Inflation Protection

[eytonxav]

With all the money the gov't is injecting, inflation pressure seems likely. Anyone adding tips at this time?

 

[BeachOrCity]

I got lucky and bought some on a dip in March. They are up almost 20%! Ha

I like them in tax protected accounts but at current negative real yields won’t buy them.

 

[eytonxav]

I got lucky and bought some on a dip in March. They are up almost 20%! Ha

I like them in tax protected accounts but at current negative real yields won’t buy them.

Good move! But a negative real yield does not necessarily mean a negative return if inflation spikes. Just seems like it would still be a good hedge against inflation.

 

[atmsmshr]

IMHO - Deflation is more of a concern in the near term, and more destructive to the macro economy.

Treasury money authorized by congress is just starting to get into the economy, and at around $2 trillion only keeps the USA economy on life support for a month. Bills/credit cards/mortgages/purchases/rents are being deferred which will start to show permanent scars next month. Major banks are now being public about this forecast and the multi billions expected in loan write downs for April.

On the demand side, some of the population who were spending money in January will now sit on the sidelines in making purchases out of health concerns. For example, Stadium games, theater, restaurants, air travel, hotels, even big home improvement. This is the demand side shock which is the precursor to deflation.

Thank God for the Federal Reserve - they acted quickly to inject liquidity into the markets and banking systems to avoid a freeze up while congress was looking to go home. The Fed has broadcast that inflation expectations will remain low and interest rates will remain as low as long at it takes. To kick of the rescue, the Fed bought a boatload of Treasury bonds previously issued and authorized by congressional deficit spending. That was one injection of money. The Fed lowered the overnight lending rate between banks, and we are in a region that may be a liquidity trap. (Sort of where everyone sticks cash under the mattress). The Fed repo'd foreign debt with US Treasuries. The Fed started purchases of previous high quality commercial paper now deemed junk by ratings agencies (fallen angels - like Ford) to stave off a run on debt prices as companies tried to raise cash to stay alive.

With all of the destruction of capital that has started, IMHO we do not need to worry about inflation in the next 10 years. Deflation is the boogyman. USA is not the Weimar Republic trying to pay off WWI debt.

Now that we have reached essentially 0% bond interest (again) there probably are not any more gains. And don't TIPS decrease in value if deflation occurs?

There are a series of Federal Reserve Papers outlining macroeconomic policy. They make my head spin for all of the various aspects of macroeconomics.

https://www.federalreserve.gov/econres/feds/files/2020020pap.pdf

 

[BeachOrCity]

IMHO - Deflation is more of a concern in the near term, and more destructive to the macro economy.

Treasury money authorized by congress is just starting to get into the economy, and at around $2 trillion only keeps the USA economy on life support for a month. Bills/credit cards/mortgages/purchases/rents are being deferred which will start to show permanent scars next month. Major banks are now being public about this forecast and the multi billions expected in loan write downs for April.

On the demand side, some of the population who were spending money in January will now sit on the sidelines in making purchases out of health concerns. For example, Stadium games, theater, restaurants, air travel, hotels, even big home improvement. This is the demand side shock which is the precursor to deflation.

Thank God for the Federal Reserve - they acted quickly to inject liquidity into the markets and banking systems to avoid a freeze up while congress was looking to go home. The Fed has broadcast that inflation expectations will remain low and interest rates will remain as low as long at it takes. To kick of the rescue, the Fed bought a boatload of Treasury bonds previously issued and authorized by congressional deficit spending. That was one injection of money. The Fed lowered the overnight lending rate between banks, and we are in a region that may be a liquidity trap. (Sort of where everyone sticks cash under the mattress). The Fed repo'd foreign debt with US Treasuries. The Fed started purchases of previous high quality commercial paper now deemed junk by ratings agencies (fallen angels - like Ford) to stave off a run on debt prices as companies tried to raise cash to stay alive.

With all of the destruction of capital that has started, IMHO we do not need to worry about inflation in the next 10 years. Deflation is the boogyman. USA is not the Weimar Republic trying to pay off WWI debt.

