[quote author="CapitalismWorks" date=1243911740][quote author="awgee" date=1243908027][quote author="CapitalismWorks" date=1243892624][quote author="awgee" date=1243836079][quote author="CapitalismWorks" date=1243827813][quote author="awgee" date=1243789326][quote author="CapitalismWorks" date=1243775270][quote author="awgee" date=1243759499]CPI is a bs, (hedonics), government statistic no matter which CPI you are referring to.</blockquote>
What is a better guage?
Bond Trader, please edit your post and correct the error! Misinformation about TIPS is a serious disservice to readers of the forum. For the average investor, and above average ones as well, TIPS should be a strategic allocation within their portfolio. Inflation is the bane of virtually every investment, except of course TIPS (and low Cap-ex business with sustainable brands and near limitless pricing power, please see See's Candy).</blockquote>
Shadowstats or Nowandfutures</blockquote>
OK, and what am I supposed to do with this information? Is there an instrument that pays these inflation estimates? If not, then what good are they?</blockquote>
Huh?
You asked "<em>What is a better guage?</em>, and I told you.
I do not know what you are supposed to do with better estimates of CPI. You are the one who asked. Why did you ask if you did not want to know?
For me, it helps me to realize that the government statistics are a lie and therefore any and all financial instruments using the governments version of the CPI as an index are using false data. It has helped me to realize that TIPS are about the last place in the world I would put funds in order to protect those funds from price or monetary inflation.
If you read Shadowstats, you will see that they estimate the CPI as it was estimated before Robert Rubin and Alan Greenspan started manipulating, substituting, and data mining the information used to estimate CPI.</blockquote>
Huh? I am trying to figure out what one is supposed to do with this "revelation". It is widely known that CPI underestimates inflation. However the difference between CPI numbers and actual price inflation are a difference of magnitude not direction. Either way inflation is erroding purchasing power, distorting risk premia, and creating undercertainty.
You can decide to do whatever you want with your money, but dismissing the inflation hedging attributes of TIPS is foolish (see Panda) especially when considering the inflationary forces that are building in the economy. They are part of the investable universe, and have provided wonderful trading opportunities.
Regardless this is all tangential. It was the post that erroneously reported the CPI measurement incorporated into TIPS that caught my attention. Frankly I am little surprised that no one was interested in the correct information. Perhaps I am wasting my time.</blockquote>
TIPS may be a good trade if you a trader, but they are a terrible investment fo anyone tryng to hedge against inflation over a long time. They are a guaranteed loss. Real price inflation is always more than TIPS will pay, so the owner is always losing purchasing power.
If it is widely known that CPI underestimates price inflation, than the foolish investment is anything using CPI as an index, including TIPS.
Many things are part of the investable universe. And for those who trade, they can be a great trade, but that does not translate into a good long term investment.
More - You trade them. Different animal.</blockquote>
I don't believe they are a terrible long term hold as an inflation hedge. I suggest that CPI may understate inflation by only a modest amount say 1-2%. If you look at your personal consumption basket you may find that this figure most closely matches your expenditures. Assuming this is the case, then the real yield on TIPS can be appropriately discounted, yet in reality investors will achieve a real return adjusted for the adjusted inflation figures (assuming the relationship holds constant). This ability to eliminate the consideration of inflation from the investment is precisely the reason TIPS are so attractive.
They are the true risk free asset.
When determining strategic investment it is essential to consider the alternatives. Within the investable universe I can think of two things that are positively correlated to inflation: commodities and ILBs (e.g. TIPS). Equities get crushed in inflationary times as the vast majority of companies are unable to pass along cost increases in a timely fashion and are faced with decreasing margins because of the lag (along with a host of other factors). Just look at the performance of the S&P over the period of 1960 to 1980. Meanwhile inflation, as measured by CPI, ran wild. Being able to lock in a 1.5-2.0% return above reported CPI, exactly what TIPS offer, seems pretty damn attractive compared to what happened in equities.
Again dismissing TIPS because you believe that CPI is innaccurate is dependent on the belief that CPI is fallacious to the point of being utterly useless, and that the difference is not only one of degree but direction. I don't share either of those views.
Again, my original post on this topic was to ensure that misinformation regarding TIPS structure was not perpetuated. It is pretty clear that that no one cares. Fine. I won't waste anymore of anyones' time.</blockquote>
We all knew CPI underestimate inflation, by how much and is open for debate, but by looking at your grocery bills and checking out prices at gas pump, you probably will get some idea, for example, as CPI for the last 2 months are pretty much flat (0%-0.1%), gas price doubled, so go figure.
And lets assume CapitalismWork's "SUGGESTION" 1-2% underestimate is correct, I attached 2 screen shots from bloomberg illustrated the spreads for the last 20yrs,
1. Buy CPI/TIPs and sell dollar, you will realized a median spread of 66 pts (0.66%, WHICH IS FAR LESS THAN THE 1-2% SUGGESTED)
2. Buy Gold and sell dollar, you will realized a median spread of 279 pts (2.79%)
Case Closed
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