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Old 05-14-2009, 05:23 PM   #41
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We're not taking about raising base rates a couple hundred BPs here, they are going to have to go well above 4% relatively quick when the velocity of money picks up. The recovery is still going to be relatively fragile at that point, do you think the economy is going to hold up with that?
You didn't answer my other parts of my last post.
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Old 05-14-2009, 07:10 PM   #42
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We're not taking about raising base rates a couple hundred BPs here, they are going to have to go well above 4% relatively quick when the velocity of money picks up. The recovery is still going to be relatively fragile at that point, do you think the economy is going to hold up with that?
Sounds like 1993-4, when the fed funds rate was raised pretty far, pretty fast. Didn't seem to hurt the late 90s boom.
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Old 05-14-2009, 10:05 PM   #43
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Its not even in the same realm. First of all moving the base rate from 3 to 6 in one year is way different that moving the base rate from 0 to 4+ in half that amount of time. Also, the annual change in the money supply went from 4% to 11% over the course of several years, and then the fed did a 300 basis point increase over the course of 1 year. The fed just increased base by more than 100% in less than a year. Do you realize to what extent that the fed will have to raise base rates to counteract that? It will have to be at least 4% very quickly(much more quickly than 93-94) to even hold off the tide, and I'm not ruling out in excess of 15% to truly get under control.

The fact is that the monetary data that has come out of this current situation, is completely different than anything we have experienced in American history. You can't try to fit it in a box of historical norms because the data is so extremely far from historical norms. All you can really try to do is develop a general principal based on previous historical extremes and attempt to fit it in a wide scale based on current data. Then price the risk/return of that range. When you look at risk vs. return your plan just doesn't fit.

Lets take a look at bonds vs. TIPS in that context. If I'm wrong and deflation continues, gets worse, or inflation doesn't really occur. My range is as follows Bad deflation: holding the TIPS until maturity and getting my principal back upon maturity, Moderate to no deflation: selling off at a minor loss because I would rather put my capital to more productive use, or underperforming for example your bonds by lets say 8-10%. In each case I'm okay with that. Now lets take a look at the range if inflation does become an issue. The complete lack of historical reference on something like this has to cast a huge range. Nobody can legitimately say that 40% interest rates for example is physically impossible because the can't find any historical reference of increasing the money supply like the Fed has. So lets put a range of 5 - 40% on there. In the case of 5% I do pretty close in TIPS to what you are earning on quality corporate bonds. Now, care to take a guess how much of a beating you take if 40% interest rates get realized? You can't tell me its not possible. Who is taking more risk? Realistically how much return do I forgo if I'm wrong?
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Old 05-15-2009, 09:26 AM   #44
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Lets take a look at bonds vs. TIPS in that context. If I'm wrong and deflation continues, gets worse, or inflation doesn't really occur. My range is as follows Bad deflation: holding the TIPS until maturity and getting my principal back upon maturity, Moderate to no deflation: selling off at a minor loss because I would rather put my capital to more productive use, or underperforming for example your bonds by lets say 8-10%.
Thatís 8-10% per year. Thatís a lot of money.

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Nobody can legitimately say that 40% interest rates for example is physically impossible because the can't find any historical reference of increasing the money supply like the Fed has.
. Not impossible, but very unlikely.

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So lets put a range of 5 - 40% on there.
No. 40% is neither reasonable nor likely.

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In the case of 5% I do pretty close in TIPS to what you are earning on quality corporate bonds.
If real return is 1.5%, with 5% inflation you get 6.5% total return, vs greater than 10 Ė 12% from the BBB. Still a pretty big annual difference.

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Now, care to take a guess how much of a beating you take if 40% interest rates get realized? You can't tell me its not possible. Who is taking more risk? Realistically how much return do I forgo if I'm wrong?
Actually, you are taking more risk by betting on the less likely scenario.
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Old 05-15-2009, 09:53 AM   #45
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I'm not betting on a less likely scenario. I'm covering my a$$ against a decent possibility. You aren't covering your a$$ against anything. My closer expectation ranges from 7% to 17% inflation. I mean do you realize that it is just as likely for you to be negative 10% in real dollars as it is for me to be underperforming your bonds by 5%(in this case I'm assuming 3% inflation). There is absolutely no validity to the notion that you're taking less risk with your corporate bonds. And reasonable assumptions put us about even or in my favor in the future. And by the way 40% inflation to you right now is about as likely as a 50% crash in the market was to someone 2.5 years ago. If there is a reason to believe they are possible, you at least need to acknowledge them.

But I'm starting to get bored of this. I'm just going to end up looking forward to the bragging rights in the future when inflation is in the double digits.
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Old 05-15-2009, 09:55 AM   #46
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By the way don't forget to discount your default risk.
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Old 05-15-2009, 09:55 AM   #47
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In investing it is often the "expectation", not the frequency, that dominates returns.

Ha
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Old 05-15-2009, 02:46 PM   #48
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I'm not betting on a less likely scenario. I'm covering my a$$ against a decent possibility. You aren't covering your a$$ against anything. My closer expectation ranges from 7% to 17% inflation. I mean do you realize that it is just as likely for you to be negative 10% in real dollars as it is for me to be underperforming your bonds by 5%(in this case I'm assuming 3% inflation). There is absolutely no validity to the notion that you're taking less risk with your corporate bonds. And reasonable assumptions put us about even or in my favor in the future. And by the way 40% inflation to you right now is about as likely as a 50% crash in the market was to someone 2.5 years ago. If there is a reason to believe they are possible, you at least need to acknowledge them.

