Data - Historical Inflation / 6 month T Bills / 6 month CDs

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Data - Historical Inflation / 6 month T Bills / 6 month CDs

Postby neverknow » Sun Mar 07, 2010 12:28 pm

I have finally found the data. .
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Postby spam » Sun Mar 07, 2010 12:32 pm

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Postby linuxizer » Sun Mar 07, 2010 1:15 pm

Plot of real rates (bond rate - inflation), with inflation on the same graph for comparison:
Image

It does appear that real rates can go substantially negative for short periods, lending credence to the idea that TIPS protect you in ways that short-term instruments don't. You would likely have to purchase the TIPS in advance for this to work, as real rates might decline to be even more negative on TIPS if people valued the protection against future/expected inflation even more....

Thanks for posting these. Can you give us links to the original datasets?
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Postby neverknow » Sun Mar 07, 2010 1:25 pm

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Postby vst » Sun Mar 07, 2010 1:35 pm

linuxizer wrote:Plot of real rates (bond rate - inflation), with inflation on the same graph for comparison:
Image

It does appear that real rates can go substantially negative for short periods, lending credence to the idea that TIPS protect you in ways that short-term instruments don't. You would likely have to purchase the TIPS in advance for this to work, as real rates might decline to be even more negative on TIPS if people valued the protection against future/expected inflation even more....

Thanks for posting these. Can you give us links to the original datasets?


I don't see how tips can protect you from anything. When reported inflation is low or negative (which I don't believe for a second), TIPS do nothing more than rip people off because they are tracking this "inflation" number. Who the heck wants to simply keep up with inflation?? I want to beat it. With a real yield over and above the inflation number. Not some ridiculous investment that simply tracks it.
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Postby dbr » Sun Mar 07, 2010 1:38 pm

vst wrote:
linuxizer wrote:Plot of real rates (bond rate - inflation), with inflation on the same graph for comparison:
Image

It does appear that real rates can go substantially negative for short periods, lending credence to the idea that TIPS protect you in ways that short-term instruments don't. You would likely have to purchase the TIPS in advance for this to work, as real rates might decline to be even more negative on TIPS if people valued the protection against future/expected inflation even more....

Thanks for posting these. Can you give us links to the original datasets?


I don't see how tips can protect you from anything. When reported inflation is low or negative (which I don't believe for a second), TIPS do nothing more than rip people off because they are tracking this "inflation" number. Who the heck wants to simply keep up with inflation?? I want to beat it. With a real yield over and above the inflation number. Not some ridiculous investment that is simply tied to it.


TIPS have a real yield above inflation.

http://www.ustreas.gov/offices/domestic ... ield.shtml
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Postby vst » Sun Mar 07, 2010 1:41 pm

dbr wrote:
vst wrote:
linuxizer wrote:Plot of real rates (bond rate - inflation), with inflation on the same graph for comparison:
Image

It does appear that real rates can go substantially negative for short periods, lending credence to the idea that TIPS protect you in ways that short-term instruments don't. You would likely have to purchase the TIPS in advance for this to work, as real rates might decline to be even more negative on TIPS if people valued the protection against future/expected inflation even more....

Thanks for posting these. Can you give us links to the original datasets?


I don't see how tips can protect you from anything. When reported inflation is low or negative (which I don't believe for a second), TIPS do nothing more than rip people off because they are tracking this "inflation" number. Who the heck wants to simply keep up with inflation?? I want to beat it. With a real yield over and above the inflation number. Not some ridiculous investment that is simply tied to it.


TIPS have a real yield above inflation.

http://www.ustreas.gov/offices/domestic ... ield.shtml


Unless you go really long (30 years), I think the shorter term yield over inflation is virtually negligible.

So yeah, to correct my previous statement, I want something that beats inflation by more than just a few basis points above inflation without having to go out and buy long term issues.

I also don't want to be making 2.14% above "inflation" on 30 year TIPS when "reported" inflation is close to zero or negative.
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Postby neverknow » Sun Mar 07, 2010 1:45 pm

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Postby vst » Sun Mar 07, 2010 1:54 pm

neverknow wrote:
vst wrote:Who the heck wants to simply keep up with inflation?? I want to beat it. With a real yield over and above the inflation number.


