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Vanguard Treasury Inflation Protected Bonds Funds (VIPIX, VAIPX)

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TIPS are government issued bonds designed to provide a certain pre-tax real return when held to maturity. You don't pay any commission or spread to purchase TIPS from the treasury, and if you hold to maturity, then there's no selling cost. This way you can isolate yourself from wide swings typical for Vanguard.  TIPS partially hedge inflation (the part of real inflation measured by CPI) and therefore could be a valuable addition for some investors in a 401(k) plan. You do not pay federal tax on interest so it can be help outside of tax deferred account. In other words do not buy TIPs funds buy actual bond from Treasury.

Vanguard TIPs funds should be viewed as a rolling ladder of individual TIPS which have a specific duration. This structure exposes investors to realized gains and losses as well as huge fluctuations in value. For long term regularly scheduled contribution (and distributions !), those impacts would theoretically average out.

There is a growing sense that the monetary and fiscal policies required to exit the great recession of 2008/2009 are laying the groundwork for future inflation. This sentiment alone can have an impact on TIPs prices, regardless of the future course of inflation and it did in June 2013. Also Vanguard TIPS fund is an  intermediate term bonds fund and as such it is very sensitive to potential move of interest rates. All that said the drop in May-July undermines confidence is this type of funds, as volatility is way too much for 401K investor close to retirement (and as such having substantial holdings) to digest.

In case of mutual fund if can hold TIPs for the period longer then duration, you might be able to solve the problem of fluctuation of TIPs mutual fund prices. Which again are considerable (more then 10%).

According to Hewitt research, specialty bond funds, including TIPS funds, increased by 10% in 2009. Vanguard’s 2009 retirement plan survey data indicated 19% of its 401K plans offer a TIPS funds.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to a principal value which is adjusted for accrued CPI inflation. Interest payments rise with inflation and fall with deflation. When a TIPS matures, investors are paid the greater of its adjusted principal or original principal, providing a hedge against both inflation and deflation.

The yield on a conventional Treasury bond that pays a fixed coupon must also include an expected inflation component to compensate the investor for future inflation. Its yield therefore includes two components:

With TIPS, the coupons and principal adjust relative to CPI so its yield is simply the real interest rate. The difference between the two yields reflects, among other things, expected inflation.

Traditional retirement portfolio planning suggests that as plan participants approach retirement they should increase their allocation to bonds to avoid the volatility of equity and other inflation hedging assets such as real estate or commodities. However, as their bond exposure grows, inflation replaces volatility as a primary risk. At a modest 3% inflation rate, prices can double over the life expectancy of the average retiree.

401 plan typically offer very few bond funds. The majority of 401(k) plans offer either a stable value fund or a money market fund and maybe an intermediate bond fund or two. None of these funds hedge inflation. Long term  bonds can perform very poorly in the expectation or real inflation  or rate spike as yields increase. With time they catch up, but the timing of this catch-up depends on the nature of the bond fund.

Money market returns are likely to increase after an inflation spike, but their response depends on monetary policy and have limits. Stable value funds and short term bond funds can adjust to inflation  better than money market funds, but there is a lag. The extent of the lag  depends on their portfolio structure, duration and cash flows.

TIPS investments can provide a conservative way for 401(k) plan participants to diversify their fixed income portfolios and hedge a slow growth, inflationary environment.

Vanguard  Inflation-Protected Securities Fund (VIPSX and  VAIPX)

Vanguard  Inflation-Protected Securities Fund (VIPSX ) is $43 billion actively managed fund , which has a duration of 8.5 years and an average maturity of 9.3 years. You're paying Vanguard 0.2% a year, so over 10 years (1.002^10), you're paying approximately 2% or one year interest.  Admiral TIPS Fund (VAIPX) has lower expense  .11%

While TIPS mutual funds are better then nothing as an inflation hedge or as a fixed income portfolio diversifier in a 401(k) plan, there are three aspects that should be considered in determining their suitability:

  1. While TIPS are relatively risk-free in the long run, they can be quite volatile in the short run. Naďve investors might assume that the inflation adjustment is the primary source of total returns for TIPS. However, the change in real interest rates, positively correlated with investors’ inflation expectations, has historically had a more significant impact on TIPS returns. TIPS mutual funds like Vanguard VIPSX can lose around 10% of its value, even with rising inflation expectations (as happened in July, 3013, when the fund dropped from 12.11 to 10.58 in six month).
  2. If TIPS mutual fund is held for the period smaller that average maturity, investors lose their fixed real rate of return.
  3. Fluctuations in the yield on newly issued TIPS result in changes in the prices of existing securities, exposing mutual fund investors to capital gains or losses.  This market price exposure means that holding TIPS mutual funds for short periods of time negates their inflation hedging capabilities and exposes investors to almost a similar level of price risk as nominal Treasuries. Ideally you should hold mutual fund forever: only at this point you have no risk of capital losses due to changed interest rates.

