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Saturday, May 23, 2009
4:57 PM TweetThis
  • Yale's legendary financial wizard David Swensen says it's time to buy TIPS: "We've had this massive fiscal stimulus... and it's hard to see how that doesn't translate into pretty substantial inflation." Much, much more in Swensen's interview on Consuelo Mack's WealthTrack. More on TIPS from the Treasury.
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This news story has 13 comments:

  •  
    There can't be inflation without having the velocity of money accelerating and this will not happen soon. Once it happens, the FED will be forced to increase rates at a very quick pace. This will delay even more the economical recovery. We are in trouble for a very long time but inflation is not yet the main worry. The worry is the massive deleveraging taking place and its impact on asset prices and future economical growth.
    May 23 05:05 PM | Link | Reply
  •  
    On May 23 05:05 PM jeandit75 wrote:

    > There can't be inflation without having the velocity of money accelerating
    > and this will not happen soon. Once it happens, the FED will be forced
    > to increase rates at a very quick pace. This will delay even more
    > the economical recovery. We are in trouble for a very long time but
    > inflation is not yet the main worry. The worry is the massive deleveraging
    > taking place and its impact on asset prices and future economical
    > growth.

    I agree, jeandit75. Inflation is more of a long-term than a near-term concern. I also expect commodities and precious metals will likely outdo TIPS when serious inflation starts to kick in.
    May 23 05:19 PM | Link | Reply
  •  
    I agree with both of you. TIPS are an interesting creation, but the yields will lag returns from commodities and (some) global stocks if and when inflation gets ugly (which won't be soon), and the fact that they can't be held effectively in tax-deferred accounts makes them kind of pointless for Joe Retail.

    Swensen is usually smarter than this. Am I missing something, or is he?
    May 23 05:37 PM | Link | Reply
  •  
    Yes. I was looking through the instrument faqs and given the coupon timings and rate, it is a better hedge against inflation than conventional treasuries, but it is still going to underperform the rate the inflation. Unless they increase the number of coupons per year (now semi-annual), I think it is not going to outdo inflation when it hits.

    On May 23 05:37 PM jacflash wrote:

    > I agree with both of you. TIPS are an interesting creation, but
    May 23 06:36 PM | Link | Reply
  •  
    TIPS may be the ultimate sucker's bet.

    Consider that they are pegged to CPI. And what is the largest component of CPI? Owner's equivalent rent, which is falling due to the bursting of the largest bubble in history.

    Inflation will occur in everything but real estate. The housing bubble of the first half of this decade cannibalized buyers for the following 10 years - buyers are being hit by a double-whammy of higher credit standards and higher down payments.

    CPI will grossly understate real inflation and leave all TIPS investors lagging other asset classes like ag commodities, precious metals miners and energy-related companies.
    May 23 06:46 PM | Link | Reply
  •  
    I would concur all the 5 comments so far are prudent and astute. Thanks. If you happen to view Mr. Swensen's video interview with Connie, his recommended TIPS holding percentage is only a modest 15% (correct me if I am incorrect).

    Yes, TIPS won't take off like a rocket probably for a good while (3-6 months?). Meanwhile, it might be wise to park that 85% your money somewhere else.
    May 23 10:11 PM | Link | Reply
  •  
    No reason to own TIPS until they outlaw gold again, at which point I'd invest in a bus ticket to Canada instead. So, actually, no reason to own TIPS.
    May 23 10:28 PM | Link | Reply
  •  
    With TIPS, by definition, you are earnings a real rate of interest on top of inflation. By digging a little further, you will realize that housing, transportation, and food/beverages make up about 75% of the pie. Which basically means, unless those 3 factors tick up, you shouldn't be expecting a whole lot of upward movement in the CPI.

    But here's the trick, CPI is a basket. Individual components could inflate more so than other components. Housing is in a deflationary cycle that probably won't be picking up anytime soon, but Energy and Agricultural Products (Fertilizer) are actually on an uptrend. If Housing actually does stabilize, Energy and Agricultural Products would be in much greater demand (And higher prices).

    Not to mention, commodity-linked equity is forward looking -- so it accounts for future increases in prices; inflation and TIPS does not.

    So if you are going for a full-blown inflation play, it would be much wiser to invest in an Energy or Agricultural Products (i.e. Potash) ETF because of the "forward looking" component.
    May 23 11:36 PM | Link | Reply
  •  
    Wow, you guys have some amazing crystal balls.

    Sounds like the fear mongoring has taken hold and you're still talking about deflation. That's so six-months-ago.

    Most investors will be left, and are being left on the sidelines, as usual, as they proclaim dead cat bounce and bear market rally, hoping they get another leg down to jump in at unbelievable valuations. Same with real estate. It's a dead sector, home prices aren't going up any time soon, lending is dead, blah blah blah.

    Most "investors" are like today's analysts. Lagging indicators. Check the stats people, this inflation boom is already beginning.
    May 24 02:01 AM | Link | Reply
  •  
    I'm no conspiracy theorist, but I can't help but be skeptical about the long-term appeal of TIPS given who gets to calculate the CPI. And that you have the privilege of immediately paying taxes on the non-cash inflation adjustment to principal makes them that much less attractive unless you want to tuck them away in an IRA.
    May 24 09:16 AM | Link | Reply
  •  
    Missing_Link, I would be cautious about buying precious metals and commodities in general. I expect a correction in the near future. Oil may be an exception but only because of it's vulnerability to geopolitical events. I cannot comment on TIPs but the article by Mr. Swensen is interesting in that he is labeled as a "wizard" yet the funds he administers lost over 20% last year so I won't be taking any of his financial tips.


    On May 23 05:19 PM Missing_Link wrote:

    > On May 23 05:05 PM jeandit75 wrote:
    May 24 09:45 AM | Link | Reply
  •  
    Commodities are definitely the better choice then TIPS. If inflation flares up, it'll just as likely be from China's demand for commodities. Why not be the one selling into their demand?
    May 24 01:49 PM | Link | Reply
  •  
    Interesting. I forgot that real estate is part of that calculation. I had some problems figuring why the percentages are that low, but now that you mentioned it, it makes no sense to invest in TIPS then. I feel sad that we are in this spiral to try to correct overvaluation by inflation, especially when it makes investing in any form of asset risky.
    May 25 10:16 PM | Link | Reply
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