Sunday, July 31, 2011

The "Free Lunch" Weight Loss Plan v.002

It's been a month. Time sure flies.

I was extremely well fed over the 4th and did not have a scale with me. I also ate out more than normal this month. Can you say Salmon Fettuccine? That said, I did stick to the plan.

I continue to be well ahead of schedule. I initially expected it to take 3-4 years to get to the blue zone (and permanently stay there hopefully).

I didn't notice much of a change in June but in July I slept better and my energy level improved. That's always a good thing.

I went on a three hour hike with some friends today. I'm told we climbed 1400' of vertical (in addition to the 200' I climb daily). I would not have even considered doing it two months ago. I can't exactly say that I was the Speedy Gonzalez of the bunch though!

See Also:
The "Free Lunch" Weight Loss Plan v.000

Saturday, July 30, 2011

Real Growth Since 1952

Click to enlarge.

As can be seen in the chart, real GDP is very highly correlated (r-squared = 0.9975) with real wages and other labor income. Correlation does not guarantee causation but in this case I'm willing to make that leap of faith.

An optimist would argue that since there is now a divergence between the two, real wages will most likely rise to match GDP. A pessimist would argue that GDP will fall to match wages. Oh how I wish I was an optimist.

Now let's add corporate profit growth and civilian employment growth to the chart.

Click to enlarge.

An optimist would argue that corporate profit growth should match wage and/or GDP growth over the long-term. Corporate profits are therefore fully rational right now. A pessimist would argue that corporate profit growth may just be tracking the civilian employment growth line over the long-term. It certainly appeared to be doing that from 1952 to 2001 (and for a brief period in 2008). Oh how I wish I was an optimist.

Now let's add the real growth of household and federal debt. Drum roll please!

Click to enlarge.

An optimist would argue something no doubt. I'm just not sure what. A pessimist would be jumping up and down while exclaiming profanities about what our true growth engine has been. Oh how I wish I was an optimist!

Source Data:
FRB: Flow of Funds
St. Louis Fed: Federal Government Debt
St. Louis Fed: Household Credit Market Debt Outstanding
St. Louis Fed: Civilian Employment
St. Louis Fed: CPI

Friday, July 29, 2011

The Sarcasm Report v.117

July 29, 2011
10 Ways to Get Americans Spending Again

Here's a summary.

1. Increase propaganda.
2. Plan to reduce the deficit.
3. Begin to fix housing.
4. Continue government tax breaks.
5. Increase government spending.
6. Increase government spending.
7. Increase government spending.
8. Reduce corporate profits.
9. Increase consumer saving.
10. Reduce exports.

Yes! It seems so easy and obvious. I wish I had thought of it.

I don't know what I like best. It's got everything.

On the one hand we'll be cutting Social Security benefits (#2) which should reduce spending. On the other hand, it will be offset by keeping Social Security taxes low (#4). Lose win!

Poor seniors will lose out (#2) but rich seniors will win it back (#9). Lose win!

I also like the idea that we'll start fixing the mortgage mess (#3). Somebody really needs to begin that process someday. Agreed.

The idea of giving American consumers more buying power for imported goods (#10) is amazingly good. We need to make sure we keep buying cheap goods Made in China like we have been. What's the harm to us if a billion Chinese are all burning oil bought with our stronger dollars? We can always print and/or borrow more someday.

And lastly, we definitely need to give Americans some reason to trust (#1). Our leaders must exude confidence at all times. It's the first rule of confidence games.


20-Year TIPS Real Rate

The 20-year TIPS just hit a new low of 1.14%.

This is the bond market's way of saying that weak real GDP growth is going to be with us for a very, very long time.

For what it is worth, it is also my way of heckling
Jeremy Siegel.

I have a theory. Treasury Inflation Protected Securities tried to run over Jeremy Siegel's dog. What else could possibly explain his ongoing hatred of them? Well, other than the fact they've made him look like a fool for the past decade by outperforming his precious stocks.

Source Data:
FRB: Selected Interest Rates
US Treasury: Real Yields

Real GDP per Civilian Employed

Click to enlarge.

This is looking really good. Just look at those productivity gains. We continue to do more work with fewer people. We're right on the exponential trend. Hurray!

Click to enlarge.

Thanks to the cumulative effects of automation, outsourcing, and a never ending debt crisis we need fewer workers. Productivity miracle! As intended, the US worker is becoming a milk cow. We have 60% fewer milk cows now than we had in the 1940s but each one does more work. Fantastic!

