morekaos_IHB
New member
Cap, I am on your side with this one. I have been a big TIP buyer for the last 6 months. So far so good
Stock Market Day-Trading Discussion Thread
- Thread starter usctrojanman29_IHB
- Start date
NEW -> Contingent Buyer Assistance Program
Maybe...
TIPS may be a good trade if you a trader, but they are a terrible investment fo anyone tryng to hedge against inflation over a long time. They are a guaranteed loss. Real price inflation is always more than TIPS will pay, so the owner is always losing purchasing power.
If it is widely known that CPI underestimates price inflation, than the foolish investment is anything using CPI as an index, including TIPS.
Many things are part of the investable universe. And for those who trade, they can be a great trade, but that does not translate into a good long term investment.
More - You trade them. Different animal.
I don't believe they are a terrible long term hold as an inflation hedge. I suggest that CPI may understate inflation by only a modest amount say 1-2%. If you look at your personal consumption basket you may find that this figure most closely matches your expenditures. Assuming this is the case, then the real yield on TIPS can be appropriately discounted, yet in reality investors will achieve a real return adjusted for the adjusted inflation figures (assuming the relationship holds constant). This ability to eliminate the consideration of inflation from the investment is precisely the reason TIPS are so attractive.
They are the true risk free asset.
When determining strategic investment it is essential to consider the alternatives. Within the investable universe I can think of two things that are positively correlated to inflation: commodities and ILBs (e.g. TIPS). Equities get crushed in inflationary times as the vast majority of companies are unable to pass along cost increases in a timely fashion and are faced with decreasing margins because of the lag (along with a host of other factors). Just look at the performance of the S&P over the period of 1960 to 1980. Meanwhile inflation, as measured by CPI, ran wild. Being able to lock in a 1.5-2.0% return above reported CPI, exactly what TIPS offer, seems pretty damn attractive compared to what happened in equities.
Again dismissing TIPS because you believe that CPI is innaccurate is dependent on the belief that CPI is fallacious to the point of being utterly useless, and that the difference is not only one of degree but direction. I don't share either of those views.
Again, my original post on this topic was to ensure that misinformation regarding TIPS structure was not perpetuated. It is pretty clear that that no one cares. Fine. I won't waste anymore of anyones' time.
We all knew CPI underestimate inflation, by how much and is open for debate, but by looking at your grocery bills and checking out prices at gas pump, you probably will get some idea, for example, as CPI for the last 2 months are pretty much flat (0%-0.1%), gas price doubled, so go figure.
And lets assume CapitalismWork's "SUGGESTION" 1-2% underestimate is correct, I attached 2 screen shots from bloomberg illustrated the spreads for the last 20yrs,
1. Buy CPI/TIPs and sell dollar, you will realized a median spread of 66 pts (0.66%, WHICH IS FAR LESS THAN THE 1-2% SUGGESTED)
2. Buy Gold and sell dollar, you will realized a median spread of 279 pts (2.79%)
Case Closed
Attached files
That has worked well. I guess zero BEI does make sense. Negative inflation accruals may be a problem over the next couple of quarters if Oil pulls back (and I think it should), but you don't have worry about rising growth so real yields should remain relatively low. Personally, I love intermediate and long TIPS as 2.5%+ real. Its easy safe money.
Best environment for TIPS is stagflation.
This is a great debate. Just curious, but what is your view on why Oil will pull back? I have been hearing the same thing (price going down), but based on what I understand on the fundamentals for oil, I believe the price in US dollars will be going up.
Despite the products you listed above as being lower in price, I have seen the price of food and gas continuing to creep up. All of the things that I need on a daily basis are rising in price (except milk
).
Based on the 7% premium actual inflation is running above CPI, according to shadowstats, I can't think of a single unlevered investment that is going to beat "inflation" over the next decade. We are DOOMED!
"According to Shadowstats" is according to the Treasury before hedonics and other manipulations. Can you show that Shadowstats is incorrect? Has anyone shown Shadowstats to be incorrect? Your "We are DOOMED" is nothing more than pounding the table when you have no valid argument.
