Can Inflation Timing Be Done?

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CaliJim
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Can Inflation Timing Be Done?

Post by CaliJim » Wed Jul 11, 2018 9:45 pm

OK... so BH's don't "Market Time"... meaning we don't buy and sell stocks based on hunches about "It's reached the peak and is heading into a correction", or "It's at the bottom, back up the truck!" That's good and fine. I got it.

Now.. in another thread... BlueSky123 said (I hope you don't mind me quoting you):
I will move to cash and or short term bonds when and if inflation starts hitting 3-4% with more coming down the road
Is this a thing we can do with any skill. Can one say with skill "inflation is going up from here, fo'shizzle!" Or, "the market is underestimating future inflation?"

And if so, can one use this 'accurate prediction about the future of inflation' to shorten one's portfolio bond and fixed income durations in a skillful way?

Are not future inflation expectations built in to today's bond prices? This is part of the yield curve - is it not?
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KlangFool
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Re: Can Inflation Timing Be Done?

Post by KlangFool » Wed Jul 11, 2018 9:56 pm

OP,

Why do you need to do all this?

It is very simple. Do not prepay your 30 years fixed rate mortgage. If the inflation is going up, you are paying the mortgage with cheaper money. If the inflation is going down, pay off the mortgage.

30 years fixed rate mortgage is a good inflation hedge.

KlangFool

averagedude
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Re: Can Inflation Timing Be Done?

Post by averagedude » Wed Jul 11, 2018 10:03 pm

I believe trying to determine interest rates is just as hard as determining where the stock market is headed. Back in 2008, just about everyone was saying the government was printing money and interest rates have to go up. Alot of people, including me were wrong. I would suggest you research the history of the federal reserve actions, especially in the mid 70's and early 80's. They would raise it then lower it. I wonder how many people pushed all of their chips to the middle of the table and went all in long term treasuries at 12% knowing interest rates were going to go down for the next 28 years. Maybe thats how Dave Ramsey had always got 12% on his money.
Last edited by averagedude on Wed Jul 11, 2018 10:11 pm, edited 1 time in total.

KlangFool
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Re: Can Inflation Timing Be Done?

Post by KlangFool » Wed Jul 11, 2018 10:04 pm

OP,

What if you are prepared for all possibilities? Then, why do you need to care about what will happen next?

For example:

Is your portfolio protected against

A) Inflation

B) Hyperinflation

C) Deflation

D) Interest rate going up

E) Interest rate going down

KlangFool

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CaliJim
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Re: Can Inflation Timing Be Done?

Post by CaliJim » Wed Jul 11, 2018 11:01 pm

I ask as a general theory thing, I wonder what others think regarding the idea that "rising inflation be timed"

Personally, I'm 45/55 at the moment, with nominal and tips bond index funds. I've shortened duration in both types by having both short and intermediate funds. (The old Sheepdog thread scared me into going shorter.) (I did consider the PP once upon a time, please don't get me thinking about hyperinflation, deflation, and government collapse! I'll go back to at work if I must. I still have some suits and ties. LOL)

Now, if I'm not mistaken:

The market's inflation expectations are baked into the yield curve.

If one "waits" until inflation is at 3 or 4% to reduce duration, the market value of the intermediate or longer bonds one is selling (to go shorter) will have dropped (by the market's expectations for what the future inflation rates will be.) So, one cannot really 'get ahead' this way, without just being lucky.

One of course can reduce exposure to fixed income inflation risk by shortening duration at any time. And that is fine. Perhaps wise in withdrawal mode. But trying to move to a shorter bond duration based on some indicator.... not bogleheadish is it?

It should be the understanding of one exposure to various risks and rewards that drives these decisions, not CPI. No?

Or have I missed something?
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KlangFool
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Re: Can Inflation Timing Be Done?

Post by KlangFool » Thu Jul 12, 2018 8:39 am

CaliJim wrote:
Wed Jul 11, 2018 11:01 pm
I ask as a general theory thing, I wonder what others think regarding the idea that "rising inflation be timed"

Personally, I'm 45/55 at the moment, with nominal and tips bond index funds. I've shortened duration in both types by having both short and intermediate funds. (The old Sheepdog thread scared me into going shorter.) (I did consider the PP once upon a time, please don't get me thinking about hyperinflation, deflation, and government collapse! I'll go back to at work if I must. I still have some suits and ties. LOL)

Now, if I'm not mistaken:

The market's inflation expectations are baked into the yield curve.