Click to enlarge.

There does appear to be an unintended consequence though. Note that overall real GDP growth peaked the same time employment peaked. It would seem that unemployed workers cut back on their spending. Who knew?

July 29, 2011
Weak GDP Report Suggests Economic Recovery Will Remain Slow Through 2011

“I think we could bounce along for a couple of years at this really miserably slow growth rate,” Bivens told HuffPost. “So we’d never technically enter a recession, but we would still have high and maybe even rising unemployment.”

A couple of years of "really miserably slow growth" and then what? A miracle occurs? I've been bearish since 2004. A few more years and it will be a decade. I can say with 99% certainty that I'll still be bearish.

Source Data:
St. Louis Fed: Real GDP
St. Louis Fed: Civilian Employment

11th Hour Debt Ceiling Absurdities

The rate on the 7-Year TIPS just went negative again (prices are up, yields are down). The real yield infection continues to spread. It is becoming harder and harder to make money off of money.

Armistice with Germany

The Armistice was agreed at 5 a.m. on 11 November, to come into effect at 11 a.m. Paris time, for which reason the occasion is sometimes referred to as "the eleventh (hour) of the eleventh (day) of the eleventh (month)". It was the result of a hurried and desperate process.


There was no question of negotiation. The Germans were able to correct a few impossible demands (for example, the decommissioning of more submarines than their fleet possessed), and registered their formal protest at the harshness of Allied terms. But they were in no position to refuse to sign.


The news was quickly given to the armies during the morning of 11 November, but even after hearing that the armistice was due to start at 11:00 a.m., intense warfare continued right until the last minute. Many artillery units continued to fire on German targets to avoid having to haul away their spare ammunition.


The exuberance with which people greeted the armistice quickly succumbed to feelings of exhaustion, relief, sorrow, and a sense of absurdity.

Rome burns while we watch the ceiling.

Aim for the sky and you'll reach the ceiling. Aim for the ceiling and you'll stay on the floor. - Bill Shankly

Disclosure: Nearly my entire nest egg continues to sit in long-term TIPS and I-Bonds. I intend to hold all until maturity.

Source Data:
FRB: Selected Interest Rates
US Treasury: Real Yield Curve Rates

Thursday, July 28, 2011

The Sarcasm Report v.116

July 28, 2011
5 Unforeseen Expenses That Can Ruin Retirement

1. Taking up an expensive hobby

That would be unforeseeable.

2. Upgrading your home

As I told you, it would be absolutely, totally, and in all other ways unforeseeable.

3. Bailing out an adult child


4. Caring for a parent


5. Supporting a special needs child


You keep using that word. I do not think it means what you think it means.

Wednesday, July 27, 2011

Complex Things

July 5, 2011
Experts warn of hidden danger of complex investments

Saker Nusseibeh and his team oversee investment for the giant BT pension fund and a string of other large funds. He despairs at the re-emergence of financial complexity.

"We are in the only industry that likes complexity," he said.

"In art or in science, the crowning rule is, 'the simpler it is the better'.

"It seems we have done exactly the opposite - the more complex a thing is, the better it is perceived to be.

"If we are making it further complicated, I question the motivation," he added.

Now what you need to do right now is avoid these six things. Trading options is not... shouldn't be difficult as long as you follow a proven principle and practice until you get it before you ever put any real money on the line.

I have no proven principle that allows me to always make money when trading against Goldman Sachs. I do have a rather simple phone that I have managed to master though. That's something I guess.

Tuesday, July 26, 2011

The Real Math Behind Siegel's Mythical 3.5% Real Yields

As economic growth recovers and real rates rise, the price of Tips will fall leaving Tips investors with large losses in the face of accelerating inflation. - Jeremy Siegel, February 2, 2011

How are we doing on that economic growth recovery theory of his? I would argue not so good. I would also point out that his rising real rate theory isn't doing so well either. 30-year TIPS rates have fallen 0.5% (from 2.1% to 1.6%) since he said that.

US Debt

US Total Debt: $55 Trillion (all forms)
US Income Taxpayers: 112 Million

If typical real yields permanently became 3.5% then the interest on the US total debt (all sources) would eventually become $1.9 trillion. Assuming we put that burden entirely on the US taxpayer's shoulders, that would work out to roughly $17,000 per year per US income taxpayer (in today's inflation adjusted dollars).