Now that we have reached essentially 0% bond interest (again) there probably are not any more gains. And don't TIPS decrease in value if deflation occurs?

There are a series of Federal Reserve Papers outlining macroeconomic policy. They make my head spin for all of the various aspects of macroeconomics.

https://www.federalreserve.gov/econres/feds/files/2020020pap.pdf

All good thoughts ^^^^^^

...but I still feel that "something has to give" regarding the debt levels incl balance sheet of USA, Japan, and probably after this most developed countries.

If people were expecting deflation, gold would be down not up....but I still get your point.

Ultimately I just wonder if all this debt / balance sheet stuff ultimately is just holding asset prices up (stocks, real estate, etc)?

Some say we are being "Japan-ified"....who knows?

 

[audreyh1]

With all the money the gov't is injecting, inflation pressure seems likely. Anyone adding tips at this time?

I’m rather sanguine about inflation. Sure inflation can happen, eventually. But people were screaming warnings about inflation since 2008, and instead we flirted with deflation, and had overall very very low inflation for the next 12 years. Even with the economy recovering in the late 2010s, inflation was very subdued and the Fed had to back off raising rates.

So, IMO, without a strong economy, and without strong global demand, it’s hard to see inflation anytime soon. Deflation seems more likely in the short term - especially in asset prices. That is real estate and stock market prices.

 

[Montecfo]

Deflation is the larger concern. Prices are already in decline.

Having said that, if we do the right thing and re-shore a lot of industry from China, then that coupled with loose money could cause a tick up in inflation. But that is a ways away if it happens. Would be a good problem.

 

[OldShooter]

With all the money the gov't is injecting, inflation pressure seems likely. Anyone adding tips at this time?

I don't try to understand or predict whether of when my house will catch fire. I buy fire insurance. I also hold TIPS.

Not picking on anyone in particular, not even picking on this thread specifically, but there are a lot of posts that remind me of what the psychologists have learned: The people with the smallest amount of expertise on a subject are the ones who are most self-confident in their opinions.

Predicting the economy has historically been a fool's errand. I doubt that this has changed. Me, I don't know nuthin'.

 

[HadEnuff]

I don't try to understand or predict whether of when my house will catch fire. I buy fire insurance. I also hold TIPS.

Not picking on anyone in particular, not even picking on this thread specifically, but there are a lot of posts that remind me of what the psychologists have learned: The people with the smallest amount of expertise on a subject are the ones who are most self-confident in their opinions.

Predicting the economy has historically been a fool's errand. I doubt that this has changed. Me, I don't know nuthin'.

What % of your investments do you have in TIPS?

 

[OldShooter]

What % of your investments do you have in TIPS?

Basically 100% of our fixed income portfolio less whatever we happen to have in short term "cash/MM" type stuff. We're a little high on that right now, so the TIPS are probably 80%. We were 75/25 AA before the current excitement. I haven't bothered to recalculate recently as the number would make no difference to us. We have been very fortunate in life. he 25 is probably more money than we will ever need.

Shortly after we retired in our 50s, 2006/7, we bought TIPS in a quantity sufficient that we felt our retirement was inflation-proofed.

For anyone serious about retirement inflation insurance, I think the approach to TIPS has to be "go big or go home." If one doesn't buy enough to matter, they won't matter.

 

[Markola]

I’m not hugely familiar with TIPS but I know the Vanguard TIPS index fund began in 2000. For 20 years since then, it has a tracked pretty closely to the Total Bond index fund and has outperformed it by a hair but also has a higher ER and greater volatility. If inflation arrived, do you have great confidence the TIPS index would wildly out-perform the bond index over the long term? Continue to be about the same?

 

[OldShooter]

I’m not hugely familiar with TIPS but I know the Vanguard TIPS index fund began in 2000. For 20 years since then, it has a tracked pretty closely to the Total Bond index fund and has outperformed it by a hair but also has a higher ER and greater volatility. If inflation arrived, do you have great confidence the TIPS index would wildly out-perform the bond index over the long term? Continue to be about the same?