But I'm starting to get bored of this. I'm just going to end up looking forward to the bragging rights in the future when inflation is in the double digits.
Well, you seem sure of yourself and quite confident that you see something the rest of us donít and know exactly how to take maximum advantage. You may be right. Good luck. And donít forget to stop by regardless of the outcome. If things donít turn out as you expect, Iíll buy you a cup of coffee.
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Old 05-15-2009, 02:53 PM   #49
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"Well, you seem sure of yourself and quite confident that you see something the rest of us don’t and know exactly how to take maximum advantage."
You are clearly in the minority, if you are expecting no/negligible inflation in the future.
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Old 05-15-2009, 04:25 PM   #50
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"Well, you seem sure of yourself and quite confident that you see something the rest of us donít and know exactly how to take maximum advantage."
You are clearly in the minority, if you are expecting no/negligible inflation in the future.
??

Iíve made it pretty clear I see the possibility of higher inflation. Where we disagree: I donít believe it is a certainty, nor is it likely to reach double digits, and chronic deflation is still a possibility. The only certainty I have is that I donít know what will happen, am trying to keep my options open, allow for either of these or something else (like stagflation) and take advantage of opportunities when they arise.

Fair enough?
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Old 05-15-2009, 05:11 PM   #51
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Personally, I am hoping to see a few years of 10% inflation and I imagine most of the policy makers won't mind it either. Frankly most of our economic problems would go away if we could wave a magic wand and increase the price of everything 20% (especially houses).

Conventional wisdom by most "smart" investors is for a period of future inflation, unfortunately CW has proven to be wrong a lot recently.

As for a period of hyper inflation 40% or so, I think it is very unlikely simply because, the government has shown it will do anything to prevent the system from getting out to extreme. We will see a WWII, or Nixon era wage and price controls long before we see 40% inflation.
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Old 05-15-2009, 05:19 PM   #52
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I'm not betting on a less likely scenario. I'm covering my a$$ against a decent possibility. You aren't covering your a$$ against anything. My closer expectation ranges from 7% to 17% inflation. I mean do you realize that it is just as likely for you to be negative 10% in real dollars as it is for me to be underperforming your bonds by 5%(in this case I'm assuming 3% inflation). There is absolutely no validity to the notion that you're taking less risk with your corporate bonds. And reasonable assumptions put us about even or in my favor in the future. And by the way 40% inflation to you right now is about as likely as a 50% crash in the market was to someone 2.5 years ago. If there is a reason to believe they are possible, you at least need to acknowledge them.

But I'm starting to get bored of this. I'm just going to end up looking forward to the bragging rights in the future when inflation is in the double digits.
You assume (incorrectly) that all I have is corporates. Actually, my largest positions are levered owners of physical assets. An inflationary scenario would suit them just fine.

As for sustained 40% annual inflation being likely, well, I think I would happily bet that will not come to pass. I could be sold on a brief period of 5 to 8% inflation, but 40% is banana republic territory and I simply cannot see the powers that be in this country let that persist.

Its not real clear why you have become confrontational about this subject, but we each live in our own heads, I guess. Good luck with that.
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Old 05-15-2009, 10:17 PM   #53
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"sustained"
I wouldn't say it would be sustained if it happened, but I recognize the possibility that it could happen. The selling off TIPS positions, equities, etc. around a time like that for the purchase of bonds would me a very wealthy person.

Do I think it will happen? No. Do I think its a possibility? Yes. Do I think it would last more than a couple months? No.
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Old 05-16-2009, 07:21 AM   #54
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"sustained"
I wouldn't say it would be sustained if it happened, but I recognize the possibility that it could happen. The selling off TIPS positions, equities, etc. around a time like that for the purchase of bonds would me a very wealthy person.

Do I think it will happen? No. Do I think its a possibility? Yes. Do I think it would last more than a couple months? No.
Good luck with that. Have a nice life.
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Old 05-16-2009, 04:21 PM   #55
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Interesting financial thoughts by several posters. I agree that future inflation is a worry, but it always has been for retirees. My investment in TIPS (tax advantaged accounts only) is based on their relative safety for the bond part of my portfolio and my need to earn a decent real rate of return in the non-equity part of the portfolio. I believe the following real historical rates for nominal Treasurys are a decent way to determine when TIPS are in the buy range:

1yr 1.7%
5yr 2.2%
10yr 2.3%
20yr 2.4%

Current TIPS real rates are at: U.S. Treasury - Daily Treasury Yield Curve
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Old 05-16-2009, 06:00 PM   #56
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I believe the following real historical rates for nominal Treasurys are a decent way to determine when TIPS are in the buy range:

1yr 1.7%
5yr 2.2%
10yr 2.3%
20yr 2.4%
I decided to load up on TIPS for my IRA when they were in the tank last November. I bought $25K face of the 1/2025s when they had an expected real yield to maturity of 2.8% and another $20K of the 7/2016s at 2.6%. Since I have every intention of holding these to maturity, I'm not too concerned about day to day fluctuation in value, and a relatively sure-thing 2.6%+ over inflation for many years is pretty easy for me to live with for a large chunk of my fixed income stuff.
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