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Who's Got The Smallest TIPS?
Yesterday we highlighted that US TIPS securities are trading with negative yields almost 6 years into the future. The chart below shows just how great the confusion is when it comes to estimating inflation based on a comparison between rate-based instruments and other securities, most notably stocks and commodities, which are now pricing in aggressive inflation.
Yet this is nothing, as the next chart demonstrates, compared to the confusion when attempting to quantify European inflation is even worse (that GGB 2.9% of Jul 2025 sure looks like it was priced by a low frequency trading ENIAC).
And lastly: Britain is now expecting inflation to not return for nearly a decade based on TIPS breakevens.
How can one explain this? As Credit Trader suggests, this is nothing more than a simple upside/downside calculation used each and every day to quantify outcome probabilities for asset managers: the market is pricing in a 99% probability of deflation in which rates approach zero as seen on TIPS (although don't tell that to the 30 year auction earlier), and a tiny (but increasing) probability of hyperinflation. Since the U/D equation thus becomes impossible to quantify, as it has either infinity in the numerator or zero in the denominator, the market's schizophrenia is easily explainable: market participants are increasingly hedging for the possibility of a hyperinflation scenario, which unlike a deflationary collapse, does not have a lower bound to exponential price expansion (what is hyperinflation 10,000,000% price increase? 10x10100,000? the distinction is irrelevant, just ask Von Havenstein). So look to TIPS and the bond auctions to determine when the denominator on the deflation scenario starts getting weaker. At that point, gold, and all resource commodities, will likely explode.
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Implied inflation in every asset class goes out the window under excessive liquidity. No shortage of bid money to park everywhere.
Perhaps a liquidity adjustment is possible when the TOS spread is negative.
Well, the fact that they are negative on the first 5 years could be explained by the probability of a hyperinflationary event as the note suggests. However, one explanation of the positive sloping curve is the increasing default probability. The FED can print as many USD as it wants in order to amortize all the nominal treasury issues, but under the "running-the-presses-at-10-gigapages-per-second scenario", it may just have to default on TIPS as it cannot afford to pay the hyperadjusted prices. Thats why they are called TIPS and not THPS. They only protect inflation :-P
btw Franziska has the smallest TIPS.... bitchez! (literally)
Oh, you said the smallest TIPS.....nevermind.
If Chartist pulled his thing out this whole room would get dark.
Becky Quick as a front runner :>
Boolean, bitches?
http://bigpicture.typepad.com/writing/images/2008/04/24/light_switch.jpg
We are either screwed, or not.
"Who's Got The Smallest TIPS?" - Erin Burnett?
I vote for Jamie Lee Curtis
Say wha?!
http://www.dix.lv/i/hottie/jamie.lee.curtis.jpg
Makes sense to me why they are trading negative. End of the system.
Same reason why the Europeans where throwing grain out at sea last time, while people onshore were starving.
Wow ! An event like that is crazy.
a few points to consider:
When you buy a TIP with a negative inflation expectation baked into the price, you can often buy at a discount to par, less than $1 buys $1 worth of the security. now be careful because the capital gain goes right to next years bottom line. The rebate is worth it.
Asset deflation, and consumer and energy inflation are very likely scenarios. Will it mean anything to the CPI? Remember not all TIP funds use CPI. Do your homework. Is gold an asset? Or is it fungible commodity?
Probably the worst situation for TIPS is high interest rates and low inflation. However if you balance direct holdings with bond fund holdings you should be able to hedge that outcome. Most of us aren't smart enough to play gold, TIPS are the gold equivalent for widows and orphans.
the preferred government policy about COLAs is to continue lying about statistics, and then offer the recipients a one off payment. However the Tea Party might put a stop to that, and eventually the rule of unsullied empirical data will prevail. The BLS is generating body counts, (see vietnam war) which are fooling no one, they are losing the war, and since we are the poor bastards on the other end, we will finally declare victory, get some real employment and CPI numbers, and the world will return to normal (haha)
Yet my TIPS bond fund has appreciated 10.5% YTD. Why, I don't know but I suspect it's an inflation hedge in 401K funds that can't invest in PMs. However, since the government makes up stats about CPI, more than likely the inflation protection TIPS are supposed to provide won't mean nothing when CPI prints as 0.000000000000004 for the next 20 years.