It doesn't end there though. These are inflation adjusted yields. If inflation averages 3.5% (3.6% over the last year) then the $17,000 would need to be doubled in nominal terms to $34,000.

Know many taxpayers that can afford to pay $34,000 per year just to service our debts? I don't. Assuming a miracle happened and the typical taxpayer could cough up $34,000 per year, then how do you suppose our many strip malls and restaurants would be doing?

Contrary to the opinion of Jeremy Siegel, clearly the era of 3.5% real yields is over. I have bet and continue to bet nearly all that I have that I am right on this and that he is wrong.

In my opinion, this can go only one of two ways from here and neither are rising real yield situations.

1. Since our economy can no longer support high real yields, low real yields are here to stay. Investors continually lower their expectations to adapt to the current reality. Think Japan.

2. Investors fear not getting paid back. Real yields appear to rise. It's a mirage though. Here's an example. You loan someone a dollar, they immediately pay you a 10% real yield on it, and then they skip town. What's your real yield once the dust settles? You started with a dollar and ended up with 10 cents. Your imaginary 10% yield turned into a 90% real loss.

Since the whole world is in this mess, I lean towards #1. In any event, I think it will become harder and harder to prosper off of our debt. It's just too big for that.

If we cannot prosper off of our debt any longer then we probably can't prosper off of our stock market any longer either. It's our debt that is propping it up. Too bad Jeremy Siegel can't see that. The prosperous
rear-view mirror has captivated him.

As I have said many times before, if I lose money in inflation protected securities then at least I won't be first. It is a strategy I often used when playing the
Game of Risk. This is also related to a quote I often use.

"If one must panic, at least panic first."

Few lost their nest egg being the first to panic out of an investment. I own TIPS. I intend to hold them until maturity. If I thought there was a good chance I'd panic in the future (and require an even greater fool), then I'd sell them right now. I do not consider them to be safe but I do consider them safer than most alternatives. Sometimes that's all that matters.

In sharp contrast, as of 2004 I do not own stocks nor do I intend to own them in the future. I think there will be many more opportunities to panic in the coming years.

I do not believe that the
"Mighty US can shake off the gloom." I've been bearish for nearly 7 years. It is my belief that our long-term financial condition continues to deteriorate. I'm more bearish now than when I started this blog in 2007. Name one macro condition that's better since then. I dare you. Here's a list to get you started. Sigh.

Stock prices?
Real estate prices?
Oil prices?
Pension fund solvency?
Real yields?


See Also:
More Dangerous Advice from Jeremy Siegel

Sunday, July 24, 2011

Peak Hamburger Prosperity (July 1999)

Click to enlarge.

I've adjusted the uncooked ground beef price index by the overall price index so that you can see a few long-term trends.

First the good news. Over the long-term ground beef prices have fallen compared to most items. See the red linear trend line. That's great if you like hamburger. It's still a relative bargain to what it was in the late 1940s and the 1970s.

Now the bad news. The cheapest relative point for ground beef was hit in July 1999. The trend since then has not been our friend. Ground beef prices have risen 46% since the bottom (in real inflation adjusted terms). That's an average of 3.2% per year above and beyond the rate of overall inflation.

There were few commodity speculators in 1999. That's no longer true.

July 24, 2011
Investors Raise Bullish Commodity Bets by Most in Year as Economy Expands

Funds boosted bets on rising commodity prices by the most in almost a year on speculation that the global economic recovery will prove resilient.

I don't share the optimism that the global economic recovery will prove resilient. I therefore don't trust commodity prices at these levels.

That said, I do think hamburger prosperity (or the lack thereof) has been tracking our overall prosperity fairly well for the last 30 years. Should the trend in hamburger prosperity since 1999 continue (which I do think is likely), then I would argue that it will not bode well for our future.

Using hindsight, here's what the so called financial "experts" were saying at about the time we hit peak hamburger prosperity.

February 29, 2000
The Winners of the New World (Jim Cramer)

First, any company that is a commodity producer simply can't be owned, no matter what.

April 17, 2000
Suze Orman Offers Straight Talk on the Stock Market

KING: You ever recommend commodities?
ORMAN: Never.
KING: Never?
ORMAN: Never.

Forehead. Desk. Whack. Whack. Whack.