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[Sep 12, 2014] Tips fall below 200 days simple average...

[Jul 15, 2013]  Gross Adds to Holdings of Treasuries After TIPS Losing Bet By Susanne Walker

Jul 15, 2013 | Bloomberg

Pacific Investment Management Co.’s Bill Gross added to holdings of Treasuries in his flagship fund in June while betting incorrectly on gains in U.S. inflation-indexed securities during the first half of the year.

The proportion of U.S. government debt in the $268 billion Total Return Fund rose to 38 percent, from 37 percent in May, according to data on Pimco’s website. The Newport Beach, California-based company doesn’t comment directly on monthly changes in holdings or specific types of securities within an market sector such as the percentage of Treasury Inflation Protected Securities in the U.S. grouping.

Gross had been buying TIPS on a bet that money printing by the world’s central banks would push up consumer prices, making Treasuries the largest portion of the fund. When yields began to rise in May on expectations the Federal Reserve would slow its bond-buying program, inflation expectations didn’t, amplifying the losses on inflation-hedged U.S. debt. The world’s largest mutual fund fell 4.7 percent in May and June, prompting $9.9 billion in withdrawals last month, the most on record.

While the yield on 10-year Treasuries soared as high as 2.75 percent on July 8, from a low of 1.61 percent on May 1, yields on inflation-indexed debt climbed even faster and further. As a result, the narrowing in the difference between yields of Treasuries and TIPS, known as the break-even rate, showed that investors viewed inflation as less of a threat in the short term and thus were cutting the price they would pay for insurance against it.

The break-even rate on the 10-year bonds dropped to 1.81 percent on June 24, the lowest since October 2011. The rate was 2.08 percent yesterday.

Gross, co-founder and co-chief investment officer at Pimco, also added to his holdings of mortgage securities, the fund’s second largest holdings. The proportion rose to 36 percent last month, from 34 percent in May.

He cut non-U.S. developed nations’ debt to 5 percent, from 7 percent in May. Investment-grade credit holdings were unchanged at 6 percent in June.

The Total Return Fund (PTTRX)’s emerging-market debt holdings were also steady at 7 percent from the previous month.

Over the past five years, the Total Return Fund has returned 7.2 percent, outperforming about 91 percent of competitors. It gained 0.15 percent over the past year, placing it in the 66 percentile of its category, according to data compiled by Bloomberg.

The Total Return Fund’s government and Treasury debt category includes fund holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities.

Pimco, a unit of the Munich-based insurer Allianz SE (ALV), managed $2.04 trillion in assets as of March 31.

[Jul 09, 2013] Fed Watch: On That September Tapering

"They talk of tapering but the rationale seems incoherent. Has whatever problem it was meant to solve now been solved? Low and lowering inflation, high and stable unemployment, low and declining growth. What signal says 'enough already'?"
July 8, 2013 | Economist's View
kievite said...

John Wagooner once said "Back in the Goode Olde Days, people spent uncounted hours trying to forecast the future. If they had a cat, they could try felidomancy, which is the art of using cats to predict the future. If they had feet, they could try pedomancy. Nowadays, people indulge in fedomancy, which is the art of predicting interest rates by observing the Federal Reserve Board. It's a difficult practice."

Jokes aside I think that some additional factors are important. The first is percentage of US foreign debt that is hold by foreigners. Right now it is around 50%. And printing money via quantitative easing was essentially one way to help the US government to pay the interest on this portion of the debt. That's why Putin at one point called Bernanke "a hooligan".

From this point of view current switch to "calendar action" were strange. First it provoke market panic. Second, while existence of "green shoots" in labor market (were good paying jobs are still replaced by McJobs) might be temporary, payment on the debt in a form of issuing new treasuries with higher interest rate is permanent.

My feeling is that unless creation of panic was the real intent this was a blunder and this panic again will cost a lot of money 401K investors who already were fleeced twice during the last 20 years. When Vanguard TIPs fund drops almost 8% for the year without rate change on the horizon and pretty stable inflation, something is really wrong.

ellen1910 said in reply to kievite...

TIPs compete with standard treasuries (USTs).

