Wow, that was some painful rant.
So his argument is two-fold 1) TIPS are bad because gold is a better hedge of inflation and 2) TIPS are bad because CPI understates inflation.
1) Flawed logic. The quality of gold as a hedge against inflation says nothing of the quality of TIPS. Besides, how good of a hedge against inflation was gold purchased in 1980? Pretty miserable. How good will gold be as a hedge when bought in 2007? Nobody knows. But it's worth considering that after a ~300% increase, it may already price in the next 20 years of inflation. But all of this, of course, is besides the point of whether TIPS are a good or bad inflation hedge.
2) More to the point, he rants that CPI understates inflation (and even argues that 5.4% nominal TIPS yields are below inflation). But nowhere does he provide any data whatsoever to back up his assertion. He claims that M3 growth is a better proxy for inflation, but wheres the price data to show that?
In this old post I compared prices found in the NJ Record from 1935 with those from 2005 and found that over a 70 year period, CPI explained a surprisingly large amount of the change in price.
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we can also simply look back on the last 20 years of nominal Treasury yields, where we see an average yield of 6.21% before taxes. That yield is especially diminutive when compared to the average increase in M3 of 7.8% (which is closer to the actual rate of inflation) over the last 35 years."
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Going back to the trusty prices in the NJ Record for 1965, and using a 7.8% inflation rate over 40 years we'd find that:
A VW Bug would cost $32,174 (new VW's start at $16,500)
A sofa would cost $6,435
Gallon of paint (interior) $60
Sears Socket Set $2,532
Refrigerator $5,810
Newspaper $1.41
Bacon ($/lb) $13.92
Butter (1 lb) $13.92
3.5 room apartment rent $2,824 (per month, Morristown NJ)
Men's slacks $443
Air Conditioner (5,300 BTU) $2,803
Bleach (1 gallon) $10.09
As you can see, Mogabo is soooo far off the mark as to be nowhere near credible.
Other quibbles:
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As it turns out, it looks to me like all this borrowed money went into the stock market, and this new monetary fuel sent stocks to new records of various kinds.
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That is one possible explanation. Another, and more reasonable one IMO, is that earnings growth expectations for the first quarter were somewhere around 5% and actual earnings growth came in at ~11-12%. That's a huge surprise to the upside. As it stands now, large cap equities are only trading at a mid-teens 2007 Earnings multiple. That doesn't sound like a bubble to me just because the market is hitting new highs. As Buffet said, if the S&P 500 grows only 5% a year we'll be marking a record high of 1,200,000 at the end of the century . . . between here and there are tons of new record highs, most of which will not be bubbles.
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Doug Noland of the Credit Bubble Bulletin at PrudentBear.com writes . . .
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And
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David Tice, founder of the PrudentBear.com site, figures . . .
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I'm supposed to take investing advice from these guys??