Source Data:
St. Louis Fed: CPI

Wednesday, July 20, 2011

Wells Fargo Fined 1.6 Cents Per Share

July 20, 2011
Wells Fargo settles mortgage-abuse case for $85M

WASHINGTON (AP) - Wells Fargo & Co. has agreed to pay $85 million to settle civil charges that it falsified loan documents and pushed borrowers toward subprime mortgages with higher interest rates during the housing boom.

The fine is the largest ever imposed by the Federal Reserve in a consumer-enforcement case, the central bank said Wednesday.

Wells Fargo's market cap is $151.80B. Its share price is $28.70. The fine works out to the equivalent of 1.6 cents per share.

That Federal Reserve sure knows how to stop banks from falsifying loan documents and pushing borrowers into subprime mortgages in the future. This is in addition to the great work the Fed has done in stopping this behavior in the first place of course.

How will the executives at Wells Fargo (especially those with stock options) ever recover from this exorbitant penalty?


July 7, 2011
Man arrested for 40 bad checks

A Covington County man is being held on 40 counts of negotiating a worthless instrument. Judge Trippy McGuire set a $1 million cash bond.

Investigator Max Smith of the DA’s worthless check unit said 38-year-old Christopher Lewis didn’t discriminate in his distribution of bad checks.

He slung a bunch out there everywhere,” Smith said. “We had to get him off the street.

I had a point here but for the life of me I can't remember what it is.

Monday, July 18, 2011

The Sarcasm Report v.115

July 15, 2011
Dealing With Retirement Withdrawals in Bear Market

Financial planners traditionally suggested a simple rule of thumb: To avoid exhausting nest eggs, retirees should only withdraw about 4% of assets in the first year of retirement.

Okay, that's the traditional approach. So what does one do in a bear market? That is the title of the post. Right?

Investors can take initial withdrawals of more than 4% in an approach developed by Jonathan Guyton, a financial planner with Cornerstone Wealth Advisors in Edina, Minn. Guyton said that if you have 65% of your assets in stocks, you can take an initial withdrawal of up to 5.6% -- provided that you are prepared to trim withdrawals in hard times.

You're entering retirement. You've been participating in the stock market for the last decade. You think it's been in a long-term bear market. You're concerned that it will continue. That's why you are reading this article. Traditionally, you might have started with a 4% withdrawal. You're smarter now though. You're trying to factor in what long-term bear markets can do. So what's the safe solution?

Increase your initial withdrawal by 40% of course (from 4.0% to 5.6%)!

Sunday, July 17, 2011

The Sarcasm Report v.114

July 17, 2011
What happens to markets if the US defaults?

Wall Street isn't panicking yet. But if the unthinkable happens, a default could strike financial markets like an earthquake.

Has the mainstream media ever been able to predict the exact date and time of an economic crisis in advance? August 2nd is now circled on my calendar though. I've used a big red crayon. Maybe it is different this time.

That said, I do expect US debt downgrades in the coming months/years. I do not believe that the US Treasuries that I own should be AAA rated. I'd be surprised if anyone honestly does.

January 27, 2011
Japan’s Credit Rating Cut to AA- by S&P on Debt Load

Japan’s borrowing costs are among the lowest in the industrialized world, helping it fund its debt load. The yield on the benchmark 10-year bond slipped 1 basis point to 1.23 percent as of 10:47 p.m. in Tokyo. It touched 1.26 percent in Jan. 19, the highest since Dec. 16.

Just look at those soaring interest rates. 1.23%! Oh the humanity! And look what they've done since Japan's credit rating was cut.

Japanese Government Bonds

10-year: 1.09%

That's right. Rates fell. It's almost like the entire world is getting caught in a Keynesian stagnation trap. Yeah, it's almost exactly like that.

It's getting harder and harder to make money off of money. That's been a central theme of my blog from the start.

October 21, 2007
The Death of Real Yields

If the economy is so strong and healthy then why haven't higher real yields returned?

Using hindsight, apparently the economy was not so strong and healthy. Further, hindsight shows that the real yields of 2007 were actually pretty high, at least in comparison to what they are now. Go figure.

US Oil Consumption (Musical Tribute)

Click to enlarge.

I do not think we will ever return to the median trend line. That said, it does take more oil for people to commute to work. If employment picks up, it is technically possible I suppose.

Click to enlarge.

Perhaps Bernanke's printing press can create full employment while simultaneously driving up the price of oil? Wouldn't that be a miracle!

That brings us to the tribute. I do not think China will ever consume 2 barrels of oil per capita per month. Ever! That can mean only one thing. America! We won!

