The economic conditions we face will become even more dark before we see stability and even mild recovery. Do not buy anything unless you run simulations about how these circumstances will impact your investments.
Deflation is here, and will increase in severity and this dynamic will drive government response, probably for three to five years.
Interest rates on (newly issuing) government securities will fall much lower than present yields. The Fed will ensure that occurs.
This will result in a (possibly brief) but substantial rally particularly in Treasury notes and bonds. It is happening already. However, with yields on the 30-year long bond only having fallen so far to 4.0%, there is plenty of room below to continue falling (and money to be made). During such periods you are better off holding straight Treasury bonds, instead of TIPS. You could go with a nice bond fund holding a range of US government 10-year notes to 30-year long bonds.
Study the behavior of the treasuries during the similar previous period first starting in 3rd qtr 2008 then dramatically accelerating (200 basis point move for both the 10-year note and 30-year long bond) during the short period from mid-Nov 2008 to the end of 2008. Look at how Hugh Hendry (Eclectica Asset Management) made a killing (40% increase in Eclectica Fund) during that period with (leveraged) buying of long-dated government bonds ahead of the rally.
That’s called front-running the Fed. Hugh Hendry is a smart guy.
Get ready for Round #2.
Feel free to go chart TIPS funds response (appreciation) versus straight 30-year long-bond fund response to that period. That will tell you why Hugh Hendry was NOT buying TIPS (and was buying government long-bonds) in Oct 2008!
Yes, we’ll eventually have the shift to incredible levels of inflation. I predict we won’t see that start for at least three years, probably even further off into the future. The collapse of a leading world currency often takes ten years or more, as history tells us.
Ahh, when you think of TIPS you must anticipate the inevitable US government conspiracy: only means of financial escape will be for USA to INFLATE and pay debtors back with ever more worthless dollars, and to pull that off you need the CPI to become even FAR MORE of a liar-metric (vastly under-reporting inflation). Ten years from now, the CPI and be far far more of a JOKE (of underreporting) than it already is.
So your TIPS will UNDERpay because they are inflation-indexed to an ever more and more UNDERreporting liar metric.
TIPS are a sucker’s bet.
I will only grant this, during this deflationary phase we are entering, TIPS are of course similar to cash and thus will be better (during this period) to hold than most all other investments.
And for God sake, do not buy city/state/county muni’s. (A better alternative would be to burn your money in the fireplace as that would have your money lasting longer than in municipal bonds, with the added benefit of providing some heart-warming flame.)