Gold may not beat price inflation, but it will maintain purchasing power better than most other investments. You are correct that there is no risk with TIPS, because they are guaranteed to lose and there is no risk for a certain loss.
First, I am almost certainly better at talking about making money than I am at making it. Though I am really good at not losing money.
Second, though I appreciate the invite, restrictions prevent me from providing any trading details. I am not 100% sure if such a game would run afoul of the rules, but I'd rather not take a chance.
I don't think the Shadowstats number accurately reflect inflation.
Again as I mentioned there are a whole list of things that are cheaper. Consider that a change in the consumption basket.
Substitutions in the consumption basket so actually keep overall costs down, and I use them everytime I go to store. I buy what's on sale. If they have a special on Rib-Eyes I buy the rib-eyes, if hamburger is on sale I buy the hamburger (min 20% fat and no ground sirloin please). Though I may lose choice, and perhaps that lack of choice equates to a lower standard of living, I don't see the harm in substitutions so long as they capture actual buying habits and aren't unidirectional in quality.
Hedonic adjustments appear to be BS, however there are a long series of compelling arguments for these adjustments.
Shadowstats figures are pure commodities figures, as best I can tell. Obviously input costs are a component of end inflation, but they are not the whole story. Shadowstats are needlessly gaming the inflation story by focusing on the most volatile sectors, while ignoring the end user cost saving provided to buyers of finished good through increased efficiencies (and that is just part of the story).
I would go on but I have more to do. Suffice it to say Shadowstats is not gospel.
I dip my toe into FAZ last week $4.32, looking to add more if this sucker rally continues, gold is consolidating as expected, looking to get back into DGP/SLV when gold gets around 900.
upperlowerclass_IHB
New member
irvine_grad said:norcaljeff said:This thing has slowed down so there's either no interest because the rally is mostly over or people aren't making easy moneyI've done well on oil and gasoline. Stayed away from everything else except TIPS.
What's causing the oil runup? I thought OPEC left output the same and was thinking about increasing it?
Maybe...
BondTrader_IHB
New member
To all, I'm simply stating the FACT that CPI is not a very good indicator about inflation and TIPs aint going to fully hedge you in a high/hyper inflation environment. Commodities like Gold, Sliver and Copper are much better alternatives against inflation. And again, at the moment, deflation is still the main scene but we will see inflation start creeping up asap this economy truly turns around, God knows when.
usctrojanman29_IHB
New member
Looks like the S&P is in rally mode and wants to hit 1,000 before the end of June. The higher and faster this thing goes up, the harder it's gonna come down.BondTrader said:
awgee_IHB
New member
CapitalismWorks said:
TIPS may be a good trade if you a trader, but they are a terrible investment fo anyone tryng to hedge against inflation over a long time. They are a guaranteed loss. Real price inflation is always more than TIPS will pay, so the owner is always losing purchasing power.
If it is widely known that CPI underestimates price inflation, than the foolish investment is anything using CPI as an index, including TIPS.
Many things are part of the investable universe. And for those who trade, they can be a great trade, but that does not translate into a good long term investment.
More - You trade them. Different animal.
CapitalismWorks_IHB
New member
awgee said:
I don't believe they are a terrible long term hold as an inflation hedge. I suggest that CPI may understate inflation by only a modest amount say 1-2%. If you look at your personal consumption basket you may find that this figure most closely matches your expenditures. Assuming this is the case, then the real yield on TIPS can be appropriately discounted, yet in reality investors will achieve a real return adjusted for the adjusted inflation figures (assuming the relationship holds constant). This ability to eliminate the consideration of inflation from the investment is precisely the reason TIPS are so attractive.
They are the true risk free asset.
