1. Arthur Laffer on Inflation: While it is hard for me to take Laffer seriously, I did read his opinion column in the WSJ today, where he argued that the U.S. faces much higher inflation in the future. WSJ.com His opinion echoes my own. The increased inflationary expectation that I have is based on the gigantic increase in the monetary base on top of the fiscal stimulus and financial bailouts undertaken with borrowed money, coupled with the failure of politicians from both parties to deal with the unfunded liabilities of the federal government now estimated to exceed 100 trillion dollars.
This seems obvious to me but I have read other articles where economist claim that the Fed will be able to take off the monetary stimulus in a magically timely fashion, and the government spending is just replacing the pullback by consumers who are saving more.
TI heard Stephen Moore echo Laffer's prediction, suggesting the possibility of a 5% inflation rate by the end of 2010.
This seems obvious to me but I have read other articles where economist claim that the Fed will be able to take off the monetary stimulus in a magically timely fashion, and the government spending is just replacing the pullback by consumers who are saving more.
TI heard Stephen Moore echo Laffer's prediction, suggesting the possibility of a 5% inflation rate by the end of 2010.
2. Proactive Planning When A Scenario Becomes More Probable Than Not: While it may be foolish to try to predict the specific rate of inflation over the next several years, there is enough reasonable reasons to be concerned about inflation becoming a problem within a year or two for me to take proactive steps, which was the primary justification for buying floaters and re-entering my TIP position. For me, I believe that it is prudent to prepare for scenarios that may come to pass, and certainty about the future would be a rare luxury to have. The floaters with a guarantee were considered desirable in the 4th quarter of 2008 and the 1st quarter of 2009 because they provided protection for both low and high inflation when they were selling at substantial discounts to par value, which inflated the value of their guarantees and also juiced the impact of the float provision as well.
The TIP was and still is a more problematic security to purchase for protection. Deflation will subtract from the principal which mitigates against it being using as a deflation or low inflation hedge. This could become problematic particularly when the security is purchased after some accretion is added due to rises in the CPI, which is then lost in a deflationary environment. The floaters did not have this issue when I bought them.
For those of us who do not believe in an efficient market, then it would easily be possible for the TIP to be mispriced as a result of a number of issues, including the break-even point compared to the non-inflation protected security and the mispricing of inflation risk, and the uncertainty of that risk, in the nominal yield.
For those of us who do not believe in an efficient market, then it would easily be possible for the TIP to be mispriced as a result of a number of issues, including the break-even point compared to the non-inflation protected security and the mispricing of inflation risk, and the uncertainty of that risk, in the nominal yield.
Since it is my personal view that the TIP is subject to constant mispricing by the market, I will try to limit my entry points to three situations.
First, when the break-even spread closes toward zero, and I know for certain that I am paying nothing or close to nothing for the inflation protection, then I will likely buy the TIP as I did in the 4th quarter of 2008.
Second, when I become convinced that a serious inflation risk is fairly imminent, I will buy the TIP as a hedge against inflation risk, whether or not the market agrees with my assessment, an irrelevant consideration for me. I am not there yet.
Third, if the nominal yield of the treasury better reflects reasonable inflation expectations and a risk premium for the uncertainty of the inflation risk, and this causes a downward adjustment in price and rise in yield, then I would be more inclined to add to the TIP. Now, I am more concerned that the base yield for both inflation and non-inflation treasuries is being influenced by factors such as a flight to safety and the Fed's quantitative easing, which are distorting a true market price, which I believe now would result in lower prices and higher yields, regardless of the break-even spread price. The second consideration will trump the third one, and the first trumps both of the others.
So, based on my view of the future now, and planning for alternate scenarios, I am not an enthusiastic buyer of the TIP, particularly when I have alternatives that give me more bang for the buck. I may at anytime, however, add 3 thousand or so to a TIP position as a modest form of insurance in case I misjudge the situation.
First, when the break-even spread closes toward zero, and I know for certain that I am paying nothing or close to nothing for the inflation protection, then I will likely buy the TIP as I did in the 4th quarter of 2008.
