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Changes in the government's CPI calculation are making
TIPS a questionable hedge against inflation. The current issue of Forbes
contains the following James Grant article that you might want to
read.
<A
href="">http://www.forbes.com/business/forbes/2004/0329/102.html?_requestid=1315
<SPAN
class=artsectiontitle>Yes, But <FONT
face="Times New Roman">Forget
TIPS James Grant,<SPAN
class=mainartdate> 03.29.04, 12:00 AM ET
They no longer protect against rising prices much, with the
inflation-adjusted yield half of what it was in 2002. Meanwhile, the CPI is bad
at gauging inflation.
<TABLE cellSpacing=0 cellPadding=4 width="100%" bgColor=#ffffff
border=0>
<IMG height=200
border=0> More From James
Grant
Stocks, bonds, and
real estate are not inherently good or bad. What decides the issue is price. At
today's prices, I believe, the Treasury's Inflation-Protected Securities are
bad. Constant readers will detect a U-turn. Three earlier installments of this
column sang the praises of TIPS. No
security is, or ever was, perfect, the argument here ran, but TIPS--at the
price--offered more reward than risk. No more. Today ten-year TIPS offer an
inflation-proof yield of 1.58%. As recently as two years ago the ten-year
fetched 3.5%. And not only is the rate
lower, but also the risks are higher. One risk is that the government will
revise the basis for calculating the Consumer Price Index. Alan Greenspan, in
his Feb. 25 testimony before the House Budget Committee, urged Congress to
reengineer the CPI to produce a lower inflation rate, the better to close the
federal budget deficit. TIPS, you'll
remember, are indexed to the CPI. The coupon is set at auction for the life of
the bond. The principal is adjusted for inflation. A rising CPI means a growing
sum of principal--on which, every six months, is paid the stated interest. At
maturity the Treasury redeems the principal, duly adjusted. In no case does the
holder receive less than par. The CPI is
nobody's favorite index. Many economists swear it overstates the cost of living.
They lament, for example, that no adjustment is made for perceived improvements
in the quality of goods and services. Greenspan, in his testimony, recommended
that the current-model CPI be replaced by a "chained" version that takes account
of changing consumer buying patterns in response to changing prices. Had such a
chain-weighted index been in use these past ten years, Greenspan testified, the
public debt would be $200 billion lower than it is. He did not mention that
pensioners, Social Security recipients, TIPS owners and others whose fortunes
are tied to the CPI would collectively be poorer. <SPAN
class=mainarttxt>"Shifting to the chain-weighted measure would not address
perhaps more fundamental shortcomings in the CPI," the maestro told the
congressmen, "most notably the question of whether quality improvement is
adequately captured--but it would be an important step...." <SPAN
class=mainarttxt>Under consideration at the Commerce Department is a study to
explore the merits of adjusting the medical-cost component of the CPI for
advances in medical treatment. If such a deflator were constructed and put into
service, the growth rate of the health care component of the CPI would be
significantly flattened. The risk of the
government's doctoring the CPI may appear remote. But whether or not the
revisionists get their way, a ten-year TIPS yielding 1.58% offers scant
protection against the scourge it supposedly guards against.
Inflation, after all, is a matter of dollars--an
increase in the supply of money not offset by an increase in the demand for
money. People will say, "Inflation is too much money chasing too few goods," but
there's a lot besides goods that too much money can chase: stocks, bonds,
houses, foreign currencies, etc. The cause of inflation is always the same, yet
the symptoms are ever changing, and TIPS protect against only one set of
symptoms. They do an indifferent job of
even that. "Shelter," with a 32.9% index weighting, is the biggest component in
the CPI (for perspective, health care is 4.6%). You would suppose that the
levitation in house prices would somehow be reflected in the CPI. It is not. The
Commerce statisticians, in fact, do not measure house prices. Rather, they
calculate the rental income that the owner of a house would receive, were he
renting it out. They call this stream of income "owners' equivalent
rent." This imputed rent, with a 23.4%
index weighting, is a mighty determinant of the measured inflation rate. And for
most of the past 20 years changes in owners' equivalent rent closely tracked
changes in house prices. Since 1997 the two series have sharply diverged,
however, with house prices racing ahead and rents lagging behind. According to a
study by a pair of New York Fed economists, it's the rent number that's out of
step. The government's methodology, write the Fed authors, Jonathan McCarthy and
Richard W. Peach, has failed to reckon with the growth of the upper end of the
rental market. An analysis by my colleague David Lane shows that CPI growth over
the past year would have been higher by about one percentage point if the
inflation-counters had counted house prices instead of owners' rent.
No surprise here: Governments have forever been
better at making inflation than at protecting against it. <SPAN
class=mainarttxt>James Grant is the
editor of Grant's Interest Rate Observer. Visit his homepage at <A
href="">www.forbes.com/grant. <BR
clear=all>
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<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Dan C
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Thursday, March 18, 2004 5:03
PM
Subject: Re: [RT] crude oil at 13 year
high
Dan please give some examples of TIPS.
Thanks, Dan
Dan Goncharoff wrote:
TIPS don't particularly care, which is the point.
They will probably outperform gold in a deflationary environment.
I suggest you do some research about them.
Regards DanG
Charles Meyer wrote:
<BLOCKQUOTE cite=""
type="cite">That's assuming inflation of
course. Bonds hate deflation. <FONT
face=Arial>chas
<BLOCKQUOTE
>
<DIV
>-----
Original Message -----
<DIV
>From:
Dan
Goncharoff
<DIV
>To:
<A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
<DIV
>Sent:
Thursday, March 18, 2004 7:47 AM
<DIV
>Subject:
Re: [RT] crude oil at 13 year high Instead of T-Bills,
consider TIPS (Treasury Inflation-Protected Securities). No maturities
to roll over.