Yes, this sounds precisely like what the financial services industry has been selling for the past 20-30 years. Maybe I am wrong, but it seems we all (myself included) have some kind of expectation that by investing in mutual funds we can "make money with money". And certainly this can be proved by selecting certain begin and end dates, but it can also be dis proved - again by selecting certain begin and end dates (such as this lost decade story going around). Seems to me to be more an accident of when you were born, lived and died - that place you in a particular time frame -- or it is out right market timing.

vst - some of us have saved up "enough". We simply need to pace inflation. The financial services industry tells us if we retire at age 65, we might live another 30 years, so therefore we need to put money at risk in the markets. I am not at all sure this is true. And the table I posted says why. It appears to me "the emperor is wearing no clothes".
neverknow


I agree with everything you said above.

And I for one advise to avoid stocks and stick with high quality debt or money markets (CDs, treasuries, high yield money market, etc.). I just feel TIPS don't provide enough over inflation to fund a retirement that would warrant the excitement about them.

I for one believe if enough people stopped buying bonds for a short while, it would force the interest rates up and we would all benefit.

Afterall, the fed influences short term interest rates. Long term rates are supposed to be driven by market forces and right now, there are too many people buying the market which is pushing rates down too low.
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Postby neverknow » Sun Mar 07, 2010 1:58 pm

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Postby Chet » Sun Mar 07, 2010 2:12 pm

neverknow wrote:Yes, this sounds precisely like what the financial services industry has been selling for the past 20-30 years. Maybe I am wrong, but it seems we all (myself included) have some kind of expectation that by investing in mutual funds we can "make money with money".


Interesting perspective. It does seem that the financial services industry has been selling the stock market as some kind of magic bucket where everyone can drop in a $10 bill, go out fishing or whatever, and then all come back and each take out a $20 bill. In other words, that it exists for the purpose of funding your retirement with no sweat to your own brow. A pension system that just works for everyone with no cost to anyone.
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Postby dbr » Sun Mar 07, 2010 2:17 pm

Given an inflation hedge feature, TIPS will be a lower risk, lower return investment than alternatives in real dollars.

Preferring to take more risk for more return is perfectly reasonable. That preference has nothing to do with the goodness or badness of particular instruments into which to invest.

TIPS goodness resides in default risk (none) of treasuries and cost free purchase at TD. Other investments may cost more to transact and have various risks, therefore badness.
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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby Doc » Sun Mar 07, 2010 2:19 pm

neverknow wrote:We all (myself included) seem to believe that cash is bad. That the risk to cash is inflation. I do not see that in this historical data.

Thanks for the data and analysis but I have to disagree with your premise. Cash (aka 30 day t-Bills) is the ultimate riskless security usually used in the CAPM model (Sharpe ratio). It is not that cash is bad because it has inflation risk, it is bad because the real yield tends to suck. :wink:

What's nice about your data is that it shows that you can still be pretty "riskless" with higher yielding 6 month CDs.
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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby spam » Sun Mar 07, 2010 2:54 pm

Doc wrote:
neverknow wrote:We all (myself included) seem to believe that cash is bad. That the risk to cash is inflation. I do not see that in this historical data.

Thanks for the data and analysis but I have to disagree with your premise. Cash (aka 30 day t-Bills) is the ultimate riskless security usually used in the CAPM model (Sharpe ratio). It is not that cash is bad because it has inflation risk, it is bad because the real yield tends to suck. :wink:

What's nice about your data is that it shows that you can still be pretty "riskless" with higher yielding 6 month CDs.


I love my CD ladder. Both of them. The cash part of my emergency fund is in 12 one year CD's laddered so one matures each month. My second is a 5 year brokered CD ladder in a Fixed Income account.
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Postby avalpert » Sun Mar 07, 2010 3:08 pm

vst wrote:

I also don't want to be making 2.14% above "inflation" on 30 year TIPS when "reported" inflation is close to zero or negative.