Vanguard TIPs duration is 8.5 years and is negative 8.00% ytd. A portfolio composed of 1/3 Vanguard Long-Term treasuries (15.5 years) and 2/3 Vanguard Intermediate treasuries (5.6 years) has an equivalent duration. That composite portfolio is negative 4.983% ytd. Note: The yield spread between the TIPs fund and the composite portfolio is 2.087%.

Can anyone explain why the TIPs experienced much greater losses?

[Jun 14, 2013] Classic Cognitive Errors On Display In These Markets

Seeking Alpha /The Inflation Trader

Numerous classic cognitive errors are on display at once in these markets. We have "overconfidence," with large bets being made on the basis of strongly-believed models and forecasts -- but these are forecasts of the dynamics of a system whose configuration is distinctly unlike anything we have seen before, even remotely. What does a "taper" do to rates? How can we know, since we have never even had QE, much less a taper, before? How aggressively does it make sense to bet on the outcome of such a transition period, given rational-sized error bars on the estimates?

We also see naďve extrapolation of trends. TIPS go down every day, it seems, for no better reason than that "core inflation is low, and the Fed is no longer going to be maintaining as loose a policy." Ten-year TIPS yields have risen 83bps since April 25 (five-year TIPS, +107bps since April 4). Ten-year breakevens have fallen from 2.59%, within 15bps of an all-time high, on March 14 to 2.03% -- the lowest since January 2012 -- now. What has changed? Our model identified TIPS as cheap to Treasuries (that is, breakevens too low for the level of nominal rates) and went nearly max-long when breakevens were still at 2.30%. It is some solace that this position has fared better than a long position in TIPS, but when markets simply follow recent momentum mindlessly it can be painful.

Year-ahead core inflation is priced in the market at roughly 1.50%, despite the fact that current core inflation of 1.7% is only at this level because of persistently soggy core goods prices (and core goods are much more volatile than core services prices). Meanwhile, although core services prices remain buoyant, housing rents have not even begun to respond to the sudden boom in housing prices. To realize the core inflation priced into the one-year inflation swap, core goods prices need to remain low and trends would need to decelerate, while a shortage of owner-occupied housing drives the prices of existing homes skyward. It is possible, but it would be a very unusual economic occurrence.

As I have previously written, we are maintaining our forecast for core inflation in 2012 at 2.6%-3.0%; although we may tweak that lowers if next week's CPI is disappointing, we will not be changing it dramatically. Based on both top-down and bottom-up forecasts, we think the inflation market right now is very wrong. However, in accordance with my first paragraph above, our 80% confidence interval for that estimate would be quite wide. Still, we feel that most errors looking out at least one year are going to be in the direction of higher inflation, not lower inflation.

[Jun 02, 2013]  'Little Cause for Inflation Worries'

Five years can be enough for the next crisis to be at doorsteps. The only question is whether it hit in 2014, 2015 or 2016.

Remember those predictions that we'd have runaway inflation by now?:

Little Cause for Inflation Worries, by Catherine Rampell, NYT: Periodically I am asked whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy. Based on the Bureau of Economic Analysis data released Friday morning, this answer is still emphatically no.
The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards...
When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago. ...

realpc said in reply to pgl...

The Federal Reserve's predictions about inflation are meaningless nonsense.

pgl said in reply to RobertWaldmann...

Krugman is noting the recent rise in the nominal interest rate on 10-year bonds and frets that this is a sign that the FED is doing premature tightening. I check on what is happening to the corresponding real interest rate. Last month negative 65 basis point. May 30 - negative 5 basis points. The rise in nominal rates is not an increase in expected inflation but a rise in real rates. Bad news.

John Cummings said in reply to pgl...

or there was a production surge in April that the indexes missed through lag and we are getting a flight from saftey as investers realize the accleration.........which Krugman has wanted time after time after time.

The econ bears don't seem to realize what is going on.

The Blorch said in reply to John Cummings...

It's not a flight from safety. Its a rotation where the smart money sells their 10 yr bonds at an enormous profit. This raises cash with which to from run the market's next big move.


Oh on the usual me dumping on QE, it is way too early for QEIII to show up in inflation (so I claim that the new data do not provide any particular support for my views).

Shifts in inflation follow shifts in output and employment (hence the 100 times too large but 1% of tons is scores of pounds literature on dynamically inconsistent optimal monetary policy). The peak effect on output of a monetary policy shift tends to come in around 6 months (so March) but I think it's still early for inflation.


How early? Six months early? Another year early? And how much inflation do you expect? 10 basis pts/year? 10%/year? More? I think in 1980 we got up to 20%/year rates. Or was it 1981? Of course circumstances were quite a lot different. Do you have any explanation for why the markets disagree with you? Greenspan says the markets are mistaken/broken, which is quite funny coming from him.

