Shouldn't TIPS and gold have been up today?

[soupcxan]

If higher inflation is today's boogeyman, shouldn't funds holding TIPS go up? Yet VIPSX was down (admittedly by less than most other bond funds, but still).

And shouldn't metals benefit from inflation? Yet GLD was off today too. Seems like the whole board was red.

 

[haha]

If higher inflation is today's boogeyman, shouldn't funds holding TIPS go up? Yet VIPSX was down (admittedly by less than most other bond funds, but still).

And shouldn't metals benefit from inflation? Yet GLD was off today too. Seems like the whole board was red.

This is an art, not a science. There is a lot of noise.

Ha

 

[Craig]

Lots of noise for sure. At least for precious metals, markets are scared that interest rate increases will trump inflation of commodities.

 

[wabmester]

If higher inflation is today's boogeyman, shouldn't funds holding TIPS go up? Yet VIPSX was down (admittedly by less than most other bond funds, but still).

The NAV of TIPS funds don't go up when inflation goes up -- it's purely a function of the current real yield.

You can watch the gyrations of the real yield curve here.

When the yield goes up, NAV goes down.    Inflation moves independently of that curve.

 

[haha]

The NAV of TIPS funds don't go up when inflation goes up -- it's purely a function of the current real yield.

You can watch the gyrations of the real yield curve here.

When the yield goes up, NAV goes down.    Inflation moves independently of that curve.

Good explanation. What should happen as I see it is that if interest rates increase because of rising inflation expectations, the spread between TIPs real yield and straight treasuries yield should widen.

Ha

 

[wabmester]

What should happen as I see it is that if interest rates increase because of rising inflation expectations, the spread between TIPs real yield and straight treasuries yield should widen.

Right. In fact, that's how the "pros" figure out what the market thinks expected inflation is. Nominal yield - real yield ~= expected inflation.

Now, how the real yield moves is more interesting. I believe it's mostly a function of supply and demand for our debt. Our supply has been abnormally high due to our crazy spending, but the real yield has been kept low by the demand from foreign central banks. The current rumor is that those banks are moving away from the dollar (the recent spike in gold may have been a side-effect), which will ultimately force the real yield up.

We live in interesting times. Definitely looks like we're at some sort of inflection point.

 

[cute fuzzy bunny]

Until next week or the week after when all of this quickly becomes something we were silly to be worried about...

 

[wabmester]

Until next week or the week after when all of this quickly becomes something we were silly to be worried about...

That'd be nice.   I've started to overuse a phrase recently: "historically unprecedented."   We have so many metrics that are at levels we've never experienced before, I've been very curious to see how everything will play out once the different pieces are set in motion.

Housing is in motion.   The dollar is in motion.   Energy/inflation is in motion.   The central banks are in motion.

I'd like to see things settle down a bit, because the future looks very opaque right now.   Not necessarily doom/gloom, just uncertain.   Don't you hate that?

 

[haha]

I'd like to see things settle down a bit, because the future looks very opaque right now.   Not necessarily doom/gloom, just uncertain.   Don't you hate that?

I will sure second that. All I am trying to do now is get a handle on what might be expected from real interest rates going forward. Even that seems beyond my abilities. In the late 70s, when the $ was falling and commodities were booming, real interest rates were low or negative. Although there are similarities with today, there are also big differences. Like our debt today, both at the government level, and at the household level, is so much larger, even when compared to GDP. And too, much of the federal debt is held by foreigners, as you mentioned.

Then when Big Paul came on board in 1979 real rates (de facto) went through the roof. I wouldn't want to be holding a portfolio full of TIPs if that were repeated, or even echoed.

Very often there is a reasonable area of investment that seems to offer good risk/ reward. If there is today, I don’t know what it is. Maybe T-bills?

Ha

 

[wabmester]

In the late 70s, when the $ was falling and commodities were booming, real interest rates were low or negative.

I think brewer mentioned this before, but when you're looking at historical real rates, it's different than looking at the forward TIPS real rate.

Historically, I think one of two things could cause real rates to go low/negative: stimulative monetary policy (like we had until recently), or the bond market guessing wrong about future inflation (what happened in the 1970's).

So, that correlation you saw is sort of tautological.   Commodity prices were high and the dollar was falling because inflation was high.   Real rates were low because the markets underestimated future inflation.

As far as safe harbors right now, that bugs me too.   There are none (unless enough people believe in the Shiny Metal).

 

[BigMoneyJim]

As far as safe harbors right now, that bugs me too. There are none (unless enough people believe in the Shiny Metal).

There's always diversification and passive investing.

 

[Nords]

There's always diversification and passive investing.

Yeah, sure-- suck all the fun & excitement out of it, too!

 

[wabmester]

There's always diversification and passive investing.

Here's my prediction for the next blockbuster from Fama and French:  "Why diversification and passive investing stopped working."

And the answer: globalization on an (... wait for it ...) historically unprecedented scale.

 

[Papi]

Here's my prediction for the next blockbuster from Fama and French:  "Why diversification and passive investing stopped working."

Of course they will "discover" new correlations and non-correlattions of assets, and pusblish the results.  By the time this information is out-there, the correltations are probably no longer valid 

I still like the simple Buffet approach: find great businesses at reaonable prices, then buy 'em and hold 'em.

 

[cute fuzzy bunny]

Or just buy the whole market and wait 20 years.