Cause they are all in on it - they are all out to get us...
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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby avalpert » Sun Mar 07, 2010 3:21 pm

neverknow wrote:I have finally found the data. The historical inflation rate is from the Bureau of Labor Statistics. Both the Historical 6 month T Bills and Historical 6 month CD rates are from the Federal Reserve. The time period for which they all match up is 1964 to 2009. I do not see any year where inflation significantly exceeded 6 month guaranteed return interest rates. I do see several years where 6 month guaranteed return interest rates exceeded inflation. I realize there can be time period slippage, and there have historically been different tax treatment of interest & dividends.

We all (myself included) seem to believe that cash is bad. That the risk to cash is inflation. I do not see that in this historical data. We all seem to believe that equity and bond mutual funds are the only way to pace inflation (which does not look to be true). And I simply can't answer whether equities and bond mutual funds outperform inflation over some time period, as I would imagine this is highly selective on what the begin and end date are.

I am not at all sure, that what the financial services industry has sold us for the past 20 to 30 years is true (or rather completely true). I do have a 60% allocation to laddered short term CD's, and the other 40% is allocated to the markets, as is most everyone else's tax deferred savings.

As always, none of us knows the future - including me.

I post this for your consideration, as historical performance in the markets - the data seems to be readily available. Historical T Bill and historical 6 month CD rates are harder to find.
neverknow

Code: Select all
Year   Inflation   6monthTBill   6monthCD
1964   1.3   3.68   4.03
1965   1.6   4.05   4.45
1966   2.9   5.06   5.6
1967   3.1   4.61   5.19
1968   4.2   5.47   5.97
1969   5.5   6.86   7.34
1970   5.7   6.51   7.64
1971   4.4   4.52   5.21
1972   3.2   4.47   5.01
1973   6.2   7.2   9.05
1974   11   7.95   10.02
1975   9.1   6.1   6.9
1976   5.8   5.26   5.63
1977   6.5   5.52   5.91
1978   7.6   7.58   8.6
1979   11.3   10.04   11.42
1980   13.5   11.32   12.94
1981   10.3   13.81   15.79
1982   6.2   11.06   12.57
1983   3.2   8.74   9.28
1984   4.3   9.78   10.71
1985   3.6   7.65   8.24
1986   1.9   6.02   6.5
1987   3.6   6.03   7.01
1988   4.1   6.91   7.91
1989   4.8   8.03   9.08
1990   5.4   7.46   8.17
1991   4.2   5.44   5.91
1992   3   3.54   3.76
1993   3   3.12   3.28
1994   2.6   4.64   4.96
1995   2.8   5.56   5.98
1996   3   5.08   5.47
1997   2.3   5.18   5.73
1998   1.6   4.83   5.44
1999   2.2   4.75   5.46
2000   3.4   5.9   6.59
2001   2.8   3.34   3.66
2002   1.6   1.68   1.81
2003   2.3   1.05   1.17
2004   2.7   1.58   1.74
2005   3.4   3.39   3.73
2006   3.2   4.81   5.24
2007   2.8   4.44   5.23
2008   3.8   1.62   3.14
2009   -0.4   0.28   0.87



I think you might be drawing the wrong conclusion from the data here - what I see are rates trailing inflation precisely when I need them not to (when inflation picks up). Look at 74-75, 78-80, 03-04 - rate of change in yields seems to lag rate of increase in inflation making it most at risk in periods when inflation rises unexpectedly and quickly- i.e when you need it most
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Postby neverknow » Sun Mar 07, 2010 3:48 pm

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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby avalpert » Sun Mar 07, 2010 4:00 pm

neverknow wrote: I acknowledge there is a time lag - avalpert. There would have to be, if your money is locked up for 6 months, right? And I do not like todays low rates any better then anyone else does. However, it was this subset of data 1979 - 1993 (1993 - which would have been recession lows, such as present day) that really surprised me. Inflation went down far faster then 6 month rates did. Perhaps it all lags, and the next 10 years 6 month rates will consistently trail inflation? I have no idea. I do not know the future.


I would be wary of using that time frame - coming off of the high inflation of the 70's as an indication of what to do heading off of a period of historicaly low inflation, particularly if we end up heading into high inflation. The periods that would interest me most are the ones where the lags are not in your favor becasue they seem to be closer to where we are today - and they will be the ones of interest to someone looking for inflation protection.

avalpert - I don't think any one is out to get us. We all are (or I perceive us to be) full grown adults capable of making up our own minds. And that is all that is happening here.


