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.
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."
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 $2,532
Bacon ($/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.
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.
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.
Doug Noland of the Credit Bubble Bulletin at PrudentBear.com writes . . .
David Tice, founder of the PrudentBear.com site, figures . . .
I'm supposed to take investing advice from these guys??