Wednesday, July 13, 2011

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.


Stagflationary Mark said...

As a side note, avoiding Jermey Siegel's "dangerous advice" back in February gave me a 15% gain. That's what the market thinks the 30-year TIPS I bought back then made me as interest rates declined. He compared my (upcoming) purchase to investing in dotcom stocks (even though I am guaranteed to get inflation adjusted principal back plus interest).

It does not make me richer though. I'm still holding until maturity. What the market thinks my bonds are worth therefore doesn't affect me unless I'd be forced to sell them early.

mab said...


Only fools need to sell to a greater fool.

Oooh, I almost forgot. Jeremy Siegle is an imbecile.

Stagflationary Mark said...


Only fools need to sell to a greater fool.

Sounds like a great book idea.

Needing to Sell for Dummies

It would no doubt capture the attention of everyone who needs to sell something (be it frustrated homeowners or appliance salesmen).

EconomicDisconnect said...

What could go wrong funding long term needs with short term vehicles? Oh, wait......stuff did go wrong.

Stagflationary Mark said...


Hahaha! Nicely put.

Stagflationary Mark said...

Speaking of funding long term needs with short term vehicles...

July 13, 2011
Texas County Pension Boosts Hedge Fund Investments

The Texas County & District Retirement System in March boosted its absolute return target from 15% to 20%, and wasted no time in spending that increase.

I sure wish I could assume 20% returns from here on out. Just think of the biscuits and gravy I could buy! Woohoo! ;)

Mr Slippery said...


This Hoisington report is quite interesting and related.

Their biz is long term treasuries and they reproduce an interesting formula for calculating the interest rate based on future surpluses and government spending. They expect rates to stay low for now, but can see a rise if a political solution is not found.

I feel like a doom prophet this week walking around with a sign. I don't like it. Chicks don't like it (not even Mrs. Slippery). But what can I do?

I'd rather things not unravel this year.

Stagflationary Mark said...

Mr Slippery,

The last paragraph of your link...

While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern, therefore we remain fully committed to the long end of the Treasury bond market.

That is absolutely consistent with my own thoughts.

1. I am currently a short-term deflationist (as seen in my inflation mood in the upper left hand corner of the blog) and it is my largest concern. I don't bet on the short-term though. The long-term seems easier.

2. I do worry about rising interest rates long-term. That's why I don't own long-term nominal bonds. While I don't expect the interest rates of the 1970s to necessarily repeat, I appreciate the insurance that TIPS provide.

3. I don't worry nearly as much about rising real interest rates long-term. That's another reason why I like TIPS.

From my perspective, I do not see interest rates rising without inflation rising too. Even during hyperinflation, real interest rates tend to be seriously negative. Nobody makes money off of money in such an environment.

Put another way, I doubt the world has ever heard...

"Inflation is running at 100% per year but that's okay! I'm earning 200% in bonds! I'm making out like a bandit! Woohoo!"

Stagflationary Mark said...

I feel like a doom prophet this week walking around with a sign. I don't like it. Chicks don't like it (not even Mrs. Slippery). But what can I do?

Sign idea.

I'm not okay, you're not okay.

Perhaps you are right. Chicks probably wouldn't like it, lol. Sigh.

MaxedOutMama said...

Mark, I wish to thank you very sincerely for the new posts. I like your blog very much, but that jobs graph was sending me to the Nexium, and it's kind of expensive!

I think the first through third questions you have to ask yourself to determine a workable investment strategy are when do I want the money, and when do I want more money and what do I want the money for?

So one brightline for us all is that if people are doling out investment advice with no consideration of those questions, they're just selling something.

Anonymous said...

Hey Mark,

The US Treasury announced today they're doing away with paper I-bonds. According to some people on the boglehead forum who wrote to the treasury, they just cut our annual purchase limit in half. From $30000 to $10000 to $5000 to ????

Stagflationary Mark said...


...that jobs graph was sending me to the Nexium...

So one brightline for us all is that if people are doling out investment advice with no consideration of those questions, they're just selling something.

(Thank GOD you did not ask me who the Vice President in charge of Nexium sales for the Pacific Northwest is. I nearly thought you had me there.)

I assuming that we're all still honoring the idea that statements made within parentheses are considered to be private thoughts and are not meant to actually be read of course.

(Oh please please please let that be the case!)

Stagflationary Mark said...


Thank you VERY much for calling that to my attention.

It turns out that the limit was actually $10,000 since you could buy $5,000 in online bonds and $5,000 in paper bonds.

So we've technically gone from $60,000 per year to $10,000 per year to $5,000 per year.

That's a 92% reduction in paper safe stores of value in the past few years. That's in addition to the 3.4% real rate of 2000 dropping to 0.0% these days of course.

Anonymous said...

No problem Mark.
I've been maxing out on both paper and TD purchases for as long as I've been able to swing it. I'm not happy about this. I guess our leaders would rather be in hock to the Chinese and Saudis that US citizens...

Stagflationary Mark said...


There is one bright spot to this at least.

They would not be trying to stop us from buying I-Bonds if they did not intend to honor the ones they've already sold us.

Stagflationary Mark said...

I just did an I-Bond post based on this news.

dearieme said...

I used to worry that an investment linked to price inflation would have the disadvantage that it would lag behind earnings inflation. I doubt if that's a worry any more.

Stagflationary Mark said...


I still worry about it a bit, but mostly only if we were to hyperinflate.