Sorry, that was targeted specifically at VST who insists that governmetn inflation data is misleading all us sheep - feel free to disregard.
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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby linuxizer » Sun Mar 07, 2010 4:10 pm

Doc wrote:
neverknow wrote:We all (myself included) seem to believe that cash is bad. That the risk to cash is inflation. I do not see that in this historical data.

Thanks for the data and analysis but I have to disagree with your premise. Cash (aka 30 day t-Bills) is the ultimate riskless security usually used in the CAPM model (Sharpe ratio). It is not that cash is bad because it has inflation risk, it is bad because the real yield tends to suck. :wink:

What's nice about your data is that it shows that you can still be pretty "riskless" with higher yielding 6 month CDs.


Cash is only risk-free if your horizon is short. Campbell and Viceira appear to have challenged the dominance of short horizons for judging risk in a coherent framework, but I'm still working through it in my limited spare time.
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Postby metalman » Sun Mar 07, 2010 5:15 pm

Who the heck wants to simply keep up with inflation?? I want to beat it. With a real yield over and above the inflation number. Not some ridiculous investment that simply tracks it.

Uh, well you will beat it, by a predictable margin. It's called the interest rate. The "ridiculous investment" is the only one guaranteed to protect your principal against inflation - hence, you will not get rich on it, because there is no free lunch. I would argue those in the accumulation stage should avoid TIPs. And no one, except the most conservative investor who has a comfortable cushion, should buy 100% TIPs, but I would also argue if you need much more expected income than what TIPs would provide in retirement, you are in trouble. Of course, some geniuses don't understand all this. They think they are going to get rich in the stock market or buying gold.

We all (myself included) seem to believe that cash is bad. That the risk to cash is inflation.

Who thinks that? Compared to what? Cash, or very ST bonds, should be considered an alternative to longer-term bonds. It is good to have when inflation increases, because while bonds and equities decline in value, it can be used to buy bonds as yields rise. So cash protects against inflation. The reason "cash is bad" is not inflation but low yield, which is the price of the flexibility (liquidity) and protection against inflation it affords.
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Postby neverknow » Sun Mar 07, 2010 5:19 pm

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Postby neverknow » Sun Mar 07, 2010 5:32 pm

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Postby Beagler » Sun Mar 07, 2010 5:35 pm

vst wrote:I don't see how tips can protect you from anything. When reported inflation is low or negative (which I don't believe for a second), TIPS do nothing more than rip people off because they are tracking this "inflation" number.


"Government: Making the Numbers Fit

Many of the numbers we cannot count on, paradoxically, are produced by our Federal Government....we're being grossly misled by government data, including the vital numbers that have become central to our national dialogue, such as our ...(GDP), our unemployment rate and our inflation rate....
The underestimates in the Consumer Price Index (CPI) are even more egregious." (John Bogle, Enough, pages 100-101) (emphasis added)
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Postby neverknow » Sun Mar 07, 2010 5:40 pm

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Postby metalman » Sun Mar 07, 2010 5:55 pm

Yes, it's all a plot.
The people who are yelping the loudest about manipulated statistics are the very same ones who want the market to decide everything.
So I am sure Mr. Market will see through the plot, right?
Maybe not, because it is the market setting the rates.
Would not the yield on nominal bonds be much higher if the market thought inflation was so high? It's the market that sets both the TIPs and Treasury yields, not the Treasury, so if you don't like TIPs BLAME THE MARKET not the bureaucrats. If the market though TIPs were being manipulated, the spread with the nominals would not be as narrow as it is.
And what are your choices? If inflation is really that much higher than those lying bureaucrats are telling us, then the real value of gold has plummeted 95% in 30 years instead of 80%, equities have lost up to 50% in the last decade, and I don't really want to think of what has happened to all those precious REITS of late.
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Postby Snowjob » Mon Mar 08, 2010 7:23 am

Now that you have historical data for most of this, why not track the performance of tips w/ a 6 month ytm for comparisons sake?
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Postby TheEternalVortex » Mon Mar 08, 2010 7:38 am

There are a couple points:

1. If you hold a significant portion of your investments in a taxable account, then inflation is terrible for you because taxes affect nominal income. In that sense equities help you both because they can produce a real return above inflation, and because of favorable tax treatment.