When determining strategic investment it is essential to consider the alternatives. Within the investable universe I can think of two things that are positively correlated to inflation: commodities and ILBs (e.g. TIPS). Equities get crushed in inflationary times as the vast majority of companies are unable to pass along cost increases in a timely fashion and are faced with decreasing margins because of the lag (along with a host of other factors). Just look at the performance of the S&P over the period of 1960 to 1980. Meanwhile inflation, as measured by CPI, ran wild. Being able to lock in a 1.5-2.0% return above reported CPI, exactly what TIPS offer, seems pretty damn attractive compared to what happened in equities.
Again dismissing TIPS because you believe that CPI is innaccurate is dependent on the belief that CPI is fallacious to the point of being utterly useless, and that the difference is not only one of degree but direction. I don't share either of those views.
Again, my original post on this topic was to ensure that misinformation regarding TIPS structure was not perpetuated. It is pretty clear that that no one cares. Fine. I won't waste anymore of anyones' time.
BondTrader_IHB
New member
CapitalismWorks said:
We all knew CPI underestimate inflation, by how much and is open for debate, but by looking at your grocery bills and checking out prices at gas pump, you probably will get some idea, for example, as CPI for the last 2 months are pretty much flat (0%-0.1%), gas price doubled, so go figure.
And lets assume CapitalismWork's "SUGGESTION" 1-2% underestimate is correct, I attached 2 screen shots from bloomberg illustrated the spreads for the last 20yrs,
1. Buy CPI/TIPs and sell dollar, you will realized a median spread of 66 pts (0.66%, WHICH IS FAR LESS THAN THE 1-2% SUGGESTED)
2. Buy Gold and sell dollar, you will realized a median spread of 279 pts (2.79%)
Case Closed
Attached files
BondTrader_IHB
New member
For clarification
DXY = Dollor Index
CPI Index =
GOLDS Comdty = Gold Spot Price
Median Spreads as showing in right hand column
DXY = Dollor Index
CPI Index =
GOLDS Comdty = Gold Spot Price
Median Spreads as showing in right hand column
CapitalismWorks_IHB
New member
Case Closed? Please notice the HUGE difference in standard deviation between GOLD and CPI charts. On a risk adjusted basis it is pretty plain that explcit exposure to CPI is a whole lot less volatile, and provides a very very stable upward trend. Gold has had a good run over the past near decade, as has the rest of the commodities complext. However the fact remains that Gold is All Over the Map. Perhaps volatility doesn't matter in your portfolios. It does in mine.
Please note that TIPS pay a premium above inflation. As of today, thanks to a little backup in the market, 10-year TIPS are yielding 1.8% real. That mean CPI + 1.8%. That goes along way toward eliminating the spread advantage you highlighted for GOLD, and at, using CPI as a proxy, 11% the VOL!!!
TIPS are Treasuries for Pete's sake, they are the true risk free asset
Again my point was that Gold is a better tool for hedging a falling dollar than rising inflation (thanks for helping illustrate that point). Over that period the GOLDS has a Beta of -0.25 while CPI was at -0.17 to the dollar. Now GOLD has done extremely well in inflation environments. Though, I ran the same charts from '67 to '80, and whew GOLD was terrfic! But since we left the gold standard in '71 that sampling period is not without bias.
I think TIPS are easy to misunderstand and dismiss, but as a fixed income instrument they are unique. As a inflation hedging instrument they are unique (remember gold's returns are only correlational with inflation, TIPS are explicit). Now we can argue about the accuracy of CPI as a proxy for inflation. You mentioned the groceries example, but I can think of a large portion of my consumption basket that has gone DOWN in price.
1) I rent movies exclusively from RedBox. As a result I have lowered my per movie cost ~75% over rates I paid for the last decade
2) I have paid more than $180 for a pair of shoes in 10 years. Same price a decade ago. Cole Haan, J&M and Allen Edmunds.
3) I pay less for dress shirts, thanks to Costco, than ever. At $16/shirt for Kirkland shirts I have cut by 2/3s what it used to cost to get a reasonable daily shirt (and they don't look all that bad). Same for underpants, socks, and T-shirts Costco is the place.
4) I pay less for rent now than I have in 5 years, and for the same or more square footage in the same zip code (though this is a recent development and not yet a trend)
5) I recently bough a 17 inch HP laptop for under $1000. I paid more than $2K for a 133mhz desktop in college.
