Gyroscopic Investing

Gumby wrote: If you want to remove that kind of deflation protection from your portfolio, it's your funeral. Not much else we can do to convince you.

More importantly, though, I think it's important to remember that we aren't talking about just buying 30 year treasuries--we are talking about buying 30 year treasuries as part of a package.

I agree with doodle completely that just going out and buying nothing but 30 year treasuries right now might not be the best idea, but that's not what we are talking about here.

doodle,

The 1% on 30-years is assuming some pretty awful conditions everywhere else... I don't think that's what anyone's actually predicting here (maybe you weren't implying that).

Regarding the 4.6% inflation figure... it's based very strongly on volatile commodities.  CPI-U has mustered up another 1.1% the last two months since that 6-month figure (in April and May), but I wouldn't be surprised if that pared back by the end of the next 4 months given the commodity pullback.

So I think by the end of the year we'll be looking at more like 3.5% inflation at most, and most of that being driven by commodity prices.

I think it's easier for people to hold inflation-lagging interest-bearing notes when the alternative is investing in commodities, which is really where our inflation is coming from.

MediumTex wrote: More importantly, though, I think it's important to remember that we aren't talking about just buying 30 year treasuries--we are talking about buying 30 year treasuries as part of a package.

Yes, this is the big issue that we must not forget.  It's so easy to view the various assets in isolation in part because at various times many of them look terrible by themselves.

I am an LT Treasury hater by nature.  Believe me when I say that I get where you're coming from on this.  I dislike them from a moral standpoint ("investing" in an asset that pays me with dollars acquired via confiscation) and they make me nervous from an investment standpoint.  So I think it's worth reading here where MT, moda, and Adam do a good job laying out the case for LT bond bullishness.  I found their ideas very valuable because it introduced another plausible narrative that may be playing out in our uncertain world.

Keep in mind, it's not about making yourself actually feel bullish so much as understand that a bullish narrative exists.  The bullish LT narrative isn't the one that resonates with me as powerfully as the bearish one, but so what?  I don't actually know, so the PP "package" is the best all-around deal.  Only hindsight will give me a chance to see what is actually happening (and even then my understanding will be incomplete, as is always the case with economics.)

doodle wrote: I think this conversation highlights perfectly how hard it is to actually predict bubbles.

When I hear people justifying ideas like 1% interest on a 30 year bond it sounds strikingly similar to the justifications I was hearing back in 2005 of how housing prices were still a bargain at those insane levels.

4.2% on a 30 year maybe isn't a bubble yet but it is certainly below the US inflation numbers which I think most recently came in around 4.6 annualized.

World economic activity isn't going to come to a complete standstill forever and sooner or later the US will have to attract capital or the balance sheet will get even uglier than it already is. Either way, interest rates at some time must rise....

Here is an important point that you may be missing.  You are comparing the inflation rate of 4.6% (actually it is 3.6% y/y as of May http://www.bls.gov/news.release/cpi.nr0.htm, or 2.4% annualized -- 1.002^12-1 = 2.4%) with the rate of Treasury bonds of 4.2%. 

But the main thing to remember is that inflation in the past is not what bond investors are concerned about, it is the expected inflation rate over the life of the bond.  It is not a big deal if inflation is currently higher than the bond rate (although it is not) since it may be expected to fall in the future.

I'm not saying that inflation won't increase, but I don't that it will, and I have enough doubts about my ability to predict the future that I am willing to hold Treasuries as part of the PP package.

The key macro theme to keep in mind when forming opinions about future inflation is that economic environments following the bursting of credit fueled asset bubbles are NOT inflationary. 

This time could be different, and I think the Fed is desperately hoping for a little bit of inflation and a healthy expectation of a small amount of future inflation, but we have to be honest with ourselves about how much inflation is really possible when wages are not rising and credit is not expanding.

MediumTex wrote: The key macro theme to keep in mind when forming opinions about future inflation is that economic environments following the bursting of credit fueled asset bubbles are NOT inflationary. 

This time could be different, and I think the Fed is desperately hoping for a little bit of inflation and a healthy expectation of a small amount of future inflation, but we have to be honest with ourselves about how much inflation is really possible when wages are not rising and credit is not expanding.

I tend to agree that deflation is a bigger risk than inflation. 

this was a great thread...esp looking back & seeing how LTT have performed

murphy_p_t wrote: this was a great thread...esp looking back & seeing how LTT have performed

Walks down memory lane can be quite sobering (and humbling).

The United States economic/military position is simply fascinating. I am so glad to live in the US because I can't imagine trying to set up something PP like in Europe....

I would probably end up building a US PP and try using derivatives to hedge out the currency risk. Nothing is quite like loaning money to a government that can credit bank accounts with a keystroke.

it's kind of nice too to have the world's reserve currency so you can get the extra fear bounce out of gold when your stocks crash (see japan for no effect).

Definitely. It's a global market, but it appears that the globe usually follows the US.