2. If you ignore taxes, it's completely correct that short-term investments protect you from inflation. I don't know that anyone would argue against this. The argument has always been about unexpected inflation. But even rises in unexpected inflation aren't so bad because you only suffer for the duration of your investment. In your example that's 6 months, so unless we have a hyperinflation scenario you'll do fine.

3. If we do have hyperinflation, which I believe there is no reason to expect, as the Fed, if nothing else, has become quite good at managing inflation since the 80s (and even then it wasn't dangerously high), then short-term investments will not protect you. If we had unexpected 1000x inflation over a month, as some other countries have experiences, and all your money is earning minimal interest, then at the end of your 6 month period you have basically nothing left to reinvest at the new, higher interest rates. TIPS don't have this problem.

Of course you won't see that in the historical data, because it has never happened in the US. But might it? Of course (although it's probably extremely unlikely).
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Postby neverknow » Mon Mar 08, 2010 8:17 am

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Postby neverknow » Mon Mar 08, 2010 8:26 am

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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby Doc » Mon Mar 08, 2010 1:35 pm

neverknow wrote:

I have to admit my ignorance regarding these terms "the CAPM model (Sharpe ratio)", so sorry I was unresponsive.


Arguably "Modern Portfolio Theory" and CAPM (Capital Asset Pricing Model) are the basis for the Bogleheads philosophy of index investing, diversification and asset allocation.

Modern portfolio theory (MPT) is a theory of investment which tries to maximize return and minimize risk by carefully choosing different assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.
http://en.wikipedia.org/wiki/Modern_portfolio_theory
In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk.
http://en.wikipedia.org/wiki/Capital_as ... cing_model

CAPM measures portfolio performance in terms of excess returns over the "riskless" security. Thirty day t-bills are the most widely used as that "riskless" security.

Many people use the term "risk" for things like losing capital or not meeting ones goals maybe because of inflation or taxes but these definitions are not used in MPT and CAPM. However, the alternative definitions are often the basis for some of our livelier discussions, right linuxizer? :wink:
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Postby BlueEars » Mon Mar 08, 2010 2:28 pm

This 2003 article from Bill Gross has some nice real return graphs: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2003/IO_08_2003.htm

Good graphs of intermediate govt bonds 1925 - 2003, and also for short real rates 1953-2003. Also provides some historical commentary.
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Postby nisiprius » Mon Mar 08, 2010 4:33 pm

neverknow wrote:I'm a bit surprised no one has mentioned what became obvious to me. We are taxed as ordinary income, this interest income that merely paces inflation. Thus, over time - there is a steady perpetual drip ... drip ... drip - not lost to inflation, but lost to taxes.
Just like with any investment. Even with the capital gains tax break, when stocks earn 7% real, they don't really earn 7% real. Yet the before-tax return is what members of the Cult of Equities are always citing. I think those impressive figures and charts how much you'd have if you'd just put $10,000 in Wellington when it was founded might look a bit different if you factored in the 80-90% income tax rates of the 1950s.
Unless you go really long (30 years), I think the shorter term yield over inflation is virtually negligible.

So yeah, to correct my previous statement, I want something that beats inflation by more than just a few basis points above inflation without having to go out and buy long term issues.
Me, too, and probably everyone reading it, but right now there just aren't any low-risk investment that do that. If wishes were horses I'd be buying more 4%-fixed-rate I bonds right now.

Agreed, I don't see any much use in short-term TIPS. But the whole point is, you can go long-term in TIPS.

You're talking meaningful risk on a 20-year nominal bond, because inflation could take a terrible toll on its maturity value... and because even if the real interest rate doesn't change much, the market value of nominal bonds responds to nominal changes in the interest rate. I've seen the nominal rate hit 15% in my lifetime.