Attached files
Please note that TIPS pay a premium above inflation. As of today, thanks to a little backup in the market, 10-year TIPS are yielding 1.8% real. That mean CPI + 1.8%. That goes along way toward eliminating the spread advantage you highlighted for GOLD, and at, using CPI as a proxy, 11% the VOL!!!
TIPS are Treasuries for Pete's sake, they are the true risk free asset
Again my point was that Gold is a better tool for hedging a falling dollar than rising inflation (thanks for helping illustrate that point). Over that period the GOLDS has a Beta of -0.25 while CPI was at -0.17 to the dollar. Now GOLD has done extremely well in inflation environments. Though, I ran the same charts from '67 to '80, and whew GOLD was terrfic! But since we left the gold standard in '71 that sampling period is not without bias.
I think TIPS are easy to misunderstand and dismiss, but as a fixed income instrument they are unique. As a inflation hedging instrument they are unique (remember gold's returns are only correlational with inflation, TIPS are explicit). Now we can argue about the accuracy of CPI as a proxy for inflation. You mentioned the groceries example, but I can think of a large portion of my consumption basket that has gone DOWN in price.
1) I rent movies exclusively from RedBox. As a result I have lowered my per movie cost ~75% over rates I paid for the last decade
2) I have paid more than $180 for a pair of shoes in 10 years. Same price a decade ago. Cole Haan, J&M and Allen Edmunds.
3) I pay less for dress shirts, thanks to Costco, than ever. At $16/shirt for Kirkland shirts I have cut by 2/3s what it used to cost to get a reasonable daily shirt (and they don't look all that bad). Same for underpants, socks, and T-shirts Costco is the place.
4) I pay less for rent now than I have in 5 years, and for the same or more square footage in the same zip code (though this is a recent development and not yet a trend)
5) I recently bough a 17 inch HP laptop for under $1000. I paid more than $2K for a 133mhz desktop in college.
Attached files
CapitalismWorks_IHB
New member
morekaos said:
That has worked well. I guess zero BEI does make sense. Negative inflation accruals may be a problem over the next couple of quarters if Oil pulls back (and I think it should), but you don't have worry about rising growth so real yields should remain relatively low. Personally, I love intermediate and long TIPS as 2.5%+ real. Its easy safe money.
Best environment for TIPS is stagflation.
ukyo116_IHB
New member
CapitalismWorks said:
This is a great debate. Just curious, but what is your view on why Oil will pull back? I have been hearing the same thing (price going down), but based on what I understand on the fundamentals for oil, I believe the price in US dollars will be going up.
Despite the products you listed above as being lower in price, I have seen the price of food and gas continuing to creep up. All of the things that I need on a daily basis are rising in price (except milk
).
CapitalismWorks_IHB
New member
The price increases in ice cream are most infuriating. Watching prices increase while the size of the container shrunk from half-gallon to 1.5 quarts is obscene.
As for oil, the last time I checked 2006 and 2007 were the first back to back years in more than a decade where consumption was greater than supply. This seemed to be a pretty strong fundamentals based case for higher prices. However, at $140+ a barrel the cost was more than 2x the highest cost of production (tar sands are generally profitable at $65/barrel), so the pullback was obvious.
At present the case for a 20%+ price decline is far less clear. New supply is not coming to market at unprofitable marginal price levels. However, the global economy is going nowhere for some time. With miles driven in the U.S. down in 2008, and slowly increasing on lower gas prices in 2009, domestic demand is still below peak levels. With rising unemployment less people will be commuting (or having money in their pockets to but gas, or cars for that matter). Historically commodities prices have been closely linked to the business cycle with peak commodities prices occuring after the peak of the business cycle. I think the recovery is some ways off, and housing plays a big role in my pessimistic view. Finally, prices recently appear to have been moving upward based on jawboning from Saudi/OPEC oil ministers, who are doing nothing new with supply.