Whew! Lots packed into this. Start with the fact that we have had historically low inflation during your 20 year period. Then look at the fact that bond fund values are driven by many factors, as we have recently seen. Finally consider that a brain-dead monkey could assemble a government bond portfolio pretty much as well as a guy in a suit. So I don't even know what I don't know about bond funds except that I don't want to buy any.

So ... reset. Lets talk about TIPS not funds.

I don't pay much attention but I think TIPS have generally been priced based on their coupon yield plus the buyer's expectations for inflation. And the recent 20 years of history leads to some pretty low inflation expectations. IMO this has resulted in the auction price difference between a TIPS and another similar govvie to be relatively small. That small difference is the insurance premium I pay for the inflation protection I get. As long as inflation is benign, it's a pretty dull ride and the TIPS and the govvie ride in tandem.

Warning/speculation: If we do get high inflation (old story I didn't read with good graphs: https://www.cbsnews.com/news/a-field-guide-to-inflation-lessons-from-the-1970s-vol-1/) things change. The prices of TIPS rise significantly to reflect the inflation. Treasury stops selling TIPS, viewing it as throwing gas on a fire. Then people who are especially terrified by the inflation start bidding up the TIPS, effectively paying a much higher insurance premium. All of this brings joy to the people that bought TIPS in times of low inflation, although the increased inflation is making other parts of their lives miserable. (By buying TIPS they were not wishing for high inflation. Unless they were stupid.)

There are some secondary details like tax issues, effects of deflation, the missing yield curve, and the fact that the coupon on the TIPS is also indexed for inflation, but I think I have hit the big picture stuff.

TIPS take some study. If you're interested I'd encourage you to invest the time.

 

[eytonxav]

Deflation is the larger concern. Prices are already in decline.

Having said that, if we do the right thing and re-shore a lot of industry from China, then that coupled with loose money could cause a tick up in inflation. But that is a ways away if it happens. Would be a good problem.

Your later comment is where I am coming from. Also, if businesses go belly up, there might be dollars chasing fewer goods.

Personally, I hope the world backs off their dependence on China after the hell that nation caused. I would much rather pay more for US made goods.

 

[Spock]

Ignoring the p*ssing contest on will we or won't we have inflation
For those who believe we will (and already are if you try to buy groceries with bare shelves), the original question was how to protect against inflation.

Gold? Maybe. It "should". The spot prices aren't going anywhere but boy howdy take a look at the prices to actually put it in your paw vs. paper.
Equities?: Somebody pointed out that Venezuelan stocks kept up with inflation.
TIPs?: In theory. Depends on if dollar avoidance becomes the source of inflation or not.

I used to work with a guy from Brazil during one of their big inflation periods in the late 80's/early 90's. Gold was one of their hedges. But so were shoes, chairs, anything physical that wasn't paper currency. He said people would spend their lunch hour shifting "assets" to avoid the decline in currency value later in the afternoon.

Last night I was thinking about a major (for me) gold purchase as the physical prices have been going stupid up. But I got to thinking... I could really use a solar power system to keep what food I have in the freezer frozen this summer... and the cost would be about the same...

 

[OldShooter]

... TIPs?: In theory. Depends on if dollar avoidance becomes the source of inflation or not. ...

Huh?

 

[Markola]

Whew! Lots packed into this. Start with the fact that we have had historically low inflation during your 20 year period. Then look at the fact that bond fund values are driven by many factors, as we have recently seen. Finally consider that a brain-dead monkey could assemble a government bond portfolio pretty much as well as a guy in a suit. So I don't even know what I don't know about bond funds except that I don't want to buy any.

So ... reset. Lets talk about TIPS not funds.

