Which 'flation' lies ahead?

[haha]

Ha's comments work both ways.

Everyone who's convinced that we're in for soaring inflation can very easily short some 30-yr Treasuries and use the proceeds to buy TIPS.

Should be a slam-dunk money maker when inflation hits double digits. "Be sure to go all in! It's a once in a generation opportunity!" someone once said.

I am sure you realize this, but thinking that long term treasuries do not present an attractive opportunity does not imply that the inverse trade does either.

Sometimes the only reasonable thing to do is to stand by.

The only long term high probablity but low risk position that I can think of now is natural gas. My preferred vehicle is a large natural gas oriented company with abundant low cost reserves and quality finances.

You can't get too badly hurt falling out of a basement window. Once you have that covered, good things can happen essentially for free.

Ha

 

[Gone4Good]

How does one easily short 30 year Treasuries? I know how to buy treasuries, but I get an error message from Schwab when I try to sell them short. I know there are short T bond ETFs but these have significant expenses associated with them.

The cleanest way is to open a futures account and sell the relevant treasury contract. You can also buy treasury puts or short a Bond ETF (no need to buy an expensive leveraged short ETF).

 

[Gone4Good]

I am sure you realize this, but thinking that long term treasuries do not present an attractive opportunity does not imply that the inverse trade does either.

Sometimes the only reasonable thing to do is to stand by.

I do realize this, and have said as much.

Agree on Nat Gas, btw.

 

[M Paquette]

Is it really more rational to worry about inflation today?

I'll be durned if I'm gonna go short Treasuries against long TIPS and pay margin while waiting for superduperhyperinflation to show up.

Besides, I don't think we'll see sustained inflation or the Inflationary Spiral of Doom as long as wages for The Rest of Us remain flat. If prices on something go up, and we can't pay, we'll switch to something else if possible (e.g., not heating oil or gasoline).

 

[clifp]

The cleanest way is to open a futures account and sell the relevant treasury contract.

Of course this exposes one to issues like contango which means that even if you guess the right direction, you could lose money if the timing or the expenses are too high.

Ideally what I'd like to short a 10 year T-bill pay my 2.4%/year interest and then sometime in the next 10 years buy it back at profit (hopefully). But I haven't found anybody willing to take the other end of this trade. As HaHa says the inverse trade aren't always great either.

 

[Gone4Good]

Besides, I don't think we'll see sustained inflation or the Inflationary Spiral of Doom as long as wages for The Rest of Us remain flat. If prices on something go up, and we can't pay, we'll switch to something else if possible (e.g., not heating oil or gasoline).

Hey look, we agree!

BTW, even if we can't find a substitute for something like heating oil, if the price goes up and we don't have any more cash in our pockets because wages are flat, we'll have to cut back on something else. That 'something else' should fall in price i.e. no inflation (even if folks in the blogosphere run around claiming hyperinflation because the price of heating oil is up).

 

[Chuckanut]

Hmmm.. Yes, the feds are spending worse than drunken sailors, but the states and local governments are cutting back spending big time. And the consumer is keeping spending on a leash while he/she pays of debt. So maybe the more conservative governments and the consumers are countering the Feds inflationary policies

 

[TromboneAl]

As someone already mention, inflation is #1 killer of retirees. However, it those retirees are planned retirees, they'll weather through the storm that's brewing after 2012 election.

Can you explain what you mean about "planned" retirees? Thanks.

 

[GregLee]

Can you explain what you mean about "planned" retirees?

Retirees who have planned ahead to meet the possibility of inflation, I think is meant.

 

[jdw_fire]

Meanwhile the bond market is currently forecasting inflation of . . .

5-YR 1.72%
10-YR 2.06%
30-YR 2.46%

are you saying you think the bond market is correctly forcasting inflation here? i suppose you also believe and can show that the bond market in late 2010 correctly forcasted the 2.99% (double that to 5.98% if want an annualized number) inflation that occured in the 1st 6 months of 2011.

 

[Nords]

Hmmm.. Yes, the feds are spending worse than drunken sailors...

Yes, because when I was a drunken sailor I had to stop spending when my money ran out.

 

[Ed_The_Gypsy]

This little article reflects my thoughts on the matter:
Hayek Is Wrong, And So Is Bernanke: The Coming Recession Will Be Deflationary - Yahoo! News
Even at 0% money, banks are not lending, businesses are not investing, job creation is not happening, people and institutions are paying down debt instead of spending. Deflation and depressions are caused by people not spending. Recessions like this are not the time for government to cut spending. As Al said, we have been seeing deflation right in front of our eyes already.