As for oil, the last time I checked 2006 and 2007 were the first back to back years in more than a decade where consumption was greater than supply. This seemed to be a pretty strong fundamentals based case for higher prices. However, at $140+ a barrel the cost was more than 2x the highest cost of production (tar sands are generally profitable at $65/barrel), so the pullback was obvious.
At present the case for a 20%+ price decline is far less clear. New supply is not coming to market at unprofitable marginal price levels. However, the global economy is going nowhere for some time. With miles driven in the U.S. down in 2008, and slowly increasing on lower gas prices in 2009, domestic demand is still below peak levels. With rising unemployment less people will be commuting (or having money in their pockets to but gas, or cars for that matter). Historically commodities prices have been closely linked to the business cycle with peak commodities prices occuring after the peak of the business cycle. I think the recovery is some ways off, and housing plays a big role in my pessimistic view. Finally, prices recently appear to have been moving upward based on jawboning from Saudi/OPEC oil ministers, who are doing nothing new with supply.
CapitalismWorks_IHB
New member
awgee said:
Based on the 7% premium actual inflation is running above CPI, according to shadowstats, I can't think of a single unlevered investment that is going to beat "inflation" over the next decade. We are DOOMED!
awgee_IHB
New member
CapitalismWorks said:
"According to Shadowstats" is according to the Treasury before hedonics and other manipulations. Can you show that Shadowstats is incorrect? Has anyone shown Shadowstats to be incorrect? Your "We are DOOMED" is nothing more than pounding the table when you have no valid argument.
Gold may not beat price inflation, but it will maintain purchasing power better than most other investments. You are correct that there is no risk with TIPS, because they are guaranteed to lose and there is no risk for a certain loss.
CapitalismWorks_IHB
New member
awgee said:
First, I am almost certainly better at talking about making money than I am at making it. Though I am really good at not losing money.
Second, though I appreciate the invite, restrictions prevent me from providing any trading details. I am not 100% sure if such a game would run afoul of the rules, but I'd rather not take a chance.
CapitalismWorks_IHB
New member
awgee said:
I don't think the Shadowstats number accurately reflect inflation.
Again as I mentioned there are a whole list of things that are cheaper. Consider that a change in the consumption basket.
Substitutions in the consumption basket so actually keep overall costs down, and I use them everytime I go to store. I buy what's on sale. If they have a special on Rib-Eyes I buy the rib-eyes, if hamburger is on sale I buy the hamburger (min 20% fat and no ground sirloin please). Though I may lose choice, and perhaps that lack of choice equates to a lower standard of living, I don't see the harm in substitutions so long as they capture actual buying habits and aren't unidirectional in quality.
Hedonic adjustments appear to be BS, however there are a long series of compelling arguments for these adjustments.
Shadowstats figures are pure commodities figures, as best I can tell. Obviously input costs are a component of end inflation, but they are not the whole story. Shadowstats are needlessly gaming the inflation story by focusing on the most volatile sectors, while ignoring the end user cost saving provided to buyers of finished good through increased efficiencies (and that is just part of the story).
I would go on but I have more to do. Suffice it to say Shadowstats is not gospel.
usctrojanman29_IHB
New member
Looks like the big boys want to fill up the elevator before they cut the cable....
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ..PPtyU40g
I love how they keep focusing how oil is running up before of the economic recovery and don't need mention that the dollar has been getting crushed during this run up in oil. That being said, I'm not fighting the tape and sale 20 USO June puts and 20 SSO June puts. FAZ is on my radar screen as well.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ..PPtyU40g
I love how they keep focusing how oil is running up before of the economic recovery and don't need mention that the dollar has been getting crushed during this run up in oil. That being said, I'm not fighting the tape and sale 20 USO June puts and 20 SSO June puts. FAZ is on my radar screen as well.
BondTrader_IHB
New member
usctrojanman29 said:
I dip my toe into FAZ last week $4.32, looking to add more if this sucker rally continues, gold is consolidating as expected, looking to get back into DGP/SLV when gold gets around 900.