(show me where I am wrong, please)
Investing for Yield -2012Right now investors are chasing yield, and are more desperate for this yield than anytime in the last 30 years, at least.
TIPSTreasury Inflation Protected Security (TIPS) is a government bond that pays a base coupon (interest) rate and an inflation index modifier on top of the base rate (applied to your original basis [invested amount[). The inflation modifier is based on the Consumer Price Index for Urban Workers (CPI-U) which presumably reflects the decrease in urban worker purchase power. Right now, the base rate on the last offering (the 4-month TIPS dated 12.30.11) is 0.125 but the inflation index modifier will actually create a loss on your basis (based on the rigged CPI-U, for a NEGATIVE yield. The previous offering (last quarter) also had a negative yield. This quarter’s negative yield was the largest in recent history, the trend is getting worse.
Another problem is that these securities are rolled into indices sold as mutual funds on the secondary market, which creates price imbalances regarding their actual yield.
In other words, you can loan the government your money for four months and have LESS returned to you (you pay $107 to receive $100) after the four months is up than you originally invested! Negative money velocity – another indicator of deflation.
See here:
Recent Note, Bond, and TIPS Auction Results
I-Bond The Series I (Inflation) Bond actually preserves capital because your basis is guaranteed to not go down. Furthermore, because these are not sold on the secondary market they are not subject to the same market-induced price fluctuations. Currently the I-Bond is paying NO core rate and about a 3.0 percent 1-year inflation rate.
So, between these two short term government offerings, you can either choose to break even or lose your money.
Great choices, eh?
You can go longer out on the yield curve, taking more risk, for extremely little more return on your money. Folks are doing JUST that, and have pushed the ugly 30-year bond up to obscene levels with yield lower than dirt.
Why is that?
Deflaglation
Let's back to the TIPS negative yield. Even with a 3% CPI-U, the yield is negative. Why would folks buy this? Well, truth is the little folks don’t – the big boys do. And the big boys are saying that the 3% supposed rate of inflation is fine when the growth rate (Gross Domestic Product) is positive; that is, the economy is expanding. However, a 3% CPI-U is not so hot when the actual inflation rate is 5%. But, the big boys are saying the expected inflation rate will not be 5% (otherwise they would be putting their money in the soft commodities like they did in 2009-2010). Instead, the major money is stating that the inflation rate is ACTUALLY about 3%, but the supposed 3% GDP IS A LIE. The CAKE Lies. The reason the short term TIPS yield is negative is because the inflation rate is actually LARGER than the GDP. Nasty DEFLAGLATION!
More proof in the pudding…
So, just where is the money flowing right now? For the last quarter, much of it has gone into the long term bonds. Let’s look at TLT [ISHARES Barclays + Year Treasury Bond Fund (TLT:NYSE)] as a proxy.
Look at the five year chart. You can see the flow into US Securities during the financial panic of 2008. Last year, 2011, provided another financial semi-panic, more of a longer drawn out process in Europe. You see the same effect pointed out in the chart as money flowed into US Securities. Now the TLT is making another all time long term high, a double chart, at the same level the spike of 2008 provided.
Would YOU put your nest egg there NOW? Looks like plenty of folk are afraid of doing just that (based on declining volume into this spike). Critical juncture; at a point where it could break hard either way with both potential signaling (or reacting to) a major market shock (major Europe or Mideast shock). Clearly money has flowed into the dollar, given the multiple travesties in Europe, more specifically US Dollar-denominated bonds. Is TLT really going to break out from here? Will the 30 year bond run now have a massive blow-off parabolic top? That would portend mass problems somewhere – a volcanic eruption in the euro land or war in the mid-east.
The other side of that coin is a sure but slow slide into oblivion, as we have been experiencing. One indicator to look here is one of the interest rate sensitive bellwether securities, Annaly Capital Mortgage (NLY: NYSE). This major publically traded real estate Real Estate Investment Trust (REIT) is impacted by mortgage rates as a function of interests rates, the underlying equities markets AND the GDP, since increase or contraction in the economy drives property rental trends.
NLY has displayed a nice dis-correlation with TLT and has had a recent selloff after a remarkably steady two year price performance. NLY looks primed to break harder from here, either direction, as both 14 and 18 provide strong price pivots and support/resistance.
For my money, I would bet NLY will rise from here, with the underlying equity markets, for the next quarter, maybe two. This would correspond with an expected pullback in the US Dollar after a very nice run. However, after that correction the US Dollar may well make another significant move up.
Hence, the action in these five instruments (4 month TIPS, 20 (TLT) and 30 year US Note and Bond funds, NLY, and USD) suggest to me that the next quarter to two will have a decent run up into summer, selling off significantly in the summer, and then gradually rising into the end of the year. Against this background gold should continue a rise, along with the USD as the two better performers over the next 12 months. The difference is that the USD is experiencing a cyclical bull within a larger secular bear whereas gold continues to move up as a secular bull.ish move.
In Sum
Volatility should only increase overall. In short, these important bellweathers would portend similar – if difficult – equity, bond and dollar performance to what occurred in 2011 = deflaglation.