I don't pay much attention but I think TIPS have generally been priced based on their coupon yield plus the buyer's expectations for inflation. And the recent 20 years of history leads to some pretty low inflation expectations. IMO this has resulted in the auction price difference between a TIPS and another similar govvie to be relatively small. That small difference is the insurance premium I pay for the inflation protection I get. As long as inflation is benign, it's a pretty dull ride and the TIPS and the govvie ride in tandem.

Warning/speculation: If we do get high inflation (old story I didn't read with good graphs: https://www.cbsnews.com/news/a-field-guide-to-inflation-lessons-from-the-1970s-vol-1/) things change. The prices of TIPS rise significantly to reflect the inflation. Treasury stops selling TIPS, viewing it as throwing gas on a fire. Then people who are especially terrified by the inflation start bidding up the TIPS, effectively paying a much higher insurance premium. All of this brings joy to the people that bought TIPS in times of low inflation, although the increased inflation is making other parts of their lives miserable. (By buying TIPS they were not wishing for high inflation. Unless they were stupid.)

There are some secondary details like tax issues, effects of deflation, the missing yield curve, and the fact that the coupon on the TIPS is also indexed for inflation, but I think I have hit the big picture stuff.

TIPS take some study. If you're interested I'd encourage you to invest the time.

Thanks a lot for the tutorial, Old Shooter! My Target Date 2020 funds have 9% TIPS or so but I admit ignorance about that component.

 

[eytonxav]

Gold? Maybe. It "should". The spot prices aren't going anywhere but boy howdy take a look at the prices to actually put it in your paw vs. paper.

My view is that gold is more of a hedge against fear vs an inflation hedge.

 

[calmloki]

I don't know how to think about the effect of 22 million people getting unemployment this morning. Seems like an awful lot of cash coming from...?.. And the Fed is buying what? with what? And everybody (with an income under $75k) is getting a check for $1200 (from where?). And don't worry - your taxes aren't due for months yet!

Then I think about the paper dollars we have stashed in the house and how unlikely we are to get change for hundred dollar bills. Then I consider the virus having people scared to touch anything handed to them - like cash money. No worries - we have a pile in Ally bank - so I try to sign on this morning and can't get in. Request cannot be processed. Ack! So if those little digital bits go bzzt what do we have?

We are in a better place as far as debt or assets than most of our peers, but I really don't know what inflation or recession would mean to us in terms of our lifestyle. Guess I'll huddle in front of the digital fire and stay out of the viral contagion outside.

 

[OldShooter]

I don't know ... I really don't know ...

There are those who know they don't know and there are those who don't know that they don't know. IMO you are ahead of the game.

 

[copyright1997reloaded]

There are those who know they don't know and there are those who don't know that they don't know. IMO you are ahead of the game.

I'm also in the I don't know camp, but also one who believes in hedging. My current asset allocation includes 10% in TIPs/Inflation Adjusted Savings bonds, and about 2% in Gold/Silver (both physical and some ETF). On the TIPS front, I haven't been adding (just because of negative real yield), but have been dipping my toes into more precious metals. I wish I had a lot more G/S, but also don't want to get burned with bad timing so I am slowly adding more. At 12%, I'm guessing that these would give me 4+ years of an OK/somewhat frugal budget. I'd be feeling a lot better if that 12% was 30%, but it is what it is. (I do also have a good slug of $ in both government guaranteed CD's and stable value funds).

 

[OldShooter]

I'm also in the I don't know camp, but also one who believes in hedging. ...

I think you're in good company. I just finished my umpteenth read of Nassim Taleb's "The Black Swan" last night and he has a concept he calls "antifragile." I haven't read that book yet, but the general idea is to hedge your bets in a way that mitigates the effects of negative black swans.

Without yet really understanding his concept I think our heavy reliance on TIPS makes us at least somewhat antifragile.

 

[Closet_Gamer]

I keep about 5% of our investments in a TIPS ETF and have done so for a long time, just on the principle that inflation will be something that sneaks up on us and that its another good asset to have in the mix for rebalancing/counter-cyclicality.