But with a 20-year TIPS, you needn't lose any sleep over its value at maturity, and its market value responds to changes in the real interest rate... which as far as I know doesn't go to 15%, ever.

From http://www.economics.utoronto.ca/jfloyd ... /evin.html :
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Postby Snowjob » Mon Mar 08, 2010 7:55 pm

neverknow wrote:
Snowjob wrote:Now that you have historical data for most of this, why not track the performance of tips w/ a 6 month ytm for comparisons sake?


This certainly sounds interesting. Perhaps you can provide this information? Despite trying, I don't seem to be able to understand TIPs.

TIPs only go back about 12 years, don't they? I am not sure what 12 years of performance shows?
neverknow


12 years especially for a new asset class probably wont show much but it will provide context for performance going foward. On the other hand, most people won't be flipping tips every six months so I'm not sure how this would even be a good comparison now that I think about it.
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Re: Data - Historical Inflation / 6 month T Bills / 6 month

Postby linuxizer » Mon Mar 08, 2010 8:19 pm

Doc wrote:However, the alternative definitions are often the basis for some of our livelier discussions, right linuxizer? :wink:



Yup. :P
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Postby Rodc » Mon Mar 08, 2010 9:34 pm

might look a bit different if you factored in the 80-90% income tax rates of the 1950s.


How many people did that actually apply to?

How many middle class people or even upper middle class people like found on this forum to that apply to?

The broader point you make though is fine.
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Postby Beagler » Tue Mar 09, 2010 12:12 am

metalman wrote:Yes, it's all a plot.


Give Mr. Bogle's statement, are you implying he feels "it's all a plot?" As someone who's studied this a great deal, I'm sure he's got rational reasons for his conclusion.
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Postby DrinkingBird » Tue Mar 09, 2010 5:45 am

TheEternalVortex wrote:If you ignore taxes, it's completely correct that short-term investments protect you from inflation. I don't know that anyone would argue against this. The argument has always been about unexpected inflation.

I don't understand your point. Short-term FI investments are frequently better than longer term FI investments when it comes to keeping up with inflation, and in that sense they "protect you from inflation". However, short term FI investments do not always keep up with inflation (even before taxes) and thus they don't truly "protect you from inflation". Perhaps your point is that whatever inflation they failed to protect you against was "unexpected"? Many have knowingly kept money in negative real yielding short-term FI investments because they felt they were the least worst/risky option.

TheEternalVortex wrote:But even rises in unexpected inflation aren't so bad because you only suffer for the duration of your investment. In your example that's 6 months, so unless we have a hyperinflation scenario you'll do fine.

Well, if one fails to keep up with inflation for 6 months and IF after that they ARE able to keep up with inflation, they only lost money in real terms during the first 6 month investment period. However, inflation affects not just the prices you pay in one year but the prices you pay for each and every year going forward (unless and until it is offset which is rare). Plus it compounds. So I think even one period of failing to keep up with inflation can reduce your ability to meet inflation adjusted expenses over the longer term, and thus the suffering can last indefinitely.
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Postby kencc » Tue Mar 09, 2010 8:21 am

Gummy has a spreadsheet 1928-2000 for inflation adjusted returns T-bills, 5 yr T, Long Bonds if you're interested.
http://www.gummy-stuff.org/allocations.htm
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Postby neverknow » Tue Mar 09, 2010 8:42 am

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Postby neverknow » Tue Mar 09, 2010 9:04 am

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Postby neverknow » Tue Mar 09, 2010 9:20 am

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Postby Valuethinker » Tue Mar 09, 2010 9:25 am

nisiprius wrote:


On real interest rates, if over 4% then the economy really is in trouble.

Generally if your real interest rate is higher than your real GDP growth rate for a sustained period, the economy starts to sell destruct-- debt outstanding grows infinitely.

You usually get those moments of inflection when:

=- the Fed hits the brakes hard (eg 1981, 1994) and inflation takes a while to fall

- if you get deflation a la Japan

It's a good guess that TIPS will fluctuate between the high 3s in real interest rates, and, at the bottom, 1%. Real Return Bonds in other countries seem to follow that sort of pattern.