Warning: The following video contains some profanity but profanity (and gallows humor) is just what this tribute deserves.

Source Data:
EIA: US Crude Oil Supplied
St. Louis Fed: Population
St. Louis Fed: Civilian Employment
The X-12-ARIMA Seasonal Adjustment Program

Saturday, July 16, 2011

The Sarcasm Report v.113

July 15, 2011
The worst China mistake you can make

It's undoubtedly painful to have been an investor in any of the Chinese-listed companies that have been alleged to be or exposed as frauds over the past year.

Yeah, fraud does kind of suck. I'll give you that.

It's in the face of those losses that many Fools have asked me why we bother investing in individual Chinese companies at all.

I've got to admit that it does make me wonder. Glutton for punishment?

Spreading one's China-targeted investment dollars across enough companies so that no single blow-up can derail the entire investment approach should enable an investor to make money from China's growth (and some of the promising valuations available today) without having to fear that someone somewhere is lying about their books.

Isn't that the exact same rationalization that investors in the growing automobile and airline industries used? In hindsight, Warren Buffett said it would have been far better to short horses.

By all means keep trusting China. Just look at that stock market performance. It's only down 49% since the Chinese investors turned savvy. It's bound to make you a fortune someday.

And don't forget to get a Chinese nanny with all those fat profits!

That's one thing that never goes down. Chinese stocks. Yeah, I think I'm going to get a Chinese nanny just because I want, you know... I don't have kids yet but I want to reserve one. If I have kids in the future I just want to make sure I have a Chinese nanny.

Yeah, I know a lot of people are getting Chinese nannies so that their children can grow up and communicate with the business elite in China but I just think it would be better for their kung fu.

In all seriousness, I love that video. Calling his mom for stock advice? Trend line master? Chinese nannies? All of that content in just 2 minutes and 9 seconds? Genius! I'll do whatever it takes to boost his view count. He deserves better! :)

Friday, July 15, 2011

LA Area Port Traffic Is Stagnating Again

To the best of my knowledge, this is the only blog that seasonally adjusts the port traffic of Los Angeles and Long Beach. I do this so we can see unexpected changes in port traffic in nearly real time (by stripping out all the seasonal noise).

Note the blue circles in the following charts.

Click to enlarge.

I believe that it is absolutely impossible for inbound port traffic to ever return to the red trend line. The red line just keeps getting further and further away. This is yet another long-term exponential trend that has failed and will never recover.

Click to enlarge.

Our exports are beginning to stagnate. Unfortunately, it is entirely possible that exports return to the red trend line. All it would take is a global slowdown.

Click to enlarge.

Total port traffic is definitely stagnating again.

Stagnating port traffic is consistent with stagnating job creation.

Unfortunately, stagnating port traffic is not consistent with the exponential growth models that our economy and stock market seem to rely upon.

Guess what? I'm still perma-bearish.


Here's a bonus chart.

Click to enlarge.

How much dollar debasement would it take to balance cargo trade at 50%? The last three years haven't even made a dent. We're sitting right on the median value for the period.

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program

CPI Thoughts

July 15, 2011
Consumer Price Index Summary

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today.

The headline number wasn't all that surprising. I had been leaning deflationary. Check out those apparel prices though. Up 2.6% in just two months? Did the world just run out of cheap labor or something? I doubt it is sustainable, but wow. Perhaps my t-shirt, underwear, sneakers, and socks hoard (no joke) will finally start paying off, lol. Sigh.

In all seriousness, I do think cheap apparel (not the high end stuff with plenty of markup) is probably not going to keep getting cheaper over time (like it has). I could be wrong but that's why I hoarded it.

The big question is where the CPI goes from here.

The WTI spot price averaged $100.90 in May. It averaged $96.26 in June. That explains much of the deflation in the overall number. It is essentially unchanged in July so far ($96.55 average).

My short-term mood is still deflationary I guess (as seen in the upper left hand corner of my blog). You can probably sense my level of conviction. It isn't much.

I just don't trust that the global economy is strong enough to support $100 oil even with the "cash is trash" global monetary policies (and ours in particular). At the very least, I would expect oil's price to stagnate at these levels. Time will tell.

In any event, I don't make investments based on the short-term. I own TIPS which are directly tied to the CPI. I lost 0.2% in nominal terms based on this report. I'm fine with that. All I care about is purchasing power. As I've said here repeatedly, I own inflation protected treasuries but I do not root for inflation. All I get from higher inflation is extra taxation (on the gains) and reduced real purchasing power.