Oh, and can you please parse, "...hence the 100 times to large but 1% of tons is scores of pounds literature on dynamically inconsistent optimal monetary policy." I'm guessing "to" is a typo for "too." "1% of tons is scores of pounds" makes sense on its own; 1% of one ton is 200 pounds, which could be stated as ten score pounds, but thatdoesn't seem to connect with the words which follow.

Young Economist said...

Frankly low inflation is from high output gap or high slack of resources. If economy can sustain at higher rate, we could see higher inflation; however, we are facing the fiscal cliff that starts to bring down economy. The monetary stimulus is supporting the higher inflation and growth but its effect is so small compared to fiscal cliff.

FOMC put the expectation of QE tapering since Q1 2013 and this causes no much effect of monetary stimulus since then. We could see bottoming of long term bond yields and mortgage yields. We can realize market is going to interpret the low PCE inflation as permanent effect from the TIPS market sell-off. Some may interpret sell-off in TIPS market due to expectation of QE tapering but breakeven inflation also drops to lowest level this year.

If PCE inflation is still keeping low in Q3/Q4 2013, we could see permanent expectation of deflation from TIPS market and surely FED will have to change to expand more QE because I think FED are wrong to forecast the stronger economy and send early signal of QE tapering without strong economy.

I think we could see jump in bond prices from change in FOMC stance of QE tapering and economic reflation will be needed again. Surely dollar will be likely drop sharply from here.

bakho said...

This is why Bernanke is berating Congress over the sequester and other fiscal contraction. The Fed cannot meet its inflation or unemployment targets and Congress has its foot on the brakes while the Fed is trying to push out of the ditch.

pgl said in reply to bakho...

True until recently but check out Krugman's post today. He fears we are seeing a little premature tight money. Really bad news if true.

jurisdebtor said in reply to bakho...

Glad the GOP has fulfilled its mandate in being a party of polemicists rather than policymakers.

The Blorch said in reply to bakho...

I think the correct metaphor is pushing on a string. "... trying to push out of the ditch." is novel but inappropriate here.

Darryl FKA Ron said...

Little cause for full employment worries then. Little cause for wage boom then. In what world is this good news?

Oh, rentiers of the world unite. Already done that.

anne said...

May 31, 2013

The 3 month Treasury interest rate is at 0.06%, the 2 year Treasury rate is 0.30%, the 5 year rate is 1.04%, while the 10 year is 2.15%.

* Remember, the Vanguard yields are after cost. The Federal Funds rate is no more than 0.25%.

anne said in reply to anne...

Investing in bonds as opposed to speculating is really simple, no matter what analysts may claim, simply look at the current yield and look at the duration of a bond portfolio and ask yourself whether you would be willing to accept that yield as your yearly return through the duration period.

A look at the range of yields and durations of Vanguard bond portfolios has been telling us since last year that the long term profound bull market in bonds is over, no matter what the Federal Reserve may do for several months or even a couple of years and no matter the current strength of the economy. No reasonable investor of new money is going to accept a yearly return of 2.12% over the coming 5.3 years duration for the intermediate-term investment grade bond fund.

The Blorch said in reply to anne...

The market has called a top and the sell side pressure is profit taking as the smart money always sells at the top. Cash raised will be rotated into stocks, front running the next big market move. This is the recipe for how the SP500 reaches 1900 by the end of the year.

anne said...

June 1, 2013

What We Have Here Is A Failure To Communicate By Paul Krugman

Interest rates are rising! Head for the hills!

OK, maybe not quite yet. Some perspective on recent moves:


The 10-year bond rate, in perspective. The 10-year bond rate, in perspective.

Still, a rise in bond rates is not helpful just as there are signs the economy is gaining momentum despite the best efforts of politicians. So what is happening?

Well, recall my little typology of rate rises: *

Bond Prices - Stock Prices - Dollar Values

Eek! Debt! ( down) ( down) ( down) Tougher Fed ( down) ( down) ( up) Stronger Recovery ( down) ( up) ( up)

With stocks down and the dollar up, this looks like a market that has upgraded its estimate of the chances that the Fed will tighten too soon. And yes, I mean too soon, for sure. Look not at the unemployment rate, which to some extent reflects people dropping out of the labor force, and instead look at the employment-population ratio — focusing on prime-age workers to avoid demographic issues:


Employment-population ratio, ages 25-54.