TIPS are more attractive in deflation than the RRBs of most other countries, because they redeem at $100 regardless of accumulated deflation. A nice downside protection.
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Postby DrinkingBird » Tue Mar 09, 2010 8:12 pm

neverknow wrote:DrinkingBird - I direct you to the table I posted. In that data, I am hard pressed to find even a handful of years where the short term instruments did not pace inflation, by any significant number. And that is the surprise in the data to me - because it is what you are suggesting, that it seems to me, we have all been led to believe.

Hi neverknow. When I looked into it (I pulled a bunch of data into a spreadsheet and played around with it), it appeared to me that short term FI investments tended to keep up with the "official/average" inflation rate. In a way this makes sense, for no one wants to lend money, for any length of time, at a rate that is lower than inflation. However, I too saw periods where the short term FI investments didn't keep up. Obligatory Note: I believe CPI-U, for example, understates the inflation experienced by very many people and thus I think the "frequency of falling behind true inflation" is higher than it first appears. People have to or at least should make up their own minds about that.

So for the most part I think I agree with you. It is just that I felt the statement "If you ignore taxes, it's completely correct that short-term investments protect you from inflation. I don't know that anyone would argue against this." seemed a bit too absolute too me. Because it didn't appear truly reliable. Plus, I think we are presently in, and probably stuck in for awhile, one of those bad periods for short term FI returns vs inflation.
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Postby alec » Tue Mar 09, 2010 8:40 pm

DrinkingBird wrote:
neverknow wrote:DrinkingBird - I direct you to the table I posted. In that data, I am hard pressed to find even a handful of years where the short term instruments did not pace inflation, by any significant number. And that is the surprise in the data to me - because it is what you are suggesting, that it seems to me, we have all been led to believe.

Hi neverknow. When I looked into it (I pulled a bunch of data into a spreadsheet and played around with it), it appeared to me that short term FI investments tended to keep up with the "official/average" inflation rate. In a way this makes sense, for no one wants to lend money, for any length of time, at a rate that is lower than inflation. However, I too saw periods where the short term FI investments didn't keep up. Obligatory Note: I believe CPI-U, for example, understates the inflation experienced by very many people and thus I think the "frequency of falling behind true inflation" is higher than it first appears. People have to or at least should make up their own minds about that.

So for the most part I think I agree with you. It is just that I felt the statement "If you ignore taxes, it's completely correct that short-term investments protect you from inflation. I don't know that anyone would argue against this." seemed a bit too absolute too me. Because it didn't appear truly reliable. Plus, I think we are presently in, and probably stuck in for awhile, one of those bad periods for short term FI returns vs inflation.


DFA's 1 yr bond portfolio/fund was started in 1983 b/c, IIRC, Fama's [or someone elses] research showed that high quality short term fixed income was better at hedging inflation than longer term nominal bonds bonds. Hence, the investment objective:

The investment objective of the DFA One-Year Fixed Income Portfolio is to achieve stable real returns in excess of the rate of inflation with a minimum of risk


See also, several papers at the bottom of DFA's fixed income strategies page.

Also, IIRC, Campbell and Viceira showed that, in the absence of TIPS, investors at inflation risk should shorten the duration of their bonds [i.e. use ST bonds].
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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Postby neverknow » Wed Mar 10, 2010 8:27 am

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Postby DrinkingBird » Wed Mar 10, 2010 7:57 pm

I like that term... "slippage to inflation". Unfortunately, it happens... especially after taxes are considered... far more frequently than people realize.

Adding more injury, I think, is that your money can not only end up slipping to inflation but also create even more inflation while it is slipping. For example, when you loan money to a bank via a deposit account, that bank loans the money out and/or invests it in the markets. When money is loaned to the government or it receives tax receipts, most of that money flows back into the economy via government paychecks, benefit payments, subsidies, government bailouts, etc. All that money... your money... flowing into the economy and markets creates even more inflation. If that makes any sense.
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Postby neverknow » Thu Mar 11, 2010 7:40 am

