Sunday, August 16, 2009

Investments for Unexpected Inflation/ Jesus & the Prosperity Gospel/More on Sarah and her Death Panels/

Andy has received a nomination for the best Dolbro player in the upcoming 2009 IBMA awards. Award Nominees| International Bluegrass Music Association | IBMA.Org He won the award last year for best instrumental album, and will be releasing his third solo album soon. Last night, the Infamous Stringdusters played the Opry, and the second song performed was Andy's instrumental composition "Blackrock". This is a link to a video of him playing Blackrock earlier in the year with the Dusters. YouTube - The Infamous Stringdusters - "Black Rock" The Dusters are working on their third album, with their first two, Fork in the Road & Infamous Stringdusters, available on Itunes, as is Andy's second album which won the instrumental award last year, Sound of the Sound Guitar. Fork in the Road won the Album of the Year award in 2007, and the Dusters also won in the category emerging artist of the year and song of the year.

1. Investments for Unexpected Inflation: The break-even rate for the 10 year TIP is currently around 1.8%. This is basically the current market forecast for the expected inflation rate over the next ten years. CPI would have to average more than 1.8% to make the 10 TIP a better investment than a non-inflation protected 10 year treasury. I view the TIP as primarily an hedge against unexpected inflation. The 40 year average inflation rate is over 4% based on the data provided by the Federal Reserve Bank of Minneapolis: Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis That may be overstating the long term average going back to 1913, since 1968 was close to the starting period for the inflation problems in the 1970s and early 1980s.

When making a decision now about buying bonds linked to the CPI, one important consideration for me is the uncertainty of the future course of inflation. A bond whose interest payments are directly tied to some spread over CPI provides me with a hedge against unexpected inflation. I have discussed on several occasions three exchange traded bonds, PFK, OSM and ISM, that pay monthly interest tied to a spread above a CPI calculation. I calculated last Friday what the average monthly interest rate would be for PFK over the next nine years (maturity in April 2018 Pricing Supplement) based on an average inflation rate of 1% and 2.5%. Added 50 PFK at $17.83 The rate ranged from 4.7% at 1%, at a total cost per share of $18, to 6.8% at a 2.5% average annualized CPI rate. The yield to maturity would be about 3% higher per year based on the profit earned on the shares when the bond matures in 2018. Assuming Prudential pays the note in 2018, the profit would be $700 on 100 shares bought with a total cost of $18. While I mentioned that either alternative, 1 % or 2.5% was find with me, another reason that I am buying those shares, and the TIP at auctions now, is to hedge against unexpected inflation. While I suspect, which is the most appropriate word for a 10 year inflation forecast, that the average will range between 2.5% to 3% when I look back at what has transpired in April 2018, it is possible that the average will be significantly more than I currently anticipate. If the rate averaged 5%, I know my long term fixed rate coupon bonds will be crushed. The PFK, assuming no material change in Prudential's credit, will likely increase in value under that scenario, particularly as it moves closer to its 2018 maturity date. At a 5% average CPI rate, the yield at a total cost of $18 becomes 10.27% for PFK.

The impact on the SLM floaters, OSM and ISM, would be more pronounced since they are trading at a much larger discount to their $25 par values, due to credit concerns most likely in my opinion. OSM, which matures in March 2017, would have an average yield at a $12.5 cost of 14% with the future assumption of an average CPI rate of 5% for its remaining life. I do not believe, based on what I know now, that 5% is the reasonable forecast. But, even though it would be unexpected, securities like OSM and ISM would give me protection against that unexpected rise, assuming that Sallie Mae survives to pay par value.

I also own the TIP ETF, and I am starting to participate in the TIP auctions in my ROTH IRA. The TIP is safer in the sense that it is guaranteed by the Full Faith and Credit of the U.S. No one can say that PFK is close to that degree of safety, but it is safe enough for me particularly when I can purchase it at a deep discount to its par value of $25. Try buying a TIP at that at a large discount to par: Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - The lowest price provided by that WSJ data is one priced at 92.1 maturing in January 2028 with an usually low coupon of 1.75%.

