Recent comments by emerging markets equities manager Marc Faber are required reading for investors who are trying to hedge their exposure to the risk of rising inflation by purchasing Treasure Inflation Protected Securities (OTC:TIPS) or the TIPS ETF, the iShares Lehman TIPs Bond Fund, ticker TIP. Excerpt:
The full article (published September 2nd) is here.
I have always been skeptical about buying inflation adjusted bonds (OTC:TIPS), simply because the yield on inflation adjusted fixed income securities is pegged to the CPI. Since the government will always understate the true rate of inflation the buyer of the TIPS will eternally be shorthanded. Moreover, I think that one day in future, the bond market will finally wake up to the fact that inflation has been understated and sell-off very badly. In fact, you would have to be the world’s greatest optimist (a la Abby Cohen or Larry Kudlow) to buy a US 30-years government bond in US dollars and with a yield of just 4.5% with the view to hold these bonds to maturity. You would have to assume that US inflation will never rise above 4.5% within the next 30 years and that the US dollar’s purchasing power will be maintained. Not a likely scenario, in my opinion (short term, however, bonds could rally somewhat more as the economy weakens).
Many people doubt the veracity of the official inflation measure. On this topic:
- Inflation is Understated: Looking at Alternative CPI Measures
- Bill Gross claims the CPI is understated, but is he right?
- If Bill Gross is right, how should equity managers invest?
- Hedonic warfare erupts between Gross, Poole & Berry
- Bond index ETFs include AGG, IEF, LQD, SHY, TIP and TLT. (Click on a symbol to view ETF Investor articles that discuss or mention that fund.)
- The complete list of funds (and links to articles about them) covered by ETF Investor.
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