Is inflation really 3%, if not......

[RockOn]

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.

 

[twaddle]

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.

 

[RockOn]

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?

 

[mathjak107]

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

 

[mathjak107]

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

 

[brewer12345]

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?

So you would like the entire world to accomodate your preferences via an enormous revaluation of treasuries. Why not use your superpowers to solve world hunger instead?

 

[mathjak107]

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.

dont forget anything that would make rates jump 7 points would mske something opposite double or maybe triple. dont forget an asset class can only go to zero, the others that move opposite can double,triple etc


opposite asset classes sometimes move together when they really shouldnt but its usually just temporary until a clear trend in one direction or another emerges

 

[RockOn]

I'm not saying 100% fixed income, maybe 50% or 60%. I need some growth beyond that. If I could make a 2% or so, real return on the fixed assets, I'd be fine. TIPS would come close to working if they I thought they were based on the actual inflation, I do not think they are. All of my investment money is tax sheltered, I pay taxes no matter how it comes out. My goal is a 3% real overall return, fixed income rates less than inflation are problem for me. I'm waiting it out, hoping I can get some better bond rates. Praying that is not a mistake.

brewer, I'm not wanting anymore than a fair price, if the government reported inflation was not being fudged, I might get closer to get that. That is my opinion.

 

[brewer12345]

I'm not saying 100% fixed income, maybe 50% or 60%. I need some growth beyond that. If I could make a 2% or so, real return on the fixed assets, I'd be fine. TIPS would come close to working if they I thought they were based on the actual inflation, I do not think they are. All of my investment money is tax sheltered, I pay taxes no matter how it comes out. My goal is a 3% real overall return, fixed income rates less than inflation are problem for me. I'm waiting it out, hoping I can get some better bond rates. Praying that is not a mistake.

FWIW, I think treasuries are a terrible deal right now. There has been a huge fear bid for them that will go away when the equity and credit markets begin to stabilize. So I would stay short and wait for the yield curve to further steepen/shift upward before buying.

I would also suggest that you do some reading on what a portfolio with a lot of fixed income, a slug of commodities and a slug of stocks did over time. Pretty attractive overall.

 

[twaddle]

I think this is the dream of ERs everywhere. All we want is a risk-free return of CPI+4% for the rest of our lives.

Why doesn't the market offer such a product? [Cue the annuity salesmen. ]

 

[RockOn]

I would also suggest that you do some reading on what a portfolio with a lot of fixed income, a slug of commodities and a slug of stocks did over time. Pretty attractive overall.[/quote]

Are you talking about the Swedoe idea someone mentioned I check out at diehards or something else?

twaddle, I am not dreaming for CPI+4%, just "the real" CPI+3%....wanted to clarify that

 

[Marquette]

I think this is the dream of ERs everywhere. All we want is a risk-free return of CPI+4% for the rest of our lives.

Why doesn't the market offer such a product? [Cue the annuity salesmen. ]

If you just bought a VA then you'd totally be able to get all of the upside with no downside risk. You'd have to have sod for brains to ignore a deal like that!!!

 

[Marquette]

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.

The Swedroe portfolio (or a slight misinterpretation thereof): 70% FI (long-term bonds, TIPS, short-term bonds... maybe some gold); 30% EM and commodity futures. Low correlation, low standard deviation, potential to meet the type of return you want.

I've been thinking more about the "what if the government is mis-representing CPI". First, how they calculate it is transparent to the world and pretty easy to check for anyone that wants to sit down and dig. I respect that the site you linked has an opinion that it's 12% off (I know you don't hold the numbers that high). However, I can provide sites that argue the earth is hollow and other sides that prove Bush is a shape-shifting reptilian alien. If we found more bored geeks with calculators that back up his claim, then he'd have something and I would think it wouldn't be quite so tinfoilish.

Anyway, think about all of the COLA payments out there. It's not just the people collecting SS. If it happened that CPI is a fraud and word got out, we'd see a march on Washington for sure... and many of the marchers would have access to our finer munitions and armament.

 

[RockOn]

Marquette quote:
Anyway, think about all of the COLA payments out there. It's not just the people collecting SS. If it happened that CPI is a fraud and word got out, we'd see a march on Washington for sure... and many of the marchers would have access to our finer munitions and armament.[/quote]

Like the million man march huh. I'd rent the first bus.

I think it is a fraud (at least some), I might be alone with that view here but I don't not think I am lonely with that view. I think if asked, over 50% of working Americans would say they believe the inflation number is rigged, can't prove that though. Maybe 80%, who knows.

Let's say we go into a downturn and deflation becomes a problem. Then we'll be told that prices are not really falling. We are eating too much chicken and need to go back to steak. That will be ironic and it could happen. That would be fun to watch.

 

[brewer12345]

Are you talking about the Swedoe idea someone mentioned I check out at diehards or something else?

Don't know or care who Swedroe is. Just making an observation based on long-term historical data.

 

[RockOn]

brewer, ok thanks, lot's of fixed income with a few slugs of uncorrelated growth sounds like my kind of plan.

 

[twaddle]

Here's a discussion of the "lots of fixed income with a few slugs" approach:

Bogleheads :: View topic - Larry Swedroe: concentrating risks/minimizing dispersion

 

[RockOn]

Thanks twaddle, that's the one I thought brewer was referring to. I went through it last week. The results are very good. At first glance, it appears to me that it might be subject to curve fitting into specific past data but I'll be taking a serious look at that one.

