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Old 02-17-2008, 01:09 PM   #61
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Yes, I understand that fully, I just use TIPS as the example because it is easy to understand. I think you will now say, "so you think you are right and the entire bond market is wrong". I cannot argue that. However, maybeeeee the bond market will turn down soon and yields will be going up based upon this type of arguement.

There are lots of people out there who think the treasury market is very overvalued. If it starts to turn, I'll start a new thread on why we didn't see the bond bubble before it burst. Look at a chart of the 30yr tresury yield (TYX) on Yahoo, one direction for 35 years, it looks bubbly to me.

That sounds like market timing, so let's just say no bonds with maturities longer than 5 years for me.
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Old 02-17-2008, 01:17 PM   #62
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Only "very" short term bonds for me.
Fascinating. So, the CPI is currently around 4%. You think that is low, so it's really, what, 7%?

But you like short-term bonds with a 3% yield? So, you're a happy camper with a -4% real yield?

If I have a choice between nominal bonds with an implied inflation estimate of 2% and a CPI-indexed bond that will adjust its yield if we get a "surprise" spike in inflation, I'll take the CPI-indexed bond.

At times like now, when short-term yields are artificially pushed down by the fed, short-term nominal bonds are about as attractive as rat poison whether you believe the CPI is accurate or not.
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Old 02-17-2008, 01:25 PM   #63
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Lets say I think it might be actually 5 or 6% now. Yes I am willing to take a lower than inflation rate of return right now because the risk of longer term bonds is higher in my opinion. I do not like it and wish the governemnt was not fudging the rate (of course assuming they are), but what can I do. I'd rather sit here and lose out slowly to inflation than risk a loss of capital in a bond fund. If the government is fudging the rate at all, borrrowers (including the US Treasury) get rewarded with lower rates while investors in bonds get stiffed. As bond investors, we should not be in the camp of wanting them to fudge the rate.

Edit: let me add this, if the rate is understated by 2% a year and it remains that way forever, TIPS are guranteed to not do very well. I know this is timing, but if yields spike and I can get a fairly locked in rate for 10 years that is 4% above what inflation averages for 10 years, I come out ahead. I'm taking my chances waiting, but that is just me. TIPS might turn out to be the better choice because rates may not rise, we all take our chances.
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Old 02-17-2008, 01:35 PM   #64
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As bond investors, we should not be in the camp of wanting them to fudge the rate.
I agree. I'd be pissed if I thought they were fudging the rate, but I like the fact that the CPI calculation is transparent, I like that it is consistently higher than other metrics (like the GDP deflator), and I like the fact that the bond market determines yields on bonds -- not the government.
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Old 02-17-2008, 01:40 PM   #65
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Marquette, if you are saying that "possible" significant (several % points) of inflation does not matter, I don't agree at all. No surprise there. Keep buying those TIPS!

In 30 years the maybe there will be a tasty hedonic substitution for ALPO.
Now you're just putting words in my mouth. where did you come up with that as my viewpoint?
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Old 02-17-2008, 01:51 PM   #66
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Sorry, I thought that was what you meant by your previous post that quoted something to the affect of "it doesn't matter", my apologies. Sometime intent is hard to read, I jumped to an invalid conclusion.
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Old 02-17-2008, 01:55 PM   #67
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I agree. I'd be pissed if I thought they were fudging the rate, but I like the fact that the CPI calculation is transparent, I like that it is consistently higher than other metrics (like the GDP deflator), and I like the fact that the bond market determines yields on bonds -- not the government.
I 100% agree with the first part. On the rest, you are more trusting than me. I know the bond market sets the rate and that is good, but I think the government plays a large role in bond rates by putting out the inflation numbers. We can both hope I am wrong.
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Old 02-17-2008, 02:24 PM   #68
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Sorry, I thought that was what you meant by your previous post that quoted something to the affect of "it doesn't matter", my apologies. Sometime intent is hard to read, I jumped to an invalid conclusion.

No, my point was that breaking out spending by category doesn't matter so much as the whole amount.. if you're just trying to get an idea of what your year-over-year living expense increases are. Someone can choose to downgrade their lifestyle (or be forced to) year over year or they may just be smarter about how they spend... but, all in all, for CPI-P, I think it's just important to have a handle on the outflow as a whole.
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Old 02-17-2008, 02:56 PM   #69
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Lets say I think it might be actually 5 or 6% now. Yes I am willing to take a lower than inflation rate of return right now because the risk of longer term bonds is higher in my opinion. I do not like it and wish the governemnt was not fudging the rate (of course assuming they are), but what can I do. I'd rather sit here and lose out slowly to inflation than risk a loss of capital in a bond fund. If the government is fudging the rate at all, borrrowers (including the US Treasury) get rewarded with lower rates while investors in bonds get stiffed. As bond investors, we should not be in the camp of wanting them to fudge the rate.
You fail to provide anything like a rational, cogent argument as to why on earth you would hold any bonds if the Gnomes of Zurich really are understating inflation that much. If you really believe this, why would you own anything but hard assets, commodity producers, companies that own hard assets, etc.?
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Old 02-17-2008, 03:04 PM   #70
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Marquette... I do like your CPI-P calclulation, it really is important. Maybe thinking that way, what I should only be concerned about is...what is my personal real rate of return. Thinking like that, if I can keep my retired inflation to 1% as some suggested thay have done, even TIPS are make sense. I'll have to think about that. Where the rub would come is that I'm not sure I can keep my CPI-P that low, I use 3% until age 75 and 2% after that in my projections. I am concerned I am too low with those numbers. My plan requires at a 3% real return minimum to make me happy. I was thinking there is nothing in the bond market that comes close to that now. If I dropped inflation to 1%, I'd have it made. Anyway it's only one variable in the mix, I cannot be totally sure I can get 3% real out of stocks either. It would be nice to be almost certain that I get 2.5%, or so, real out of bonds. I am a pretty conservative investor.
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Old 02-17-2008, 03:37 PM   #71
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Brewer, I think my answer it simple. I am a conservative investor and need a large portion of income in my portfolio. I need to lower volatility, not increase it. Hard assets are way too volatile for much very of my money. I want to be a fixed income investor.

