Numbers, deflation, inflation

Some recent numbers of interest from the WSJ:

• Gold SPDR ETFs in first six months of 2010:  up $7.4 billion
• Long Term Treasury Bonds 1/10 to 8/1/10:  + 15.5%
• S&P from his 1/07 to 8/6/10:  - 28.35
• Home price average from 2006 to today: - 29.1%
• 2010 Consumer Price Index:  +1.4%   (projected: +1.5 to 2%)

These numbers show the continuing disinflation and deflation as to prices. The FED is fearful of deflation as it will hurt the government coffers and Wall Street; further, it is immune to jerry-rigging, unlike inflation.

In a these times, it doesn't hurt the average person with gold or even cash sitting around at a modest return. Stocks are problematic as demand declines and companies continue to batten down the hatches. Still, a solid consumer-based stock, best with a  dividend, should survive well enough.  

As noted previously, one school of thought was to go all-in on government long term bonds, which you see above have done very well.

IMPORTANT:  TIPS can lose principal in deflation. They are great during inflation, however.  The WSJ says zero coupon bonds, aka strips, are better since return is locked in and the dividends are reinvested at that rate. Of course, then what do you do if inflation takes off?  It is not easy for real people to jump in and out of investments, most of us have jobs.

Hedging seems a good plan.  Perhaps, have some TIPS and some cash. If deflation appears, take a hit on the TIPS, but the cash will balance it. Then, when it looks like the high inflation is coming, buy TIPS.

If we slide into deflation, cash is king, the opposite of its status during inflation.  You can see the money changers who deal in credit do not want deflation.  Here, if you can find a pleasant return or good dividend, that may be the smartest thing.  In deflation, you will want to have your money in US cash, the opposite of the threat I have been harping about.  We are at the crossroads.

To paraphrase Hamlet, there is much provenance in the fall of a rate.  It is not be now, it be later. If it not be inflation, it will be deflation....   And so on.  One has to hedge one's property.  Prepare for both events, as both will come.  If not now, later.

If you speculate and guess right, you come out way ahead.

One of the early mega-wealthy Russian tycoons ordered thousands of Lada cars, with the help of a down payment garnered from friends, as he was certain the Rubble would crash, and I mean crash.  It did and he purchased the cars for pennies on the old Rubble as the contract price was in inflated currency. This would be akin to actually getting a fixed mortgage before an inflation.

So,  defense and offense is good.  Waiting in line for the shearing is not, as you can be whip-sawed in both directions.  

The dominoes are falling

First, Greece is collapsing, France, Portugal etc to follow, then Germany. The dollar will look strong as it becomes the place to put EU.  That is an illusion


The TIPS, the US inflation protection bonds were moving up this week, according to Bob, this is contrary to the dollar moving up.  Historically, the TIPS should go down. The smart money is moving into them.


Gold and silver are up, but historically they should be down as the US dollar is strong.....but....  


So get that silver or TIPS, now.  Forget timing the market. The first domino is falling. Today's blips will be the floor of tomorrow.


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Washington Post, from Greg:

HI lawmakers vote to limit Obama document requests

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The Associated Press 

Tuesday, April 27, 2010; 11:03 PM

HONOLULU -- Hawaii legislators have passed a measure allowing a state agency to ignore repeated requests from a person or organization for PresidentBarack Obama's birth certificate.

The measure approved Tuesday by the state Legislature would carve an exemption in the state's public records law and allow officials to ignore all kinds of duplicative requests, including those for Obama's birth certificate.

Hawaii Health Director Dr. Chiyome Fukino has issued two statements since 2008 saying she had seen vital records proving Obama is a natural-born American citizen. Obama was born in Honolulu to a Kenyan father and an American mother.

But state officials say they still get between 10 and 20 e-mails each week seeking verification of Obama's birth.

The bill now goes to Gov. Linda Lingle.

The bill is SB2937.

----
I like it when Fukino refuses to release information for privacy reasons, then tells you what is on file. Not a good lie. Who knows where the conclusion came from that the vital records prove Obama is a natural born citizen?  The hearsay of a clerk who was not suppose to release any private information?  The newspaper? Facts would be wonderful, no.  So, absent non-hearsay facts, just apply Occam's razor. 


Nonetheless, Hawaii and The Washington Post agree Obama had a Kenyan father.

Slaughterhouse Cases, 83 U.S. 36 (1872): The Court discussed (not an opinion on the subject)  the Citizenship Clause of the Fourteenth Amendment:the phrase 'subject to the jurisdiction thereof' was intended to exclude from its operation children of ministers, consuls, and citizens or subjects of foreign states, born within the United States

 The Supreme Court has not directly ruled on exactly what natural born means. Nonetheless, Mr. Obama's father was a British citizen and returned home after school.  He was the subject of a foreign state and his son was his son - perhaps a dual citizen who was required to renounce his British (Indonesian?) citizenships.  I have no idea why I am in triple space and can't remove it.

TIPSY

There has been some welcomed distrust of Greg's comments, but I think he is serious. It could happen.

A good answer from an item sent by Irene:

Home  Bonds  Bond Types

Treasury Inflation Protected Securities

WHAT IS AN INFLATION PROTECTED SECURITY? 

TIPS, or Treasury Inflation Protected Securities were introduced into the bond market in early 1997.  TIPS are issued by the United States government and therefore have no default risk associated to them.  As with Treasury bonds, TIPS are issued through the Federal Reserve auction quarterly and can be purchased through the Treasury Direct system and coupon payments are made on a semi-annual basis. 