I consider this to be a tame CPI report and one that won't keep me up at night. I'm thankful for that.

Trivia: We had 11 straight months of seasonally adjusted CPI increases. June broke the streak.

Thursday, July 14, 2011

The New Contagion Risk

July 15, 2011
Why I’m lightening up on stocks for good

Obviously I’ve had a good run and don’t want to push my luck. But more importantly I’ve been looking at some research that defies the conventional wisdom that investors should keep a lot of stock in their portfolios even as they age, because only stocks protect investors against inflation and outliving their nest eggs.

That concept — the need to hold a lot of stock at all stages of life — may be the single most wrong-headed idea in investing now. Retirees who took the advice of many financial planners had 60% to 70% of their assets in stocks when the financial crisis hit. Those who couldn’t hold on may have suffered irreparable losses.

I got completely out in 2004. I have no desire to return. My disease may be spreading.

When I say disease, I mean it literally using the origination of the word. Owning stocks puts me in a "without ease" state. It's uncomfortable. I don't sleep well.

Wednesday, July 13, 2011

An Open Letter to My Congressperson

Dear Congressperson,

I'm worried about you. Knowing that you are honest and ethical, you would surely cut your own pay before that of senior citizens relying on Social Security checks. The toll it will take on your personal finances is just too much for me to bear.

I therefore offer you a way out and it is one you have probably not considered. It might seem a bit sleazy in fact, but desperate times call for desperate actions. Please forgive me.

If you meet behind closed doors in the 11th hour and find a solution at the last possible second, then each and every one of you can come out looking like heroes.

Here's to a successful debt launch. Let's get it into orbit and eventually land it on the moon. We're all counting (down) on you. You are our last hope.

Yours truly,
Stagflationary Mark

I-Bond Investors Get Shafted Yet Again

July 13, 2011
Treasury to End Over-the-Counter Sales of Paper U.S. Savings Bonds; Action will save $70 million over first five years

"Savings bonds are very much a part of this country's history and culture, and will remain a part of America's future – but in electronic form," said Public Debt Commissioner Van Zeck. "It's time for us to take a 1935 model and make it a 21st century investment tool."

I love the 1935 reference. That really makes me feel good about our future. It's always nice to be reminded of the Great Depression, but especially as it relates to debt.

You know what else makes me feel good? All this modernization!

One way they modernized I-Bonds was to reduce the amount we can buy from $60,000 per year ($30,000 in online bonds and $30,000 in paper bonds) to $10,000 per year ($5,000 in online bonds and $5,000 in paper bonds). That was announced in

They then re-modernized them by reducing the amount to $5,000 per year ($5,000 in online bonds only starting on January 1, 2012). That's a 92% total reduction in the amount of I-Bonds we can buy each year. It is even less if one factors in what inflation is doing to the fixed $5,000 limit.

This is in addition to the modernizing they have done by reducing the amount of interest paid on new purchases from 3.6% over inflation in 2000 to 0.0% over inflation today. This was done to more closely match the modern real yield investments of the 21st century. For example, today's 5-year TIPS yield of negative 0.54% makes I-Bonds a modernized screaming bargain right now.

Isn't the new "21st century investment tool" economy fun! There are so many modern investments and so many modern tools!

Disclosure: I have over 25% of my net investment worth (not counting my house) sitting in I-Bonds. Unlike most investments the seller really wants me to stop buying though. It's like the horses are escaping and they are desperately attempting to nail the barn doors shut. Go figure.

Special thanks to Anonymous for pointing this news story out to me in the comments of the previous post.

The Sarcasm Report v.112

Forbes must hate math. It's the only thing that makes sense.

If I buy a 30 year TIPS and hold it until maturity and you tell me what the CPI and taxes will do over the period then I can use math to determine exactly what I will get as a return (right down to the last penny). How can I do this? TIPS are directly to the CPI (100% correlation) and I kind of like math.

So imagine my surprise when I read the following.

July 13, 2011
Forbes: Worried About Inflation? TIPS Aren’t The Answer

The problem is, Cutwater’s research shows that TIPS have zero correlation to inflation.

Fascinating. Forbes is claiming that inflation linked treasuries have no correlation to inflation. I'm having the same reaction one would have if Forbes declared that gravity has zero correlation to falling objects.