If one "waits" until inflation is at 3 or 4% to reduce duration, the market value of the intermediate or longer bonds one is selling (to go shorter) will have dropped (by the market's expectations for what the future inflation rates will be.) So, one cannot really 'get ahead' this way, without just being lucky.

One of course can reduce exposure to fixed income inflation risk by shortening duration at any time. And that is fine. Perhaps wise in withdrawal mode. But trying to move to a shorter bond duration based on some indicator.... not bogleheadish is it?

It should be the understanding of one exposure to various risks and rewards that drives these decisions, not CPI. No?

Or have I missed something?
CaliJim,

In general, anything that is expected, interest rate, inflation, and so on is priced into the market. Only events that are significant enough and not expected will move the market. So, how could a normal folk like us know anything that is significant enough and not expected? We don't. It will be a wild guess and gamble.

I lost 50% of my whole life savings in Telecom bust. My family member has a master degree in the economy from the University of Chicago. He worked in the Wall Street for 20+ years. He earned 7 figures in bonus and salary every year. He lost 10 million in the Telecom Bust too. Nobody knows nothing.

<<(I did consider the PP once upon a time, please don't get me thinking about hyperinflation, deflation, and government collapse!>>

Why not?

1) To prepare for deflation -> Keep some amount of cash

2) To prepare for hyperinflation -> Keep some physical gold.

3) To prepare for government collapse -> Be prepared to migrate to some other country if it happened.

KlangFool

GAAP
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Re: Can Inflation Timing Be Done?

Post by GAAP » Thu Jul 12, 2018 9:45 am

CaliJim wrote:
Wed Jul 11, 2018 11:01 pm
I ask as a general theory thing, I wonder what others think regarding the idea that "rising inflation be timed"
If that could be done reliably, there would be no need or demand for inflation-protected securities that respond to unexpected inflation.

Blueskies123
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Re: Can Inflation Timing Be Done?

Post by Blueskies123 » Thu Jul 12, 2018 10:03 am

averagedude wrote:
Wed Jul 11, 2018 10:03 pm
I believe trying to determine interest rates is just as hard as determining where the stock market is headed. Back in 2008, just about everyone was saying the government was printing money and interest rates have to go up. Alot of people, including me were wrong. I would suggest you research the history of the federal reserve actions, especially in the mid 70's and early 80's. They would raise it then lower it. I wonder how many people pushed all of their chips to the middle of the table and went all in long term treasuries at 12% knowing interest rates were going to go down for the next 28 years. Maybe thats how Dave Ramsey had always got 12% on his money.
I was referring to inflation rates not interest rates. I vividly remember the 70's and how clear it was that inflation was going up. Another person made a very good comment that people have been saying for years that inflation should/will be going up and many missed out on the run up in longer terms bonds. I think the difference is that in the last decade the talking heads have been saying inflation will be going up but there was zero evidence of inflation in the current economic numbers. Back in the 70's I was working in finance and inflation was evident everywhere, wages, gasoline, food, housing, and the money supply.
I think we all agree inflation is not going to 7 or 8 percent. But there are plenty of ways to see if inflation will be hitting 3 or 4 percent. Just watch wages and a few other indicators. When I was getting 6% raises and HR told me my people will be getting 8% raises next year it was pretty clear inflation was increasing.

GAAP
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Re: Can Inflation Timing Be Done?

Post by GAAP » Thu Jul 12, 2018 10:09 am

Blueskies123 wrote:
Thu Jul 12, 2018 10:03 am
I vividly remember the 70's and how clear it was that inflation was going up.
Me too -- but I don't remember it being clear just how much it would go up (however, I was fairly young then).

Blueskies123
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Re: Can Inflation Timing Be Done?

Post by Blueskies123 » Thu Jul 12, 2018 10:24 am

It was pretty clear inflation was going down when Reagan increased the prime rate to 20 percent. Much higher than inflation.

