my thanks for a well-timed bounce (as seen in the chart below)!

Source Data:
U.S. Treasury Real Yield Curve Rates


Anonymous said...


Hopefully you are not experiencing any buyers remorse after the 20 year TIP auction. Per the following link, it appears that you locked in a reasonable "REAL" yield. At least on a historical and risk adjusted basis (imho).

If you get a chance, I'd appreciate your thoughts on the above link. The chart of personal savings makes me particularly uncomfortable. Especially in light of the compelling evidence that stocks are at historically high valuations.

Should equities revert to trend anytime in the near future, your returns will be enormous on a relative basis.

Stagflationary Mark said...


If you get a chance, I'd appreciate your thoughts on the above link.

You are looking at the chart that made me turn so bearish in 2004. I posted a similar one on the very first day of this blog (created a few years previously).

Here's a followup chart I did in November. I think plotting it on a logarithmic scale is more interesting though (since constant growth on a log chart is a straight line).

Should equities revert to trend anytime in the near future, your returns will be enormous on a relative basis.

The 20-Year TIPS I backed up the truck on (~15% of my net investable worth) yesterday are now worth considerably more (the real yield fell from 1.807% to 1.73%). Taken over 20 years, that difference adds up to quite a lot. Meanwhile, the Dow lost 1.4%. When you say near future, you aren't kidding! D'oh!

Anonymous said...


"The Death of Real Yields"

"Look who knows so much. Well, it
just so happens that your friend
here is only mostly dead. There's
a big difference between mostly
dead and all dead." (Miracle Max, The Princess Bride).

They'll most likely be killed tomorrow (or next Wednesday) by the Dread Pirate Bernanke.

I've racked my brains trying to get comfortable with out current economic situation. The more I see though, the worse off I think we really are. Stocks, bonds and real estate are WAY above trend. So are liabilities. Bad, bad, bad and worse. Talk about the four horsemen.

Today, it seems, the Fed is again utilizing price fixing. Except its asset price fixing rather than consumer price fixing. Forget more bubbles, I think they would be happy to just keep stocks and housing afloat until a contolled inflation brings them back to trend. The vast majority certainly don't need more liabilities. Heck, the vast majority have very little in the way of wealth. Pain city for all, dead ahead. Including those with assets.

BTW, I think that the changes to CPI in the 1980's regarding rent & housing really skew the historical record. I'm not taking sides, it just seems important on a historical/comparative basis.

Stagflationary Mark said...


I just want to point out that the stimulus package IS a helicopter drop of money.

BTW, I think that the changes to CPI in the 1980's regarding rent & housing really skew the historical record.

Indeed. It has skewed the picture in many ways (and not all of them are entirely obvious). Rising rents scare me (from an inflation standpoint) far more than rising home prices (since booms and busts are relatively normal). In theory, if housing prices rise much faster than the cost to make houses (which we've seen) and houses are built to excess (which we've seen), then rent increases may continue to stay low.

More concerning to me is where the price of food and energy go into the distant future (the very things that the Fed hopes they can somewhat ignore when it comes to predicting future inflation).

Anonymous said...


Its odd, but from the little I know about your situation, rising rents would be a good thing for you.

One, you own your house, so even though rising rents are a large part of CPI, your personal spending power would not be diminished. The rising inflation caused by higher rents would result in higher interest payments on your TIPS. Since you're holding to maturity, a temporary decrease in the value of your bonds would have no effect on your purchasing power either.

One could also argue that if rents were higher, less money would be spent on other CPI goods which would also help maintain your purchasing power. Money would continue to be concentrated with the wealthy (asset owners).

Unfortunately, I see no way rents will rise rapidly. Supply is above demand. Domestic wages are going nowhere either. Federal, state and local payrolls have swelled and are a significant percentage of the work force. By definition, Gov't wages will only rise with inflation (cola). Private wages will continue to stagnate. Generous public employee benefits, however, will continue to drive medical costs higher at rates above inflation.

The majority are tapped out financially. Wealthy people just don't rent, eat or drive enough to drive inflation. IMO, the coming inflation will come from helicopter drops (politicians and the fed) and from abroad. Whats been rising will continue to rise - medical, food, energy and commodities. If I had to handicap it, I would guess inflation will range from 2% to 6%. Its the reversal of direction that is important to me. Eventually, people will regognize this reversal and all future cash flows will be worth less. Hence, lower asset prices.

The trend is no longer our friend. The USA will have to work for its wealth. Except of course, certain lucky lottery winners and a blogger in the great Northwest.

Stagflationary Mark said...


I'm reasonably comfortable with your analysis of my situation.

If I had to handicap it, I would guess inflation will range from 2% to 6%.

I'll continue to root for the lower end of your range just so I pay less taxes. There are two ways I see that I could be financially ruined by taking such a one-sided nondiversified bet (since the vast majority of my savings is in TIPS and I-Bonds).

1. The USA defaults on the national debt by using WAY too much deflation to do it (it simply refuses to add to the national debt to pay the holders of treasuries).
2. The USA defaults on the national debt using WAY too much inflation to do it (if we hyperinflate, even inflation protected treasuries will offer no protection).

I'm hoping that both of those options are unacceptable to the powers that be. First, many own treasuries. Second and just as importantly, many own treasuries. D'oh!

In any event, I'm not bullish on real yields (regardless of what inflation ends up being). The time for making serious money off of money was from 1980 to 2000. Those days are gone in my opinion.

I'm reminded of a recent article that told me how to acquire a million dollars in savings. It started with the assumption that I'd be earning 8%. If 3.5% long-term treasuries end up earning anywhere near 8% long-term, I'll eat a bug. In order to average 8%, even more gains must come from stocks and real estate in order to make up the difference. Good luck on that one.