I think we may see substantial inflation from three causes:

1) Global supply chain reshuffle. If we start answering call in Omaha and not India, and we start making more stuff domestically, buckle up. Both could happen as a result of Covid.

2) Short term supply chain lock ups. Sending people checks is not an economy. I believe we've been blasting through inventory on lots of topics. You can see it reflected in the number of amazon items that are now out of stock. Ironically, this could be amplified when we let everyone out of their houses.

3) Too much money in circulation as a result of the printing press. I tend to think of this as less of an issue as the Fed has options to soak money up if needed.

Of course, I live to be proven wrong in life...

 

[daylatedollarshort]

Isn't inflation only really bad for people who have long term, non-inflation adjusted fixed income? Otherwise, it seems like real interest matter more than inflation. If inflation is 10% but CDs are paying 13% wouldn't that be a good thing for most investors? They'd have a 3% real yield for a change.

There are some good strategies on planning for inflation in the matching strategies section on the Bogleheads wiki. We took our pensions as annuities but they are mostly offset by a fixed rate mortgage. If inflation takes off our pensions won't increase much but our mortgage won't change either. When our mortgage is paid off the pensions will be worth less in future dollars, but then our mortgage will be paid off so the pension money will be just extra income to save or use for discretionary expenses anyway.

We have a TIPS ladder but we're not buying any new ones at negative rates. We had some fixed income CDs and TIPS mature recently and are just buying CDs for now.

 

[daylatedollarshort]

I think you're in good company. I just finished my umpteenth read of Nassim Taleb's "The Black Swan" last night and he has a concept he calls "antifragile." I haven't read that book yet, but the general idea is to hedge your bets in a way that mitigates the effects of negative black swans.

Without yet really understanding his concept I think our heavy reliance on TIPS makes us at least somewhat antifragile.

I made my own spreadsheet before we retired and we modeled all sorts of real returns, high inflation, deflation and really every scenario we could think of to try to make it as bullet proof as possible. So far so good. Our portfolio is down just tad recently. If home prices really drop here like they did during the last recession we're going to buy condos for our adult kids.

 

[OldShooter]

... I think we may see substantial iiflation from three causes ...

Maybe. I'm no economist and even economists can't predict this stuff. Me? I don't know nuthin'. I look at very high (>10%> inflation from a classical risk management approach, considering three parameters: probability, impact, and cost to mitigate.

• Probability: Low but very hard to evaluate because this is black swan territory. The dollar losing its status as the world's reserve currency is a risk I can identify though.
• Impact: Large. Economic chaos in the country as wages lag, creditors are stressed or go out of business, cost of internationally-traded goods like food and oil go through the roof, etc. Bad juju for our life style.
• Cost to Mitigate: Impossible to mitigate completely, but a serious investment in TIPs is relatively cheap and will make a difference.

Isn't inflation only really bad for people who have long term, non-inflation adjusted fixed income? Otherwise, it seems like real interest matter more than inflation. If inflation is 10% but CDs are paying 13% wouldn't that be a good thing for most investors? They'd have a 3% real yield for a change. ,,,

How about all those CDs that are paying negative real interest? All those bonds that will be paid back with funny money? All the consumer discretionary segment businesses that will see no consumers as wages lag inflation? Re those 3% real rate CDs, what is the net real rate after that 13% number is taxed as income? Oh, and sorry about all those fixed pensions. Money is no longer a reliable store of value. As I said, I am not an economist but I think the consensus among economists is that high inflation is very damaging.

We have a TIPS ladder but we're not buying any new ones at negative rates. We had some fixed income CDs and TIPS mature recently and are just buying CDs for now.

Don't forget that the YTM numbers you see for TIPS are just a lower bound, implicitly assuming zero inflation. The actual interest you collect is effectively indexed to inflation because it is paid on the current value of the TIPS, not on their face value. So after 20 years of 3.5% inflation, you will find that your interest payments have doubled. But, as I have said, I am buying TIPS for insurance and not for yield.

YMMV, of course.