Thomas J. Gordon

Inflation Ahead: What's an Investor to Do?

Living4Dividends, thanks for the nice words, I have enjoyed some of your articles as well. I bought u.s. gov't tips directly when Hanke was recommending them in Forbes when the payout yield was 4%. It kind of kills me to take the 2%+ payout yield you get now, but you may be right. One thought I had about tips. I don't think tips have ever experienced high unexpected inflation during their lifetime. How would unexpected inflation affect tips? One would expect that the payout yield would drop (capital gain for the tip bond holder) if suddenly inflation came in at 7% and that surprised people. But you seem more knowlegeable on tips than I, so it is your article to write.

Inflation Ahead: What's an Investor to Do?

For those of you interested in tbt as an investment. I would argue there are two plausible scenarios where tbt could rise. One is the scenario described above where gov't spending double+ of tax receipts causes inflation which then gets factored into interest rates. The other scenario where you can make money on tbt is where we are not headed to Great Depression II. I know people will howl, but I'm not sure q42008 wasn't just everyone getting too nervous and an unnecessary chain reaction set in. If we aren't headed for Great Depression II then it's unlikely gov't interest rates are going to stay as low as they are. A more normal 30 yr treas rate is 5%. If you see the stock market rise over the next 6 months you are going to see tbt go up too. I actually wrote this article in February 2009 so I get some credit for being right as the 30yr rose from 3% to 4%.