 

[Chuckanut]

Yes, because when I was a drunken sailor I had to stop spending when my money ran out.

In reality, I must apologize to drunken sailors. They only spend the money they have until it runs out and they are wasted. The Feds spend the money they have, and the future money of me, my children and my grandchildren!! Drunken sailors are fiscal conservatives by comparison.

 

[Sandhog]

Can you explain what you mean about "planned" retirees? Thanks.

Retirees who have planned ahead to meet the possibility of inflation, I think is meant.

Exactly

Much like many if not all the FIRE members of ER. I'm sure they had contingency plans for high inflation years and market down years. You can not prepare for all the possible worst cases but you can prepare for some.

 

[arebelspy]

This little article reflects my thoughts on the matter:
Hayek Is Wrong, And So Is Bernanke: The Coming Recession Will Be Deflationary - Yahoo! News
Even at 0% money, banks are not lending, businesses are not investing, job creation is not happening, people and institutions are paying down debt instead of spending. Deflation and depressions are caused by people not spending. Recessions like this are not the time for government to cut spending. As Al said, we have been seeing deflation right in front of our eyes already.

So what's your move then? Increase the cash aspect of your AA? Any other assets in particular?

Or stay the course (regardless of any flations)?

 

[HFWR]

My cash (~10%) and bond (~45%) holdings are mostly dry powder for the upcoming DOW [-]5000[/-] [-]3000[/-] 0...

I think deflation is the bigger risk, with some (or a lot) stagflation in certain commodities...

Just for grins, the USA, according to wikipedia, has about $470B worth of gold at today's prices. So, let's go on the gold standard, and try to use $470B in gold to run a trillion dollar economy... Piece of cake!

 

[Chuckanut]

I have seen no evidence of deflation. Certainly housing prices are down but they are just one item in the basket.

 

[MichaelB]

I have seen no evidence of deflation. Certainly housing prices are down but they are just one item in the basket.

Real median household income has declined >5% over ten years. That is deflation.

 

[Ed_The_Gypsy]

So what's your move then? Increase the cash aspect of your AA? Any other assets in particular?

Or stay the course (regardless of any flations)?

Good question, reb.

I am still working, in a very nice situation, making about twice what I used to make. I am paid in UK pounds (my choice). I plan to work for several more years. I like what I do.

I am paying off my debts (credit card debt already gone, to be followed by student loans for my kids, then what remains of our second and first mortgages). I do not plan to retire until after the debt is gone.

I am taking distributions from my mutual funds (all in an IRA) into a money market fund and will probably decide what to buy with it towards the end of the year. I will be buying dividend-producing equities. I might decide to divert some of the money going to debt reduction to equities. It depends on how cheap things get.

Basically, no change.

 

[Chuckanut]

Real median household income has declined >5% over ten years. That is deflation.

Hmm.. so a drop in income is also deflation? I am not sure my economics professor would agree with that.

 

[MichaelB]

Hmm.. so a drop in income is also deflation? I am not sure my economics professor would agree with that.

Very much so. Declining consumer prices is only one part. Sales and production fall and that pulls down wages. Debts do not decline and that makes then relatively more expensive. The DSR increases until they become unserviceable. It is an economic cycle that feeds upon itself and is self-sustaining. When fully underway it needs external shock to disrupt the cycle.

The US economy is not deflating, but the consumer debt overhang is quite serious. Deflation is definitely still possible.

 

[Lsbcal]

Here's an inflation picture of the past (12 month inflation rate):

FWIW, my bond method is trend flowing. One half moving between cash, 2 year Treasury, and intermediate bonds. Right now it's in intermediate bonds. Also other half of my bonds move between 2yr Treasuries and short term investment grade. The rest is older Ibonds.

BTW, if you tell me when the next war is coming I might be able to work out an inflation forcast

 

[calmloki]

I'm guessing inflation. Gold went right through the
$1800s and has crested the $1900/oz mark as of today. Awful lot of paper to trade for the same old chunk of gold.

 

[Gone4Good]

Hmm.. so a drop in income is also deflation? I am not sure my economics professor would agree with that.

He sure would. Wages are a price, just like any other.

Of course it is just one price and deflation isn't defined by just one price - even one as important as wages.

 

[Lsbcal]

I'm guessing inflation. Gold went right through the
$1800s and has crested the $1900/oz mark as of today. Awful lot of paper to trade for the same old chunk of gold.

Maybe the hockey puck phase? Danger ahead.