If the CPI is 4% now or 6% possibly (as I have said is possible) and I make a fixed investment it seems to me I should be getting at least some real return. What do TIPS pay now? I haven't looked for awhile but around 3.9% I think. AAA corporates are 5%, MM's going below 3%, 10yr treasuries 3.78. All of these rates look to me like inflation is around 2%.

The public doesn't believe inflation is that low, I'm sure I'm could google upsome polls on that. Where does the market get the idea inflation is that low? The BLS? What are they measuring? How are they measuring it?.... i.e. my concerns.
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Old 02-17-2008, 04:02 PM   #72
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although im only using long term treasury bond funds as a trading vehicle right now , going on the 10th time ive bought and sold them this year for someone who wants a truley diversified portfolio long term treasury bonds or funds are really the only way to go right now in my opinion.

the reason is they are the only asset class that will protect a portfolio in a deflation or global recession with enough ooomph. shorter term bonds just cant give that kind of gains to make them worth owning at this point with rates so low. . even at this level of just below 4% they can stiill easily provide capital gains of 20-30% if economic conditions dictate.

remember a truely diversified portfolio doesnt shy away from buying an asset class because one thinks its over valued, or the interest isnt high enough or the economic conditions of the moment show a drop in that class highly likely. 25 years of investing has taught me nothing ever plays out the way it looks. there is always something not even on the radar yet to alter the course of events. . you do it for the protection it can provide to ease the pain of the losses in other areas. yes if rates go the other way you will sustain losses in your bonds but the gains in other areas should far out weight it. isnt true portfolio diversification about taking the good with the bad and never having to say im sorry?


a truley diversified portfolio always is designed to answere the age old question... WHAT IF IM WRONG?
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Old 02-17-2008, 04:27 PM   #73
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So if long-term treasuries are your deflation hedge, what's your inflation hedge?
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Old 02-17-2008, 04:32 PM   #74
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commodities and even stocks. while stocks may take a brief hit in a relatively higher inflationary enviornment prices soon catch up and there are very few years stocks werent ahead of inflation. rising commodity prices are the best place to protect a portfolio.. i dont think i would buy proxies like gold stocks or oil stocks as they are still companies first and a play 2nd. i use gsg, gld,dbc and uso swapping them from time to time
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Old 02-17-2008, 04:33 PM   #75
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Brewer, I think my answer it simple. I am a conservative investor and need a large portion of income in my portfolio. I need to lower volatility, not increase it. Hard assets are way too volatile for much very of my money. I want to be a fixed income investor.
So you want to be a fixed income investor so badly that you are willing to accept what you believe is a large negative real return over the long haul? It doesn't make any sense to me, but you sure are dedicated.
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Old 02-17-2008, 04:36 PM   #76
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Good points mathjak107. Going long 30 year bonds at 4.5% takes more more conjones than cutie can provide. It is a deflation hedge for sure. Just roughly if rates drop to 3.8% you can make around 15% plus interest, if rates go to 7% you could loose around 50% minus the interest paid. If the economy goes down it helps hedge the stocks, if the economy goes up stock will likely make up for the loss.
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Old 02-17-2008, 04:37 PM   #77
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I thought stocks lost to inflation for the 1968-1982 period.

In any case, Swedroe does sort of agree with you wrt commodities. He thinks it makes sense to take on the duration risk of longer term bonds if you also hedge shorter-term inflation risk with CCFs.
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Old 02-17-2008, 04:42 PM   #78
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So you want to be a fixed income investor so badly that you are willing to accept what you believe is a large negative real return over the long haul? It doesn't make any sense to me, but you sure are dedicated.
It's not that I want to do it, I just want to be compensated reasonably in fixed income which I do not believe is available now. I do not think it is prudent to give up a fairly sure thing retirement by going hog wild in a diversified mix of risky assets. Why take too much risk when I do not have to?
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Old 02-17-2008, 04:42 PM   #79
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that was a very different market. gold was regulated by the government and fixed at 35 bucks, the markets were thinly traded for stocks, information took for ever to reach the markets. it was just a very different time. even so the explosion of gold in that hyper inflation more than made up for stocks, real estate sored too.. when gold crashed stocks took over their run and bonds had the biggest bull market in history
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Old 02-17-2008, 04:43 PM   #80
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It's not that I want to do it, I just want to be compensated reasonably in fixed income which I do not believe is available now. I do not think it is prudent to give up a fairly sure thing retirement by going hog wild in a diversified mix of risky assets. Why take too much risk when I do not have to?


fixed income can be a guaranteed loss , 100% guaranteed after inflation and taxes
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