Long-time readers know I like treasury inflation protected securities as a relative safe haven during the storm (not that I think anything is safe). I stumbled upon this article today and thought it does a pretty good job summing up my thoughts. I'd encourage you to read it. I do have one major disagreement though.
TIP ETF: A High Dividend Stock and Inflation Hedge?
The US Government’s CPI consistently underestimates inflation, so the TIPs are at best a partial protection.
I really can't stand opinions offered up as fact. The government's CPI is "consistently" underestimated? Let's look into that claim for a moment.
Oil prices crashed.
Commodity prices crashed.
Housing prices crashed.
That is Great Depression style deflationary activity. I will debate anyone who would argue differently.
Gasoline averaged $3.070 per gallon in December of 2007.
Gasoline averaged $1.745 per gallon in December of 2008.
What about the price of big screen televisions and furniture?
As flat-screen prices fall, sales of modern consoles rise
According to Tamaryn Pratt of Quixel Research, in 2005 the average price of a 40- to 44-inch flat-screen television was $3,500. In 2008, the average price for the same size was $1,110. Consumers would pay about $1,700 for a 32-inch flat-screen in 2005. Today, the average is around $600.
So what does the government say the CPI has done from December 2007 to December 2008? It has dropped from 211.680 to 211.490. That's essentially unchanged.
I guess once you've come to believe that the government's CPI consistently underestimates inflation (which was easy to do with skyrocketing home and crude oil prices), you pretty much have to stick to the theory.
I never did embrace the theory in the first place though. The CPI is what it is. At times it will underestimate prices as they affect me and at other times it will overestimate prices as they affect me. In my opinion, we're currently in the overestimating part of the curve.
I continue to embrace deflation in the short-term. I'm riding it out in TIPS just the same, because I don't feel that I can even remotely time what may be coming next, and that would be yet another round of inflation/stagflation. It might take a few months or even a few years. I'm confident it will come someday though. Our government has a technology that can print money at essentially no cost and has shown a willingness to credibly threaten us with it. One thing it cannot do is print real prosperity though. It just prints paper. I'm fairly certain of that.
Source Data:
St. Louis Fed: Seasonally Adjusted CPI
EIA: Retail Gasoline Prices
Like you, I'm inflation-protected. I fear that all that may mean is that I'll be ruined a few months after everyone else. Slim consolation!
ReplyDeletedearieme,
ReplyDeleteLike you, I'm inflation-protected. I fear that all that may mean is that I'll be ruined a few months after everyone else.
I figure I'll be ruined about three years after everyone else. Call me an optimist! Hahaha!
Year 1: Inflation skyrockets but so would TIPS. The heavy gains would push me into a much higher tax bracket. I'd pay nearly 1/3rd in taxes.
Year 2: Repeat.
Year 3: Repeat.
Fortunately, I'd still have some left. I'd only be losing 1/3rd each year of what I had left from the previous year, not from the original amount. However, I think that would be offset by the time it would take me to load my wheelbarrow with fresh dollars as I race off to the store to buy bread.
Slim consolation!
It would be especially slim consolation if the store was actually out of bread!
What are the odds of that though? Our economy is SO resilient. How is it so resilient you might ask?
That's easy! You take modest non-resilient real parts that are driven by cheap energy and combine them with massive resilient imaginary parts driven by cheap credit and borrowed prosperity!
What you end up with is the facade of a robust and resilient economy as long as everybody keeps their story straight and doesn't panic!
The Wall Street Panic of 2008
http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx
Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."
I'll have to remember that advice if I ever find myself on fire while wearing a polyester clown costume and standing in a puddle of gasoline, lol.
They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now.
Starbucks was $11.53 a share on October 8, 2008. It is now $9.44.
Todd Wenning panics at the sight of clowns, but at little else.
Too bad.
Sadly, a lot of "experts" are advocating inflation as a solution. Harvard's Rogoff for example.
ReplyDeleteWhat a great idea! We'll replace private financial fraud with government financial theft.
We are truly a morally bankrupt nation.
Our most vibrant enterprise consists of senseless credit creation and rent seeking.
mab,
ReplyDeleteFebruary 7, 2003
Inflation: the solution to all problems
http://media.www.jhunewsletter.com/media/storage/paper932/news/2003/02/07/Opinions/Inflation.The.Solution.To.All.Problems-2247003.shtml
If soaring debt service costs causes the government to increase inflation, selling the policy may be an easier sell than one might think, since the government isn't the only habitual debtor. The American people have been amassing piles of debt for years, on credit and in the form of instruments such as home mortgages.
This was written in 2003. The debt has really begun to amass lately.
At this point, inflation sounds like a good idea, but the problem with inflation is that for each dollar of debt relief, an equal amount is taken from someone.
In good times, other people's money is invested in risky investments minus fees and expenses of course. It seems only fair that in bad times other people's money is also taken.
In addition, inflation imposes other costs on the economy and creates the risk that as an individual, your wages won't rise as fast as inflation, decreasing your purchasing power and leaving you worse off.
Thanks to automation and outsourcing, wages didn't rise as fast as inflation during the good times (the exception being high level management of course). It seems only fair that wages won't rise as fast as inflation during the bad times.
Of course, someone in the Administration would have the wherewithal to stand up and stop it before we end up with a Carter-era economy.
I'm betting most of what I have on the idea that someone won't stand up and stop it.