I'm not done yet though. There's much more to be sarcastic about.

Corso figures a 10-year TIPS could lose 10% or more of its value if real rates double to their historical norm of about 3%. Until recently, real rates tended to track overall growth in Gross Domestic Product.

First of all, if I buy a 10-year TIPS and hold it until maturity then I will not lose so much as a penny if real rates double. I will have simply lost the opportunity to do better. That's all. No big deal. Not only that, but I even root for that outcome. It would mean that when the TIPS in my bond ladder mature then I could reinvest them at a higher rate. What's not to like?

Secondly, what if I don't expect real GDP to grow like it has historically? Knowing that real rates tend to track the real growth of GDP, the real growth of GDP tends to track employment growth, and I can prove that employment growth will not rise like it has historically, then what might I expect real rates to do in the future?

You'd think I'd be done heckling but you'd be wrong. The sarcasm was just getting warmed up for the grand finale.

One remaining rule: Under no circumstances go beyond 10 years.

Yes. By all means sit in short-term investments to meet your long-term needs. Do not take advantage of the steep yield curve to lock in higher long-term rates. Don't worry about the long-term future. Things are bound to get miraculously better once we get through this soft patch (of quicksand).

I've been betting on falling real yields for a decade under the assumption that it would become increasingly difficult to make money off of money. It was just over a decade ago that I first embraced TIPS and I-Bonds. For what it is worth, I continue to do so. Growth has been lousy over the last decade. Real rates are therefore justifiably low. I don't expect the next decade to be much (if any) better. In fact, it could easily be worse.

We're told over and over again to avoid long-term TIPS. I have avoided that advice each year and have been rewarded for doing so. That was especially true this year.
Thanks Jeremy Siegel! Not one of the TIPS in my bond ladder is currently underwater, not that it matters. I only track the inflation adjusted principal. I do not track what the market claims they are worth. I know what they are worth to me.

Perhaps I am wrong. Perhaps this economy is about to generate enormous "real" prosperity for the typical middle class American worker. I put the odds of that happening slightly higher than a snowball's chance in hell though. Barring that I tend to place my long-term bets on the combination of inflationary World War II, the inflationary 1970s, and deflationary Japan though. That's why I like long-term TIPS. It's the same reason I hoard toilet paper (and why I once hoarded gold and silver). It is my way of locking in a current standard of living for what I see coming.

And lastly, if you are willing to lock in a current standard of living then even
0.0% real rates on I-Bonds don't look so bad. At the very least, it's a better rate than most short-term investments.

Tuesday, July 12, 2011

The Trend Is Your (Saver's) Nightmare

Click to enlarge.

The rate on 5-year TIPS hit -0.54% today. That's a new low.

I suppose you could try waiting for a return to "normal" and/or greener pastures. Good luck on that one.

Where's the recovery in real yields like we saw in 2005-2007? It seems to be missing in action.

Source Data:
FRB: Selected Interest Rates
U.S. Treasury: Daily Treasury Real Yield Curve Rates

Bond Investors Have Been Warned

June 24, 2011
What would a Default on U.S. Debt Look Like?

Bond investors have been warned to stick with shorter-dated U.S. debt like short-term 1-5 year TIPS (NYSEArca: STPZ) and short-term 1-3 year Treasuries (NYSEArca: SHY).

Generally speaking, have investors been rewarded by heeding the warnings offered by mainstream financial entities?

You will note that the following contrarian warning is not mentioned.

Short-term TIPS earn -0.5% per year for the next 30 years, inflation averages 6% over the period, and investors sit in the 28% tax bracket. What happens in that scenario?

((1+(0.06-0.005)*(1-0.28))^30)/((1+0.06)^30) = 0.56

The government manages to confiscate 44% of the purchasing power due to negative real yields and the taxation of inflationary gains. Think it can't happen? In the grand (ponzi) scheme of things, real yields of -0.5% and inflation of 6% are nothing. It could get much worse (think the 1970s and World War II).

Our generation has never seen such a confluence of financial troubles with far-reaching consequences. The U.S. government’s dubious fiscal situation presents a whole slew of unfamiliar problems. And preparing your investment strategy for these pitfalls ahead of the storm is the wise course.

What good would come of sitting in 5-year TIPS if our economy is even worse off 5 years from now and real yields continue to die? What's the plan if 5-year TIPS are yielding -1% at that time and we're stuck in a stagflationary mess? What would be done with the proceeds? Reinvest? Capitulate? Panic into gold at any price? All of the above?