The Sallie Mae floaters raise more concerns, but my concerns have not caused me to avoid buying those bonds at more than 50% discounts to their par value. The concerns do cause me to monitor the current situation with Sallie closely, and to keep my positions in OSM and ISM small. The positions in TIPs, the individual bonds and the TIP ETF, may end up being at least 10 times larger than all of the positions combined in individual corporate bonds whose coupons are tied to the CPI.

Some of these issues are discussed in prior posts, including:

2. Prosperity Gospel/Sarah/Is Medicare Socialism?: While I was reading the NYT article about the "Prosperity Gospel", run by Kenneth and Gloria Copeland, I could not help but think of a famous saying from W.C. Fields. I tried practicing, as I read this story, my spiel of the prosperity gospel, "give me money and Jesus will bless you". I wondered to myself how that kind of sales pitch would actually produce the desired results. Then, I wondered why Jesus would want me to become rich, maybe I need to read the Sermon on the Mount Again, particularly Matthew 6 Matt 6; Discourse on ostentation - Wikipedia.

Once again, after reading about the prosperity gospel this morning, I was confronted with something as far beyond my comprehension as Einstein's theory of relativity. Maybe that is an overstatement since I can comprehend, at least feebly, the theory of relativity. But then, I do not understand Sarah's appeal either. As Maureen Dowd noted in her column, it is not necessary for Sarah to state what is factual and true, just appeal to the visceral instincts of the true believers who could care less about distinguishing fact from fiction. 

It is interesting that Sarah was for end of life counseling on such matters as living wills before coming up with her "death panel" characterization of such a plan. In April 2008, Sarah proclaimed Health Decision Day in Alaska, encouraging education about end of life decisions. Alaska This is a quote from Sarah's 2008 statement: "Healthcare Decisions Day is designed to raise public awareness of the need to plan ahead for healthcare decisions, related to end of life care and medical decision-making whenever patients are unable to speak for themselves and to encourage the specific use of advance directives to communicate these important healthcare decisions".

It is regrettable that a usually sensible Senator Grassley has succumbed to the madness of crowds.

Some of the opposition to the healthcare plan uses the tried and true rhetoric, claiming that American liberty is at stake as the Democrats take us down the path toward Socialism. While I am opposed to the plan, I at least recognize that Medicare is a government run, insurance program providing health insurance to over 43 million Americans in 2007. Medicare (United States) - Wikipedia 

This may be news to the loud and angry white people appearing at some of these Town Hall meetings. The number of individuals receiving insurance under Medicare rose to 45.2 million in 2008. (page 2: Prior to Medicare's adoption, the "conservatives", loud and boisterous then as now, claimed that Medicare would lead to Socialism in the U.S. 

Some of the ones who claimed then that Medicare was socialized medicine or Socialism included Ronald Reagan, George H.W. Bush, Bob Dole and Barry Goldwater. I would hope that all of those people, who actually "walk the walk" of their talk and wish to avoid appearing hypocritical, will forfeit their benefits under the Medicare Trojan Horse of creeping Socialism. 

To be fair, the U.S. would need to reimburse them the amount of the payroll tax allocable to Medicare, and then they can use those funds to pay a few years of premiums under a private plan for folks over 65. However, there would have to be an ironclad guarantee that they would never seek care without paying for it once their funds ran out to pay for private health insurance premiums in their old age. The Medicare fund is scheduled to go broke by 2017. Being a Baby Boomer myself, looking forward to my benefits at 65, getting out from under my current privately financed plan with BlueCross, I recognize that the Baby Boomers need all the help that we can get to shore up both Medicare and Social Security up.

I have been trying to understand the TBs all of my life without much success. Finally, a new study may provide an avenue for understanding. Monkeys share human preference for imitation - Maybe, once you are born into the TB culture, never make any attempt to start actually thinking for yourself or to separate accurate from false information, and to congregate only with other TBs who mimic the same palaver, then it starts to make some sense.

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