The unique feature with these bonds is that their principal is tied to the CPI (Consumer Price Index).  The CPI measures the rate ofinflation monthly by measuring price changes in common consumer goods.  TIPS protect the value of your investment by increasing the principal value of your bond by the rate of inflation, ensuring that periods of high inflation will not erode the relative value of your coupon.  The term "relative" is used here because the interest rate of a bond will mean much less if inflation is very high and visa versa. 

You can perform a very simple analysis to determine if the treasury vs. treasury TIPS yield spread (aka. "TIPS Spread") makes it worthwhile to invest in the TIPS.  For example, assume the yield on a 5 year TIPS is 3.5% while the yield on a treasury bond with the same maturity is 6.25%.  Now assume an average inflation rate of 3%.  The TIPS would actually yield 6.5%, or 25 basis points higher than the treasury bond of the same term to maturity.  Through investing in TIPS, you are basically making a bet that inflation will move higher over the period of your bond term. 

POTENTIAL RISKS OF INVESTING IN TREASURY INFLATION PROTECTED SECURITIES 

The first risk factor of investing in TIPS is that the measurement of inflation is done through CPI.  The CPI measurement may not be completely accurate so the principal balance of the TIPS may not increase alongside with true inflation. 

Secondly, if interest rates spike higher, TIPS yields may rise as well.  This would negatively impact the price of the bond on the short run; however, TIPS should still outperform on the long run. 

Another downside of investing in TIPS revolves around the fact that they do not pay the inflation adjustment out until the bond matures.  This has in implied risk, albeit almost zero since the United States government is backing this security.  Also keep in mind, the inflation adjustment that the bond receives will be taxable yearly, even though you do not receive this cash.  Basically, you will be charged on income not yet realized (Hmmm)

Finally, and least importantly, there is a deflationary risk.  While deflation has not been around for quite a few decades, it is a possibility and TIPS will adjust your principal lower to account for deflation.  There is a safety net, if you will, that does not allow the principal balance to drop below the original amount. 

CONCLUSION 

In conclusion, TIPS can be a good investment for those of you who believe that inflation is here and here to stay.  When general market yields move higher, TIPS begin to underperform similar maturity fixed income investments due to a potential drop in inflationary pressures, which will in turn drop the price of the bond in the short run.  Longer term, TIPS provide as a good hedge against inflationary and even hyperinflationary environments.

TIPS

Here is a long piece worth reading, with pencil in hand.

Here

I went to this site as pundits and investment bankers are talking up the market, talking about the FED raising or not raising rates or when, or what happens when they do.  Lions and tigers and bears, oh my.

This is all fun, but the article from Kitco will offer some caution.  At some point the manipulators lose control of the strings and the marionettes crash into one another.

Investors are like the person with a hammer - everything looks like a nail. They have been making money, after losing it and destroying our monetary infrastructure, but that was a long time ago, right? Now, they see more investment because of cheap money - think about this distortion.

I mentioned Soros was buying B of A last month and, sure enough, it took off today.  Clearly, there is information insiders know, like the government protects its own. He looks smart, but is just connected.

Gold fans just buy without examining its underlying value which, it turns out, doesn't matter, as yet, as what is more important is the bad value of our economy.  Old time traders say: wo, way too high, look for 850.  Other old timers say, don't sweat the dips all hell is breaking loose. Depending on the time frame, both are right.  Still, there is a see-saw.

My only point, in the end, is anyone with cash is nuts. You are paying money to keep it. Why not protect it in something not a stock and not a commodity?  If you have extra assets, then you can play investor as and see what happens.  If you a worried about survival, time to take a conservative action.

Stocks and gold, and so on, are flags in the wind of monetary pricing and government interference.  Winds change.

If you go here, you can learn how to buy TIPS.

TIPS are ignored, in general, as they are not sexy, at all, but they are the only security against serious inflation. There is no reason to not purchase these treasury bonds, other than emotional inertia, the tool of the crooks.

The site mentions you can buy TIPS from your broker.  TIPS are bonds and trade at a discount or premium.  Prices change and one can buy and sell them like regular bonds.

Here, you can see TIPS prices move. When inflation is low, TIPS are low; when inflation heats up, TIPS move up.  Why?  Because they guarantee a return so they are of interest to those wanting to defeat inflation.

A TIP guarantees a certain, modest return, no matter the inflation rate. If you get 2%, that sounds trivial, but if the inflation rate goes to 18%, as it has in recent memory, you will get 20%

If that doesn't sound like fun, consider what you are getting on your checking and savings account, then factor in a 7% reduction in the dollar each year.  The government is using an invisible tax to take your assets.

When inflation starts up seriously, see article, investors will look around for a place to park cash.

If you are holding TIPS, you will see the value of the bond increase both to match inflation, as promised, AND because of a panic to get to security, the price of the TIP will see an increase.  It could be a serious move.

Also, I am concerned that there will be an attack on Iran soon, so security is a nice idea.

The government is using inflation to erase debt.  It eats debt by making the debt easier to pay as money becomes worth less and, thus, you get paid more. (Hence, get a loan now as it will be easier to pay later)  Real assets, like silver, will apparently go up during this time, but mostly it goes up because the dollar goes down. The same with oil.  As I was informed yesterday, an ounce of gold will always buy a good suit.

If inflation takes off, so will oil prices- even as demand goes down.  Supply and demand have an affect, but the devaluation of the dollar will trump the markets.

Your friendly government is digesting your money. It does so intentionally.  So, you do as you think best.  A god serf will have a nice checking account.

Even Republican politicians join in this shell game, though not at the spectacular numbers afoot these days, so I won't bother to activate the socialist meter at this point.  

Monetaristic policy is agnostic, you can be whatever party you like as you play with people's lives.