Our labor market has barely begun to recover. Meanwhile, inflation is dropping well below target, even as a growing number of analysts believe that the target itself has been set too low.

So unless Bernanke and company mean to signal their intention to tighten much too soon, and derail recovery, they had better start getting their message out better.


anne said... 

January, 2013

Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2013

(Standard and Poors Composite Stock Index)

May 31 PE Ratio ( 24.20) April PE Ratio ( 22.67)

Annual Mean ( 16.47) Annual Median ( 15.88)

-- Robert Shiller

anne said...

January, 2013

Dividend Yield, 1881-2013

(Standard and Poors Composite Stock Index)

May 31 Dividend Yield ( 1.94) April Dividend Yield ( 1.98) *

Annual Mean ( 4.44) Annual Median ( 4.38)

* Vanguard yield after costs

-- Robert Shiller

realpc said in reply to anne...

Any bull marktets the Federal Reserve brings us are just pyramid scams. They will crash, the only unknown is when.

Amileoj said...

"...whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy."

It's continuously astonishing how much of a hold the corpse of monetarism still maintains on the economic imagination.

The only thing QE "pumps into the economy" are bank clearing balances, which accumulate to excess in reserve accounts at the Fed. Meanwhile an equivalent value of bonds are "pumped out of the economy" in the same way (securities accounts are debited). Why should this portfolio reallocation cause inflation? What is the mechanism supposed to be?

There may of course be a channel from the resulting compression of the yield curve. Relatively lower long rates are not the official target of QE but they are it's one practical means of influence over private sector behavior. But surely that outcome is quite uncertain and indirect, at best, for it depends on the marginal propensity to spend of qualified borrowers as compared to that savers who experience reduced interest income?

The point is that even if such a channel exists, it has nothing whatsoever to do with "pumping money into the economy." To the extent the interest rate channel proves successful, an increase in the supply of money (via private sector credit/debt expansion) would be an *outcome* of the policy. It would not be the *mechanism* used to achieve that outcome.

Why then do economists and economic commentators still talk as if this were the case? Isn't it worth a little extra effort to get the independent and dependent variables straight?

Schumpeter's Disciple Pittsburgh, PA

"What would be the budgetary/debt effects of interest rates rising to a variety of levels - say, 4%, 6%, 8%..."

It's easy to do the math. Right now we're paying an average of 2.4% on our federal debt, which is fast approaching $17 trillion. Even if this debt were to stop growing (unlikely since we're still running annual spending deficits), here is what a spike in rates would do to our (gross) debt servicing burden:

Rate Interest Cost

 2.4% $400 Bn.
 4.0% $680 Bn.
 6.0% $1,020 Bn.
 8.0% $1,360 Bn.

Total federal spending is running at $3,800 Bn. a year. An increase in rates would wreak havoc and painfully crowd out other expenditure items. So if you think our federal budgeting process is a dysfunctional mess now, just wait until rates go up.

Rate Stories

green shoots again?

I’ve been getting some questions about the recent rise in long-term interest rates. Those rates are still at levels that would have seemed absurdly low not long ago — but they are up significantly from a few months ago. What should we make of this move?

Well, rather than offering a commentary on the market, I thought I might be most helpful by talking about how to figure things like this out on a more general basis. And the way you do this is by trying to tell several alternative stories that might explain what’s happening in one market, and then ask what those stories imply for other markets.

So when long-term interest rates rise, there are three main stories you hear. One is that the bond vigilantes have arrived, and are selling US debt because they now believe in the horror stories. Another is that the Fed has changed, that it may be ready to snatch away the punch bowl sooner than previously believed. And the third is that the economy is looking stronger than expected, which means that the Fed, although just as soft-hearted as before, will nonetheless start raising rates sooner than previously believed.

All three of these stories would imply falling bond prices, that is, rising interest rates. But they have different implications for other markets, in particular for stocks and the dollar. Debt fears — basically, a run on America — should send stocks and the dollar down along with bonds. A perceived tougher Fed should send stocks down but the dollar up. And a better recovery should send both stocks up (because of higher expected profits) and drive the dollar higher.

OK, there are possible complications; you can manage, just, to tell stories that don’t quite work as I’ve described. But these are surely what you should have in mind in your first pass at the issue. Here it is in a table:

And while day by day there are variations, basically what you see over the last month or so is line 3: falling bond prices accompanied by rising stocks and a rising dollar. So this looks like a story about macroeconomic optimism.

Leon E Alexandria, VA

Ok, in Japan bond prices and stock prices are both going down but the yen is going up. Not in the table. What's up with that?