Regards DanG
Charles Meyer wrote:
<BLOCKQUOTE cite=""
type="cite">
Cash, (US T-Bills), Gold, or a combo of
the two. Inflation or Deflation? Keep a ratio chart of
cash gold divided by the<FONT
size=-1>30 year Treasury. This will show you the daily struggle
of the two forces; and which one is currently winning
battles. Re
conspiracy; a famous supreme court justice once said (sorry I don't
recall his name) not to mistake a conspiracy for<FONT
face=Arial>what can be ascribed to simple incompetence;
and of course there is a lot of that inherent in
bureaucracy. <FONT
size=-1>chas
<BLOCKQUOTE
>
<DIV
>-----
Original Message -----
<DIV
>From:
<A title=jwhite43@xxxxxxxxxxxx
href="">Jim White
<DIV
>To:
<A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
<DIV
>Sent:
Thursday, March 18, 2004 6:47 AM
<DIV
>Subject:
Re: [RT] crude oil at 13 year high <FONT
size=-1>I just finished a book that describes what could happen in a
full financial meltdown. It's a novel by James Cook called "Full
Faith & Credit". Pretty scary but enlightening
reading. In that
vain, could some of you share your strategy for asset protection and
profit should such an unwinding happen.I don't have one yet but am
beginning the planning and would appreciate the thoughts of
others. <FONT
size=-1>Jim
<BLOCKQUOTE dir=ltr
>
<DIV
>-----
Original Message -----
<DIV
>From:
<A title=BHEISLER@xxxxxxxxx
href="">Bob
<DIV
>To:
<A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
<DIV
>Sent:
Thursday, March 18, 2004 3:18 AM
<DIV
>Subject:
Re: [RT] crude oil at 13 year high <FONT
face=Verdana>This conspiracy stuff has been
discussed on this forum going back to the early bubble years in
the mid-90's, and back then I subscribed to that theory too.
I also believed that the government was actively involved in
propping up the stock market but after seeing what happened to the
markets since the bubble popped I no longer believe that
either. I
think the questionable economic numbers we get are due mostly, if
not completely, to the normal inefficiency and incompetence you
get out of any massive bureaucracy. Doesn't "CPI excluding
food and energy" sound a lot like "EPS of xx cents excluding one
time charges that recur every quarter"? How about the
headline Labor number we get every month that doesn't include
independent contractors or the self-employed? But there's a
Household number that does include that number which is rarely
mentioned, however I suspect there are problems with how that
number is calculated too. <FONT
face=Verdana>The other item that argues against any
meaningful "cooking of the books" is that these massive government
agencies are comprised of people from both parties, albeit mostly
democrats. So it's hard to imagine they could maintain a
"cover-up" year after year and through different
administrations. This would be especially true for a
republican administration since the media would be in an orgasmic
frenzy to cover such a story. <FONT
face=Verdana>I share the longer term negative view
on the equity markets being expressed on this forum, but it's not
because of any government conspiracy....it's because of what has
transpired in previous post-bubble periods and the length of time
it took to truly and fully recover from a financial bubble (15-20
years).
<BLOCKQUOTE
>
<DIV
>-----
Original Message -----
<DIV
>From:
<A title=profitok@xxxxxxxxxxxxx
href="">profitok
<DIV
>To:
<A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
<DIV
>Cc:
Mike Burk
; <A title=ketayun@xxxxxxxxxxxxx
href="">Kate (E-mail) ; <A
title=Jseaton357@xxxxxxx
href="">Jseaton357@xxxxxxx ; <A
title=urania@xxxxxxxxxxxxxxxx
href="">Elizabeth (E-mail) ;
<A title=dcarter888@xxxxxxxxxxxxx
href="">doroty.h ; <A
title=dperrino@xxxxxxxxxxxxx
href="">Dom Perrino ; <A
title=DELTA88343@xxxxxxx
href="">DELTA88343@xxxxxxx ; <A
title=cyclesman@xxxxxxxxxx
href="">Cyclesman (E-mail) ; <A
title=astrofin@xxxxxxxxxxxxxxx
href="">astrofin@xxxxxxxxxxxxxxx
; <A title=yacov@xxxxxxxxxxxxx
href="">Yacov Twena ; <A
title=bigschmo@xxxxxxxxxxxx
href="">vincent ; <A
title=u.Stuart-Auslander@xxxxxxx
href="">U.
Stuart-Auslander@xxxx Net (E-mail) ; <A
title=SLAWEKP@xxxxxxx href="">Slawek
(E-mail) ; <A title=rmac@xxxxxxxx
href="">Ronald McEwan ; <A
title=rginsat@xxxxxxxxxx href="">Ron
Miller (E-mail) ; <A title=panda2222@xxxxxxxxxxxxx
href="">panda2222@xxxxxxxxxxxxx
; <A title=ntt-list@xxxxxxxxxxxxxxx
href="">ntt-list@xxxxxxxxxxxxxxx
<DIV
>Sent:
Wednesday, March 17, 2004 9:41 PM
<DIV
>Subject:
[RT] crude oil at 13 year high <FONT
size=-1>Hello <FONT
size=-1>this will filter into higher manufacture cost,
transportation, and airlines,<FONT
face=Arial>(good
shorts,) <FONT
size=-1>corporate earnings will decrease as cost
increase,gov
stats on inflation today phony, <FONT
face=Arial>payroll employment
decreasing, <FONT
size=-1>they are keeping the # nice until
elections,then will
drop the bomb with REAL numbers<FONT
face=Arial><FONT
size=-1>Ben
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