Anonymous said...

Stagflationary Mark,

Would there be any cons in your opinion to holding a Vanguard TIPS fund? I find TIPS so confusing.


Anonymous said...


"I just want to point out that the stimulus package IS a helicopter drop of money."

Indeed it is. I just can't help wondering if the "drop" was based on misleading info (Jerome Evil Kneivel). This bad intel is getting expensive when you add in the 1 trillion or so from the Iraq war.

I heard that Mssr. Kneivel is blaming his misfortune on the extreme stress of a 30 hour work week with only 12 weeks of paid vacation a year. Apparently, Mssr. Knievel made large, leveraged bets that the French would suddenly stop being rude, pompous and snobby. He also bet heavily that the French would incorporate the English phonetic "CH" (chuh vs shuh) sound into the language. According to Mr Kneivel's lawyers, these ludicrous views prove the exteme stress which Mr Kneivel was forced to endure at his place of employ. Investigators are also looking into rumors that Mssr. Kneivel only had one mistress. Under French law, this would be defacto proof of diminished capacity and entitle Mssr. Kneivel to permanent disability payments from his employer and the French Government.

What's the French word for "sarcasm?" And what's another word for "thesaurus"

Stagflationary Mark said...


I find TIPS so confusing.

Let me use a real world example of the TIPS I bought in 2000. Perhaps that will help.

On 7/16/01 I participated in the 10-Year TIPS auction. I signed up to buy $25,000 in 10-Year TIPS (it was actually just 9 1/2 years since it was a reopening of a previous auction).

The actual price and yield were determined at the auction (which is hard to budget since you only have a ballpark idea of how much you will have to pay).

I paid $25,468.17 and got a 3.5% real yield.

TIPS are composed of two parts. First, the $25,000 I bought will adjust for reported inflation over the years. As of a recent statement, the government says it is worth $30,092.25. That's the amount the government would pay me if it matured today (it is still growing though, until 1/15/2011).

Meanwhile, I was paid 3.5% annually (about 1.75% twice a year). The amount of the payment is based on the inflation adjusted total. It therefore grows over time (since my inflation adjusted total grows over time).

As for taxes, I pay tax on the 3.5% I make each year. I also pay tax on the amount the TIPS have gone up due to inflation. Since my $25k is worth about $30k now, I've paid tax on about $5k of it over the years. It is not tax deferred. I pay tax each and every year based on how much inflation pushes the value higher.

Would there be any cons in your opinion to holding a Vanguard TIPS fund?

Let's go back to my previous example. In theory, if hyperinflation set in, I'd owe a tremendous amount of tax on the amount my TIP was appreciating due to inflation. In theory, the 3.5% I'd be earning would not be enough to pay the tax. I'd therefore have a negative cash flow situation. Not good.

They are designed to do better than most investments during inflation, but they clearly have their limits. That's the bad news in a bad economy.

Now let's talk about the bad news in a good economy. If real yields rise (which tends to happen when the economy strengthens) the fund itself would adjust to those rising yields by falling in price.

Here's a hypothetical example of how the TIPS could hurt you. Let's say you bought a 1% 10-Year TIP (pays 1% over reported inflation for the next 10 years). Let's say the 1% real yield rises to 2% the day after you buy it. The relative value of your TIP purchase has dropped 10% (1% per year less yield for 10 full years). A fund made up of these TIPS would drop similarly in price. Ouch.

If you buy a 1% 10-Year TIP (not a fund) and hold until maturity you'd also lose that 10% (which you would find out if you tried to sell it in the secondary markets). However, in this example it was only an opportunity cost since you are holding until maturity. You'd still earn 1% over reported inflation for the next 10 years. That would not change. In 10 years you'd be doing exactly as you thought you would. The downside is that you could have done better elsewhere with your money.

As a holder of TIPS, the most important thing to figure out is where inflation adjusted real yields are headed.

In general, since the Great Depression (when we were on the gold standard), real yields have been low when the economy is struggling (1970s, present). Real yields have been high when the economy is doing well (1980s through 1990s).

Real yields are currently low. The 2-Year nominal (not inflation protected) treasury is paying a mere 2.2%. That looks negative to me (won't know for sure until 2 years have elapsed). I'd have a hard time buying the 2-Year nominal treasury.

If you think the economy is bottoming out and good times are ahead of us once we are through this current crisis, then it would not make sense to lock in a low but positive real yield on TIPS.

If you think the economy is only going to get worse and the market has not fully priced in the pain yet, then it would make sense to lock in the already low yield on the TIPS (on the thinking that it will go even lower in the future).

My TIP fund (iShares) is paying a real yield of ~1% right now. I doubt there's much room left for it to appreciate in price. 0% is the lowest it can possibly go (since the yield on an individual TIP is guaranteed to have at least a 0% yield during the auctions). Further, I don't think people will willingly lock in a 0% return. I say willingly, because I suspect that they might be doing worst than that when they buy the 2-Year non-inflation protected treasuries these days (on the opinion that inflation will fall lower than that).

Stagflationary Mark said...


Too funny!

Anonymous said...


Uh Oh! Apparently, the productivity miracle is not dead yet. The above link could spell "real" trouble for a stagflationists. AND banks.

And to think, I thought there was going to be a scarcity of investment ideas going forward!

BTW, I found this link on the homepage of Yahoo! Finance. The genie is out of the bottle.

Anonymous said...

Stag, All,

Correction to my previous post:

"BTW, I found this link on the homepage of Yahoo! Finance. The genie is out of the bottle."

The above came from Mish's blog, not Yahoo!

My bad.

Stagflationary Mark said...


Baby steps get on the elevator. Baby steps get on the elevator. Ah, I'm on the elevator. - Bob Wiley (Bill Murray), What About Bob?