John Hartford

OMG the ten year moves from around 1.75 to for the hills the world is coming to an end. Talk about grasping at straws.

Michael O'Neill Bandon, Oregon

It is a metrology problem. Macroeconomics is rife with them. In order to measure any variable you have to have an acceptable yardstick. Bonds, stocks and cash are all money with varying degrees of liquidity. When you talk about the Japanese economy you either need to measure everything with a stable exogenous ruler, or you have to qualify the Yen.

FRHorton New Mexico

Hello Leon

Bond vigilantes can be home-grown

The Bank of Japan has been known to intervene in FOREX directly.

JcN nj

"So this looks like a story about macroeconomic optimism"

What you left out was: "Which is misguided, though one could hope" Some large international conglomerates are showing "caution" for future earnings.

To me that translates into: business stinks right now.

banicki michigan

Being myopic on the topic. I believe the rise in interest rates has a lot to do with the rise of housing prices. The largest asset held by most Americans is their house. In 2008 when that market collapsed everyone conserved assets and feared a depression.

Housing prices are now rising and the consumer is watching his net worth growing again. As a result, he is in a better mood to consume. As FreeFreeMarkets said in 2008, "Hangovers Hurt". ...

JohnK Durham

There are some suggestions among these comments that the budget sequester has kick-started the economy, with the arrival of the long-awaited confidence fairy. Here are the recent federal deficit numbers (as share of GDP) along with GDP growth (measured in line with the federal fiscal year):

deficit GDP growth 2007 1.2% 2.47% 2008 3.2% -0.62% 2009 10.1% -3.34% 2010 9.0% 2.80% 2011 8.7% 1.55% 2012 7.0% 2.60% 2013 7.5% 1.43% (through March 2013)

It should be obvious that we are not yet experiencing a period of high growth. It should also be clear that there is no simple relationship between the federal debt and GDP growth - it's a more complicated story.

Moving forward, consumers, businesses, and local governments all have stronger balance sheets than at the bottom of the recession. Increased spending from these groups will help to offset contractions in federal spending. We're going to have growth, though we'd be doing better without the sequester.

Mikael Olsson Sweden

I find it interesting to see so many talking about economic recovery just because the stock market index goes up.

Really? How is the stock market index a sane indicator of how the economy is working?

The stock market is up up up up up for a long time now and there's been barely a change in the normal every day economy where we all live.

Have fundamentals changed? Are companies making more business suddenly? Or are we just inflating P/E across the board? Or did some major corporations suddenly decide to start paying out profits like they should have done a long time ago instead of keeping liquid assets in their coffers to the detriment of the everyday economy?

scott365 Texas

A story of macroeconomic optimism you say?

But what about the zero bound? But what about the effects of austerity? What about the mean Republicans ruining everything?

Maybe you have some other stories to tell about why you were wrong?

Will you conclude that you were too smart to be wrong, and therefore you must have been mendacious?

Greg K. Cambridge, MA


Or the fourth is that all these traders really don't have a clue and are sheep following what their golf buddies told them to do, or what the latest fad is. Or it's just the 0.01% playing with their money because they certainly don't have the brains or ability to invest it wisely. Too many MBA's, stock brokers and lawyers in this world...need a lot more engineers and teachers to really get the economy going properly again.

Young Economist NY

The next phase is that we will see inflation will drop below 1% for the third quarter, maybe 0.7-0.8%. Bond prices will be up, Stock may be up from higher growth and less concern on FED tapering but Dollar will drop sharply.

Let' see what is going to happen. This Friday we will see the real trend of inflation.

Leopold New York

I agree with your some of thoughts. Except: how do you reconcile the higher growth/higher stock prices with falling inflation?

A.Swift Cary, NC


Stock Market - chump change, who cares? It's the little casino.

Dollar - manipulated for the Derivatives Market.

Interest Rates - Major lever for the Derivatives Market, notional value of interest rate derivatives is about $800 TRILLION dollars. This is the Big Casino. Does anyone actually think that with that much money on the line, that anything would be left to chance? Although, I wonder if someone is smart enough to beat the House?

Scientella palo alto

Boy Americans have short memories.

The Fed prints money at a huge rate. This enables the rich and gamblers to speculate on Wall Street and on real estate - which means wall street and real estate improves. The Fed cannot do this ad nauseum. People talk asset bubbles. Indices at high rates. Palo Alto real estate up 40 percent in one year. Investors crowding into 1 percenters investment. Eg. Assuming Palo Alto Real estate is for the 1 percent it is a sure bet.. Next suburb over - not so sure. This is all about beggering the 99 percent, so next pop they will get it in the solar plexus as usual. Now everyone jumping back in. Banks will start lending to the insolvent. And the next boom bust boom will be on.


the next bust will come - and all the worse America will be for it.