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Postby linuxizer » Thu Mar 11, 2010 8:36 am

neverknow wrote:Just commenting back to your CPI-U comment ... I have looked "every which way but loose" at these government statistics - trying to answer for myself, whether the reported number came anywhere close to what I was, at the household level, experiencing. My conclusion was that if your household spending matched the CPI it did, but if your household did not, then of course it did not. And the 3 biggest wild cards appeared to be shelter at 33% - I do not match, my home is paid for. Education & Health Care are such small percentages, this must be sending everyone for a loop. I have no idea who would be the average in these items, for you are either spending this or not. And if you are, likely it is way more, and if you are not - it is irrelevant. Personally, what I did about this was invest in Vanguard Energy and the etf XLU (utilities) - as apparently, it is my utility bills that is swinging my annual cost of living -- which was less in 2009, then 2008 - and it was the utility bills that made all the difference in my household. Oh - I also bought shares in my trash pickup service ... the dividend pays me more, then I pay them.


CPI is only an average. Doesn't mean it's a conspiracy. And everyone in government knows that its formula is quite old and not necessarily super current. Still, there's value in consistency; imagine the conspiracy theories when the government updates the formula, no matter how good a job they do.

I would submit that your housing expenses are still part of the CPI, in the form of opportunity cost. You could lease out the house tomorrow for a market rent and rent a place yourself. Essentially you have an investment whose value automatically increases with your personal housing inflationary cost. The analogy would be retiring on a 100% TIPS portfolio and then claiming that you do not experience inflation because you always have the same amount of real dollars. It's a valid claim in one sense, but it makes equal sense to view the investment and the consumption differently rather than commingling them.
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Postby neverknow » Thu Mar 11, 2010 9:11 am

linuxizer wrote:I would submit that your housing expenses are still part of the CPI, in the form of opportunity cost. You could lease out the house tomorrow for a market rent and rent a place yourself. Essentially you have an investment whose value automatically increases with your personal housing inflationary cost. The analogy would be retiring on a 100% TIPS portfolio and then claiming that you do not experience inflation because you always have the same amount of real dollars. It's a valid claim in one sense, but it makes equal sense to view the investment and the consumption differently rather than commingling them.


I don't dis agree, however - this sort of accounting is just over my head.

My home costs property insurance, and property taxes - and I see it 2 ways; capital invested not earning a return that flows into my cash flow, and as the ultimate reserve for paying the bills, if I run out of all other options. Other then that - I live here. It is not for sale. I don't care what it's mark to market value is.

There is a level of detail in accounting today - that is just over my head. Perhaps this sort of ignorance of my part was evident earlier in this thread when terms were thrown out, I don't understand.

My goals are pretty simple. I just want to pay my bills.
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Postby DrinkingBird » Thu Mar 11, 2010 4:26 pm

linuxizer wrote:CPI is only an average. Doesn't mean it's a conspiracy. And everyone in government knows that its formula is quite old and not necessarily super current. Still, there's value in consistency; imagine the conspiracy theories when the government updates the formula, no matter how good a job they do.

Funny you bring up the consistency issue. AFAIK, the CPI-U data is NOT computed in a consistent fashion. They change the methodology and weightings from time to time. Somewhere I read that their policy is to avoid revising older CPI-U data, but that they have on at least one occasion revised then recent data due to a computation error.

In other words, I believe they DON'T go back and revise older CPI-U figures when they change methodologies. Plus, the weightings are meant to reflect changes in consumption patterns and thus aren't the same for all periods (IIRC, consumption patterns from 2005-2006 were used to calculate 2007-2008 CPI-U, and consumption patterns from 2007-2008 are now being used to calculate 2010-???? CPI-U).

The end result is, AFAICT, a situation where one can't reliably look at historic CPI-U data and say for example "oh, inflation was high then and has since dropped". They'd (possibly) be comparing a CPI-U datapoint calculated one way to a CPI-U datapoint calculated a different way and thus relative comparisons could be problematic.

FWIW, one outfit that purports to continue to calculate inflation using older methodologies is ShadowStats. Slightly down from the top on their home page is a chart of "Official CPI-U" vs "Pre-Clinton Era CPI":
http://www.shadowstats.com

On this page is another chart comparing official CPI-U to "1980 era CPI":
http://www.shadowstats.com/alternate_data/inflation-charts
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