Second, when I become convinced that a serious inflation risk is fairly imminent, I will buy the TIP as a hedge against inflation risk, whether or not the market agrees with my assessment, an irrelevant consideration for me. I am not there yet.
Third, if the nominal yield of the treasury better reflects reasonable inflation expectations and a risk premium for the uncertainty of the inflation risk, and this causes a downward adjustment in price and rise in yield, then I would be more inclined to add to the TIP. Now, I am more concerned that the base yield for both inflation and non-inflation treasuries is being influenced by factors such as a flight to safety and the Fed's quantitative easing, which are distorting a true market price, which I believe now would result in lower prices and higher yields, regardless of the break-even spread price. The second consideration will trump the third one, and the first trumps both of the others.
So, based on my view of the future now, and planning for alternate scenarios, I am not an enthusiastic buyer of the TIP, particularly when I have alternatives that give me more bang for the buck. I may at anytime, however, add 3 thousand or so to a TIP position as a modest form of insurance in case I misjudge the situation.
Today the ETF TIP rose 5 cents to $100.23 which was a better showing than the 7 to 10 year treasury ETF IEF which fell 53 cents to $88. The long treasury bonds continue to move down in price and up in yield, with the latest impetus being the tepid bidding for the 10 year auctioned today. WSJ.com
The 10 year hit 3.996% briefly today before closing at 3.9458%. This correction in bond yield was overdue, and it is hard for me to view a 4 or even a 5% 10 year treasury yield as a major problem for the economy. It does indicate to me a problem with the current expansionary fiscal and monetary stimulus, and the debasement of the dollar, with the potential inflation ramifications probably being signaled in the rise in rates. The ten year was yielding 2.18% on the last day of 2008, where did you expect it to go, up or down? www.federalreserve.gov
3. Credit Suisse-Dollar Sell-off Overdone: In a research report summarized in an Investor's Soapbox column in Barron's Online, published on 6/8/09, several Credit Suisse analysts claim that most of the dollar sell-off is done. Barrons.com
I would not quarrel with their assessment about the dollar's value versus the Euro. CS points out that the dollar is 22% cheaper on a trade weighted basis and 20% cheaper on a purchase power parity against the Euro.
And, it can not be reasonably argued that Europe is likely to recover from the current recession quicker, and the next move by the FED will be to raise rates. I am not sure those same arguments would apply when discussing the Canadian and Australian dollars. And, there are longer term issues that will impact the value of the dollar including the ultimate impact of the U.S. expansion of its money supply, as discussed by Laffer, and the constant need to float ever larger amounts of paper to fill the budget hole.
Personally, I would not be so foolish as to try and predict the movement of a currency. I am just adding to and paring my position in BWX based on significant moves of the dollar as shown in the Dollar Index in an effort to manage my currency risk with international bonds.
Pared BWX
And, it can not be reasonably argued that Europe is likely to recover from the current recession quicker, and the next move by the FED will be to raise rates. I am not sure those same arguments would apply when discussing the Canadian and Australian dollars. And, there are longer term issues that will impact the value of the dollar including the ultimate impact of the U.S. expansion of its money supply, as discussed by Laffer, and the constant need to float ever larger amounts of paper to fill the budget hole.
Personally, I would not be so foolish as to try and predict the movement of a currency. I am just adding to and paring my position in BWX based on significant moves of the dollar as shown in the Dollar Index in an effort to manage my currency risk with international bonds.
Pared BWX
4. Tejon Ranch: There is a favorable article on Tejon Ranch at In Adv. I currently have a small position, established when I was transitioning some funds to hard asset plays such as St Joe & Tejon. Nibbled at ST JOE
5. Budget Deficit: With four months left to go in the current fiscal year, the U.S. budget deficit hit 991 billion with a record 189.7 billion dollar deficit in May 2009. The fiscal year ends in September, with the current deficit projection estimated at 1.84 trillion.
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