Game over.

China kleptocrats in charge.

George Dover Los Angeles, CA

Krugman analyses the very small increase in interest rates on 10-year treasuries. He is probably right that it does not signal the arrival of the bond vigilantes.

The overall theme of Krugman's blog has been: we need more economic stimulus and higher interest rate targets, say 4%.

More economic stimulus, particularly stimulus that pays for itself in the future, when we need to shoulder a heavier debt burden is indeed needed. I have repeatedly expressed my disappointment that Obama did not press for more spending on infrastructure and education. Indeed, contraction in the states has caused many of the universities to increase tuition and expand class size which cuts quality. This contributes to one of the six "headwinds" discussed by Robert Gordon in a recent essay, namely the plateau of educational attainment in the US, although it may be more appropriate to say the decline of funding for education.

This is a long term problem---population increased by 36% in the last 30 years, while positions in medical schools increased by only 16%.

While Krugman talks about small changes in rates, Congress debates "immigration reform" without a prior discussion of the economic impacts of immigration, or of whether the increased population growth that results from continued immigration is sustainable.

The fact that the NY Times effectively censors a full discussion of this issue (with alternate viewpoints) provides a clear example of how political correctness destroys democracy.

Tom Silver Barnstable, Massachusetts

Precisely. So at what point in this apparent recovery will Prof. Krugman rethink, or downsize, his call for more stimulus? It's easy to be a financial pundit because, unlike with a money manager, you're never held accountable for your predictions. Very few remember, devoted acolytes excepted - and they can be counted on to facilitate the "explanations". What would be the budgetary/debt effects of interest rates rising to a variety of levels - say, 4%, 6%, 8% - on both short and long term bases? The Professor doesn't say, despite his contempt for those who do worry about debt and deficits.


[Feb 03, 2013] Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

Premiums remain almost shockingly thin even as gold and silver rally.

Gold has not quite returned to its pre-end-of-year smackdown that began in December of last year, needing to hit 1720 for that to happen.

Commentary on the precious metals has been riding the 'downward spiral of dumbness' in the past week, as gold bears become emboldened and begin to abandon mere negativity in favor of sheer ridiculousness.

What was most suprising this morning was not the negative GDP print, but the negative chain deflator that went along with it, and facilitated a 'better' GDP number than we would have otherwise seen. That is, instead of the expected 1.6% chain deflator as an indication of inflation, the negative deflator that was used was -0.6%.  Otherwise the real GDP number printed would have been quite a bit worse.

I don't think we have seen a negative deflator since the Great Crash of 2008, and not often before that either.

Still I doubt they will take this one seriously since they can blame it on Hurricane Sandy, uncertainty over the fiscal cliff, and the dockworkers strike.

Chain deflators with plenty of leeway are a wonderful way to overstate growth, hide decay, and mask the effects of monetary inflation. Unfortunately they cannot provide real growth, economically viable jobs, and a decent standard of living. Only reform and transparency can do that for the West.

So far the metals are still in a broad trading range. I have some optimism that we will see a breakout, and a new rule set for a cup and handle in the face of extreme market pressure. But one thing at a time.    Do not expect this to be easy as the currency war intensifies.

[Feb 03, 2013]  The Disingenuous James Bullard

October 05, 2012 | Economist's View

Tim Duy:

The Disingenuous James Bullard, by Tim Duy: St. Louis Federal Reserve President James Bullard is making some headlines today. He fears that inflation expectations are becoming unglued:

Is this happening? Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target.

He seeks to prove this claim with this chart:


I just can't let this one go. I honestly don't know if I should laugh or cry. I have a whole new respect for Federal Reserve Chairman Ben Bernanke if this is any indication of the kind of grief he needs to deal with on a regular basis.

This is disingenuous on two levels.



Nothing to see here, folks. Move along.

Bullard starts down this path as a response to suggestions for higher inflation to reduce real debt burdens. This appears at least partly in response to his realization that the work of Professors Reinhart and Rogoff is not as obviously supportive of his position as he previously believed. Rogoff has offered up the possibility of higher inflation to address the debt load. Bullard offers a number of bullet points in response:

The partial default would occur against savers, mostly older U.S. households, and against foreign creditors.

Alas, in economics there is no free lunch.

A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing. 