Say what you will about gold investors (I personally think gold is overvalued, compared to toilet paper and other basic necessities anyway), but at least many understand the importance of matching long-term investments with long-term problems (especially those who bought gold a decade ago and are still holding it).

Disclosure: I own short-term TIPS, long-term TIPS, and long-term I-Bonds as part of a relatively balanced long-term bond ladder. Right or wrong, other than some cash and a home, that's pretty much all I own. Call me bearish (and not just for the short-term).

Monday, July 11, 2011

The Morning After (Musical Tribute)

July 11, 2011
Stocks sink on fresh fears about global economy

NEW YORK (AP) -- Stocks fell sharply Monday as investors feared that Europe's debt crisis would spread.

I thought that all the subprime problems had been contained. Who knew!

I do have some good news.

To the delight of my readers, my
last post has finally been replaced. MaxedOutMama hoped that I "replaced the top post" because "that graph hurts the eyes and the mind behind them." Watchtower said that a "feel-good soundtrack song is probably not going to be enough this time."

Mission accomplished! Two birds! One stone! Woohoo!

By comparison, this post has all the biscuits, gravy, and free lunches one can stomach. Enjoy!

And lastly, just look at those real yields (TIPS) today. Their death continues. This has definitely been one of my better calls of the last decade. 1.59% on the 30-year TIPS? Seriously? As Yogi Berra would say, "it's deja vu all over again." Thank you stock market bulls for allowing me to get 2.19% in February's auction. I'll be holding until maturity more than likely. That's how confident I am about our long-term future. Sigh.

Friday, July 8, 2011

38.5 Million Missing Jobs

Click to enlarge.

This chart shows the employment trend from 1939 to 2000. It also extrapolates that trend to the present.

This exponential trend has failed. No amount of wishful thinking is going to bring employment back to the trend line.

Click to enlarge.

This chart shows the difference between the long-term trend and our current non-farm payroll employment. We're 38.5 million jobs below trend now. That's up 300,000 from last month's 38.2 million missing jobs.

Captain Ben Bernanke thinks he can guide this economic ship into a safe harbor. It's going to be an adventure.

That's the way out. That's our only chance.
Don't listen to him! We've got to stay here 'til help arrives!
Help from where? From the captain? He's dead.

Source Data:
St. Louis Fed: All Employees: Total nonfarm

Thursday, July 7, 2011

A Sign of the Times: Restaurant Fraud

July 7, 2011
Study: Salmon served in some Puget Sound restaurants often mislabeled

More than 38 percent of restaurant samples tested by students in the UWT’s introductory biology classes were mislabeled, said Erica Cline, assistant professor in the university’s environmental program.

For what it is worth, I remain bearish on our restaurant industry.

Ray Riutta, Alaska Seafood Marketing Institute executive director, said the mislabeling, whether intentional or accidental, is cheating both the customer and the seafood industry.

Was king salmon ever accidentally served instead of farm-raised fish? Somehow I kind of doubt it.

The Sarcasm Report v.111

July 7, 2011
Why the bulls still have room to run

"Really, the recovery that's now 3 years old is just too young to die," Mirhaydari says.

Now you'll want to be one of the first to have your own flying superman so listen carefully 'cause here's all you do to get yours.

Wednesday, July 6, 2011

Gold's Stagnationary Path?

July 6, 2011
The Path to $5,000 Gold

The author lays out 2 scenarios. One shows how gold gets to $5,000. The other shows how gold gets to $500.

I offer a 3rd scenario. It is a combination of the two extremes he's offered. It is what you get when you multiply the gold price by three and divide it by three. Let's call it investment stagnation.

1. U.S. bonds do not lose status. Rates do not rise.
2. There will continue to be a lender of last resort.
3. The big banks continue to be too big to fail.
4. The majority of investors do not become desperate to own hard assets at any price.
5. The U.S. government does not address its fiscal problems.
6. The U.S. economy does not achieve escape velocity.
7. Employment does not meaningfully improve.
8. China does not engineer a soft landing.
9. Global macro imbalances continue.
10. Richly priced gold struggles to track moderately rising inflation. New investors are disappointed that gold ceases to become a money making venture and those shorting it also find disappointment.

I don't wish to place odds on this outcome but I do think it is much more likely than either of the two extreme scenarios that the author has offered.