http://www.fedprimerate.com/wall_street ... istory.htm

Annual Inflation from 1980 – 1989
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 13.91% 14.18% 14.18% 14.76% 14.41% 14.38% 13.13% 12.87% 12.60% 12.77% 12.65% 12.52%
1981 11.83% 11.41% 10.49% 10.00% 9.78% 9.55% 10.76% 10.80% 10.95% 10.14% 9.59% 8.92%
1982 8.39% 7.62% 6.78% 6.51% 6.68% 7.06% 6.44% 5.85% 5.04% 5.14% 4.59% 3.83%
1983 3.71% 3.49% 3.60% 3.90% 3.55% 2.58% 2.46% 2.56% 2.86% 2.85% 3.27% 3.79%
1984 4.19% 4.60% 4.80% 4.56% 4.23% 4.22% 4.20% 4.29% 4.27% 4.26% 4.05% 3.95%
1985 3.53% 3.52% 3.70% 3.69% 3.77% 3.76% 3.55% 3.35% 3.14% 3.23% 3.51% 3.80%
1986 3.89% 3.11% 2.26% 1.59% 1.49% 1.77% 1.58% 1.57% 1.75% 1.47% 1.28% 1.10%
1987 1.46% 2.10% 3.03% 3.78% 3.86% 3.65% 3.93% 4.28% 4.36% 4.53% 4.53% 4.43%
1988 4.05% 3.94% 3.93% 3.90% 3.89% 3.96% 4.13% 4.02% 4.17% 4.25% 4.25% 4.42%
1989 4.67% 4.83% 4.98% 5.12% 5.36% 5.17% 4.98% 4.71% 4.34% 4.49% 4.66% 4.65%

KlangFool
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Re: Can Inflation Timing Be Done?

Post by KlangFool » Thu Jul 12, 2018 10:54 am

Blueskies123 wrote:
Thu Jul 12, 2018 10:03 am

I think we all agree inflation is not going to 7 or 8 percent. But there are plenty of ways to see if inflation will be hitting 3 or 4 percent. Just watch wages and a few other indicators. When I was getting 6% raises and HR told me my people will be getting 8% raises next year it was pretty clear inflation was increasing.
Blueskies123,

No, I don't. I believe that in the next few years, we may have an oil shock and the oil price will go up and drive up the inflation.

KlangFool

MotoTrojan
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Re: Can Inflation Timing Be Done?

Post by MotoTrojan » Thu Jul 12, 2018 12:23 pm

Still requires predicting the future. By the time the data hits your feed, it’s priced in.

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Earl Lemongrab
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Re: Can Inflation Timing Be Done?

Post by Earl Lemongrab » Thu Jul 12, 2018 1:07 pm

For me, no. I don't think I can time any markets, including bonds.

What I do, and have done since creating my asset allocation in 2007, is 50/50 bond index and stable value. The latter is of very short duration, as far as it is possible to express a duration for it.

The idea has always been that the bond index will be more volatile and if it gets too far out of line then rebalancing with stable value will take place. In practice they've stayed pretty close in value of their allocation slices. That was with the moderating influence of lots of new contributions coming in, which isn't happening anymore.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Phineas J. Whoopee
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Re: Can Inflation Timing Be Done?

Post by Phineas J. Whoopee » Thu Jul 12, 2018 4:09 pm

How could one reliably and repeatedly tell whether more inflation is "coming down the road?" Furthermore, how could one reliably and repeatedly tell that better than the other market participants?
PJW

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willthrill81
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Re: Can Inflation Timing Be Done?

Post by willthrill81 » Thu Jul 12, 2018 7:07 pm

Blueskies123 wrote:
Thu Jul 12, 2018 10:03 am
Another person made a very good comment that people have been saying for years that inflation should/will be going up and many missed out on the run up in longer terms bonds.
Rob Berger of the Doughroller podcast has commented that he remembers the early 1980s when people were afraid to buy long-term CDs paying 16% because of inflation concerns. :shock:
Blueskies123 wrote:
Thu Jul 12, 2018 10:03 am
I think the difference is that in the last decade the talking heads have been saying inflation will be going up but there was zero evidence of inflation in the current economic numbers. Back in the 70's I was working in finance and inflation was evident everywhere, wages, gasoline, food, housing, and the money supply.
I think we all agree inflation is not going to 7 or 8 percent. But there are plenty of ways to see if inflation will be hitting 3 or 4 percent. Just watch wages and a few other indicators. When I was getting 6% raises and HR told me my people will be getting 8% raises next year it was pretty clear inflation was increasing.
Inflation could easily be 3-4% in a year or so. It could also fall below its current levels. The notion (not saying that you are implying this) that a period of low inflation must be followed soon by a period of high inflation is demonstrably false, even today with 'more intelligent central banks'. For instance, Japan's inflation rate has swung between almost +4% and under -2% over the last 10 years. It's current about .3%.
https://tradingeconomics.com/japan/inflation-cpi

Japan has also demonstrated that low interest rates are not inevitably followed by higher interest rates. They may remain low for a long time.
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nedsaid
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Re: Can Inflation Timing Be Done?

Post by nedsaid » Thu Jul 12, 2018 8:31 pm

Don't know about the research on this. My suspicion is that the track record for this is similar to that of timing the stock market and predicting interest rates. So many factors involved.
A fool and his money are good for business.

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