There is an important point here - a partial default will have winners and losers. But guess what? So will no default, hard or soft. Just ask the people of Greece (worst of all worlds, partial hard default). Or Ireland. Or Spain. As I said with regard to the Japanese situation:

They are all taxpayers and bondholders. They take the hit in taxes, spending, or capital position. The longer they wait to take that hit, the bigger it will be....

...In other words, you can take your inflation medicine a little bit at a time, or a whole bunch at once. But a even a little bit at a time becomes increasingly more difficult politically as the debt load grows larger.

Pay attention to the last line; Bullard is already identifying older households as a class resistant to taking a capital loss. But they are also struggling with low returns. Now they can't win. This is exactly the trap Japan found itself in - those who initially lost from the zero bound lose again if they were to exit the zero bound. The zero bound is a very bad place to be for an extended time. I don't think the Federal Reserve takes this problem seriously enough.

In short, Bullard wants to pretend that the only costless option is the strict low inflation option. That's simply not true. It has a cost as well, in a particular distribution of winners and losers. A higher inflation target will result in a different distribution of winners and losers that may be more beneficial to domestic residents if, for example, the burden of higher inflation were to fall disproportionately on foreign central banks who have acquired large holdings of dollar assets for mercantilistic reasons (hint, hint). There is also the issue of using inflation to lower the real rate at the zero bound.

It very well may be the case that the US economy normalizes such that output returns to a level that the fiscal impulse can be lessened and debt to GDP ratios level off and decline while interest rates climb such that the Fed returns to using the fed funds rate as their primary tool throughout the next cycle. In such a scenario, there may be no need to exercise the inflation option. But other equilibriums are possible. Japan never experienced sufficient lift-off to break its reliance on fiscal stimulus. Policymakers should be aware of the possibility and adopt a flexible response, one that does not a priori rule out what may be the most cost-effective options.

Bottom Line: If Bullard wants to take a hard line against higher inflation, so be it. In reality, that hard line has been adopted by the vast majority of Fed officials. They aren't inclined to touch the inflation option for fear, I think, that it would work. Then what's to stop 4% from becoming 6%? And 6% from becoming 8%? And I do believe this question would need to be addressed. But don't pretend that not pursuing the inflation option is costless. Just different costs. And please don't use an obviously disingenuous data analysis to fuel inflation fears. We expect better from our policymakers. Or at least we should.

Vanguard To Challenge Pimco TIPS ETF By Cinthia Murphy

Jul 24, 2012 Yahoo! Finance

Vanguard, the third-largest U.S. ETF provider by assets, filed regulatory paperwork to market a short-term inflation-protected securities index fund that would include an ETF share class that would compete with similar products from Pimco and iShares.

Under Vanguard’s unique structure, its ETFs are a share class of mutual funds. The prospectus detailed plans for a Vanguard Short-Term Inflation-Protected Securities Index Fund that would track the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, and invest in inflation-protected U.S. Treasury securities that have a remaining maturity of less than five years.

The fund would serve up four share classes, including an ETF share class that would cost 0.10 percent in fees, or half the price tag of competing funds.

Interest in inflation-protected bonds has been on the upswing amid growing concern among investors that excessive monetary stimulus from central banks such as the Federal Reserve is creating inflationary pressure that will rear its head before long.

More broadly, the fact that Vanguard plans to undercut both iShares and Pimco is par for the course for the firm, which is known for its low-cost funds. As a mutually structured company that is owned by holders of its funds, Vanguard runs its products at cost, giving it an advantage over most firms.

The Details

Vanguard’s index fund has an effective duration and an average maturity of roughly 2 1/2 years. It would join the company’s $43 billion actively managed Inflation-Protected Securities Fund, which has a duration of 8.5 years and an average maturity of 9.3 years, the company said.

Vanguard said in the filing it aims to have the registration statement become effective on Oct. 10, meaning a launch could come shortly after that.

Aside from the ETF share class, the planned index fund will also offer an Investor Shares class that will cost 0.20 percent, an Admiral Shares class that will cost 0.10 percent and an institutional share class costing 0.07 percent.

The classes are divided by amount of initial investment, with Investor Shares, Admiral Shares and Institutional Shares requiring minimum investments of $3,000, $10,000 and $5 million, respectively.

“To offset the transaction costs of purchasing TIPS, the fund will assess a 0.25 percent purchase fee on all shares, excluding ETF shares,” the company added in the release.

Vanguard manages some $700 billion in fixed-income-linked assets, including $235 billion in bond index fund assets and $37 billion in bond ETF assets.  The Valley Forge, Pa.-based company had ETF assets totaling more $208 billion, according to IndexUniverse’s latest “ETF League Table

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