 

[Independent]

I agree with your math, we were not on the same page. So prices in 10 years went up 30.7% according to BLS and if they were off 3% per year prices went up 74.1%. That does seem exessive doesn't it? It's hard to remember prices 10 year ago, some things did go up 74%, but probably not on average. I am sure my health insurance went up more than 74%, gas more than 74%, the price of a house (I know that doesn't count) more than 74%, but not everything, ok, I'll buy that. Let's say that inflation might be under-reported 1.5% now, can you go there? It still makes TIPS 25% overpriced and puts GDP below zero.

BTW, so ShadowStatistics isn't calculating inflation like it was done before 1990? Do you have solid proof for that? I understand the geometrics, but he could be eliminating the chicken verses steak substitution (or value added adjustments) going on, I do not see how geometrics handles that.

Edit: I missed cute fuzzy bunny's comments, she/he/it says her/his/it's father lost 30% purchasing power in 15 years after getting his SS which was adjusted to inflation. That seems to confirm the 3% I was talking about. Maybe I should have said it could be off about 2% or 2.25%, how about that?

I think that at some point we're within the margin for error on this type of statistic. I don't know if 1.5% is there, but I know that's too small for me to chase.

Regarding ShadowStatistics, remember he says that prices didn't go up 30% or 74%, they actually went up 160% (based on his graph). I can't show exactly where he got off, but that's because I've looked at his site and haven't found a clear example of his calculations. So I don't have any way of checking him. If his method is really the "old" BLS method, then the old BLS method was pretty bad.

 

[RockOn]

Thanks, Independent, I guess 1.5%/year would be very hard to argue. 1.5% over 30 years makes quite a difference on my planning spreadsheet for 30 years, that I am sure of. On ShadowStatistics, it would be interesting to see how he gets his numbers. It is obviously wrong, I was hoping you could see why. He has been around for awhile, I guess there is a market for that. When he says he calculates it like it was done before 1990, if that were to be true, that would be shocking to me.

 

[emilylynn]

IMHO, the CPI cannot be "fudged" because it is self-defining. The problem comes in when we attempt to attribute to the CPI the ability to measure something outside of itself.

If, tomorrow, I decide to institute a novel economic index dubbed the "Maslow Quotient," based upon the number of Hindenberg Omens occurring in the past month multiplied by the daily VIX, its validity--like that of the CPI--cannot be refuted because it does not purport to measure anything other than what it is designed to measure. The problem arises when we attribute to the index the ability to accurately represent something larger than itself--in this case, "economic stability,--or in the case of the CPI, "inflation." But unless we have objective, agreed-upon definitions for the concepts "economic stability" or "inflation," it is impossible to assess the validity of the indices that purport to measure them.

We know that the CPI measures the cost of a basket of goods that may bear little resemblance to how any one of us (either individually or in aggregate) actually allocates our paycheck. Moreover, the so-called "hedonic adjustments" intended to account for the fact that the Playstation 10 has more buttons than last year, and that that coronary bypass surgeries have better outcomes, have little or no meaning when it comes to those non-discretionary expenses that dominate most peoples' budgets.

Therefore, as others here have pointed out, the only meaningful data in terms of personal financial planning is how one's own unique budget is affected by increasing prices.

 

[emilylynn]

With that said, you'd have to be a complete nimbus NOT to recognize the extent to which the US government benefits by having us believe that the CPI provides a good estimate of the rate at which your and my cost of living is rising.

 

[cute fuzzy bunny]

I doubt anyone at the BLS gets up in the morning and thinks "Now, how can I tinker with this number so as to deceive the public and rob them of their well deserved inflation adjustments".

However, I have enough business maturity to know that there is an institutional mindset that gets passed from organizational leaders to their subordinates, and that consciously or subconsciously there is a desire in many workers to fulfill the goals and objectives of their leadership.

Its the governments objective to fight inflation, encourage a strong economy and lower unemployment. Our leadership expresses these goals through the press, in documents, and in speaking engagements.

It should therefore be no surprise when employees of the government, given a range of options, choose the ones that help prove out success in reaching those objectives and are probably rewarded when they do show success. Nor should it be any surprise that employees who fight against that slow gentle tide are not well received.

Further, there are obvious roadblocks to thinking differently about things. It may just be economically unfeasible.

If you read up on the CPI-E, there are a good number of PDF's showing the various studies, proposals, and letters written between agencies released through the FOIA. In some of the letters, senior government execs acknowledge that the CPI-E is valid and a better representation of inflation for the elderly, but then note that it cant be adopted for the social security COLA because it'd cost too much.

So we are in fact 'cheating' our seniors out of a little bit every year, just because the checkbook would suffer as a result.

That having been said, as we circle around and around this slinging accusations of conspiracy theory and government malice/stupidity, the fact remains that its a good idea to make sure that your investments returns covers your cost of living and its changes.

If you ask me, the boneheads in this category are the people who say "I bought TIPS, so inflation has no effect on me". Unless their cost of living changes happen to mimic the CPI-U...

 

[twaddle]

If you read up on the CPI-E....

If you ask me, the boneheads in this category are the people who say "I bought TIPS, so inflation has no effect on me". Unless their cost of living changes happen to mimic the CPI-U...

Here's a graph of the CPI-E vs CPI-U.

Looks like over an 18 year period, they differed by 0.5%/year or so.

The 20-year TIPS currently pays CPI+2%, which I believe is greater than CPI+0.5%. So, could you please explain to our audience why it is "boneheaded" to believe that TIPS would protect them from inflation?

 

[HFWR]

Here's a graph of the CPI-E vs CPI-U.

Looks like over an 18 year period, they differed by 0.5%/year or so.

The 20-year TIPS currently pays CPI+2%, which I believe is greater than CPI+0.5%. So, could you please explain to our audience why it is "boneheaded" to believe that TIPS would protect them from inflation?

But where's the graph for "real" inflation?