Investing for Yield -2012Right now investors are chasing yield, and are more desperate for this yield than anytime in the last 30 years, at least.
TIPSTreasury Inflation Protected Security (TIPS) is a government bond that pays a base coupon (interest) rate and an inflation index modifier on top of the base rate (applied to your original basis [invested amount[). The inflation modifier is based on the Consumer Price Index for Urban Workers (CPI-U) which presumably reflects the decrease in urban worker purchase power. Right now, the base rate on the last offering (the 4-month TIPS dated 12.30.11) is 0.125 but the inflation index modifier will actually create a loss on your basis (based on the rigged CPI-U, for a NEGATIVE yield. The previous offering (last quarter) also had a negative yield. This quarter’s negative yield was the largest in recent history, the trend is getting worse.
Another problem is that these securities are rolled into indices sold as mutual funds on the secondary market, which creates price imbalances regarding their actual yield.
In other words, you can loan the government your money for four months and have LESS returned to you (you pay $107 to receive $100) after the four months is up than you originally invested! Negative money velocity – another indicator of deflation.
See here:
Recent Note, Bond, and TIPS Auction Results
I-Bond The Series I (Inflation) Bond actually preserves capital because your basis is guaranteed to not go down. Furthermore, because these are not sold on the secondary market they are not subject to the same market-induced price fluctuations. Currently the I-Bond is paying NO core rate and about a 3.0 percent 1-year inflation rate.
So, between these two short term government offerings, you can either choose to break even or lose your money.
Great choices, eh?
You can go longer out on the yield curve, taking more risk, for extremely little more return on your money. Folks are doing JUST that, and have pushed the ugly 30-year bond up to obscene levels with yield lower than dirt.
Why is that?
Deflaglation
Let's back to the TIPS negative yield. Even with a 3% CPI-U, the yield is negative. Why would folks buy this? Well, truth is the little folks don’t – the big boys do. And the big boys are saying that the 3% supposed rate of inflation is fine when the growth rate (Gross Domestic Product) is positive; that is, the economy is expanding. However, a 3% CPI-U is not so hot when the actual inflation rate is 5%. But, the big boys are saying the expected inflation rate will not be 5% (otherwise they would be putting their money in the soft commodities like they did in 2009-2010). Instead, the major money is stating that the inflation rate is ACTUALLY about 3%, but the supposed 3% GDP IS A LIE. The CAKE Lies. The reason the short term TIPS yield is negative is because the inflation rate is actually LARGER than the GDP. Nasty DEFLAGLATION!
More proof in the pudding…
So, just where is the money flowing right now? For the last quarter, much of it has gone into the long term bonds. Let’s look at TLT [ISHARES Barclays + Year Treasury Bond Fund (TLT:NYSE)] as a proxy.
Look at the five year chart. You can see the flow into US Securities during the financial panic of 2008. Last year, 2011, provided another financial semi-panic, more of a longer drawn out process in Europe. You see the same effect pointed out in the chart as money flowed into US Securities. Now the TLT is making another all time long term high, a double chart, at the same level the spike of 2008 provided.
Would YOU put your nest egg there NOW? Looks like plenty of folk are afraid of doing just that (based on declining volume into this spike). Critical juncture; at a point where it could break hard either way with both potential signaling (or reacting to) a major market shock (major Europe or Mideast shock). Clearly money has flowed into the dollar, given the multiple travesties in Europe, more specifically US Dollar-denominated bonds. Is TLT really going to break out from here? Will the 30 year bond run now have a massive blow-off parabolic top? That would portend mass problems somewhere – a volcanic eruption in the euro land or war in the mid-east.
The other side of that coin is a sure but slow slide into oblivion, as we have been experiencing. One indicator to look here is one of the interest rate sensitive bellwether securities, Annaly Capital Mortgage (NLY: NYSE). This major publically traded real estate Real Estate Investment Trust (REIT) is impacted by mortgage rates as a function of interests rates, the underlying equities markets AND the GDP, since increase or contraction in the economy drives property rental trends.
NLY has displayed a nice dis-correlation with TLT and has had a recent selloff after a remarkably steady two year price performance. NLY looks primed to break harder from here, either direction, as both 14 and 18 provide strong price pivots and support/resistance.
For my money, I would bet NLY will rise from here, with the underlying equity markets, for the next quarter, maybe two. This would correspond with an expected pullback in the US Dollar after a very nice run. However, after that correction the US Dollar may well make another significant move up.
Hence, the action in these five instruments (4 month TIPS, 20 (TLT) and 30 year US Note and Bond funds, NLY, and USD) suggest to me that the next quarter to two will have a decent run up into summer, selling off significantly in the summer, and then gradually rising into the end of the year. Against this background gold should continue a rise, along with the USD as the two better performers over the next 12 months. The difference is that the USD is experiencing a cyclical bull within a larger secular bear whereas gold continues to move up as a secular bull.ish move.
In Sum
Volatility should only increase overall. In short, these important bellweathers would portend similar – if difficult – equity, bond and dollar performance to what occurred in 2011 = deflaglation.
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