"Yet my TIPS bond fund has appreciated 10.5% YTD. Why, I don't know"
It's a %10 return for the same reason my Pimco Bond Fund returned %30. They bought bonds when they were a lot lower and now bonds, ALL bonds, are going through the roof as an entire class of delusional investors believe in deflation. Or course the Fed printing the money to buy bonds helps too (bashful smiley face). Hey wait I'm one of the delusion investors. It's ok, I'll hang with the loonies a little while longer to suck that last bit of marrow out. I'm holding onto my Pimco Bund Fund until next year at which point I'm pulling the money out and investing in Dried Milk, Hard Tack and shotgun shells.
"They bought bonds when they were a lot lower and now bonds, ALL bonds, are going through the roof as an entire class of delusional investors believe in deflation."
Perhaps your analysis leaves out several gross facts: A) Most retail investors alive today wouldn't know deflation if it bit them on the behind, at least in the beginning, as they have never experienced it, except for those who got entangled in the RE flipping/ mortgage mess--and they won't be buying bonds anyway; b) retail investors, and their proxies, are overwhelmingly those pumping up bond funds; c) retail investors are delusional in the sense that they expect bonds to be SAFE, which is why they switched to them in the first place, after being screwed yet again by equities--they are recent, and desperate, buyers of bonds, to include junk bonds, because they feel they have no other place to generate income. We are talking about retirees, for the most part, or their proxies. I might agree that the proxies, such as pension funds, might have other ideas, but the retail investor is clueless.
Why would you trust the US government to define inflation? IMHO, TIPS is a self-referential security. No thanks...
Asians, male or female, depending on how you read the question...
You know, when doing proper fundamental analysis and technical analysis, I find that if I do not like the numbers or the chart, i just turn it upside down, then it all makes sense to me.
I think Tiffany might suffer some collateral damage and be a decent short going into year's end.....imho.
Oh, i'll just put this here. "Ball of Confusion" - as sung by the "Temptations" in 1970. If this song hasn't already been posted on ZH, I feel as though I made a contribution today. And away we go...
People movin' out
People movin' in
Why, because of the color of their skin
Run, run, run, but you sho' can't hide
An eye for an eye
A tooth for a tooth
Vote for me, and I'll set you free
Rap on brother, rap on
Well, the only person talkin'
'Bout love thy brother is the preacher
And it seems,
Nobody is interested in learnin'
But the teacher
Segregation, determination, demonstration,
Integration, aggravation,
Humiliation, obligation to our nation
Ball of Confusion
That's what the world is today
The sale of pills are at an all time high
Young folks walk around with
Their heads in the sky
Cities aflame in the summer time
And, the beat goes on
Air pollution, revolution, gun control,
Sound of soul
Shootin' rockets to the moon
Kids growin' up too soon
Politicians say more taxes will
Solve everything
And the band played on
So round 'n' round 'n' round we go
Where the world's headed, nobody knows
Just a Ball of Confusion
Oh yea, that's what the wold is today
Fear in the air, tension everywhere
Unemployment rising fast,
The Beatles' new record's a gas
And the only safe place to live is
On an indian reservation
And the band played on
Eve of destruction, tax deduction
City inspectors, bill collectors
Mod clothes in demand,
Population out of hand
Suicide, too many bills, hippies movin'
To the hills
People all over the world, are shoutin'
End the war
And the band played on.
Copyright 1970 Jobete Music Company, Inc.
EDIT: This is some Nostradamus shit right here!
I have posted the Love and Rockets version before. Here it is again:
http://www.youtube.com/watch?v=vhwPWRp2pkE
Yeah, I knew someone had to have posted before. I was taking my son to school this morning when this little gem popped on the radio. First response - ZH crew needs to hear this! 1970 'til today...amazing.
Tyler, ENIAC? ;)))
Those 2-3-4 watt tubes must be working OVERTIME, lol
Hey Ben, show us your TIPS!
Can TIPs be trusted, with the FED QE etc?
I just love TIPS and ARBS...
LOL, so you're a TNA kinda guy huh?
Blondes (Bernanke Lending Out Next Decade's Earnings) have more fun!
+1! Nice...
Thanks Tyler. Got it now. It's like Schrodinger's cat, simultaniously dead and alive, and six years from now we will find out... what exactly?
Wouldn't an inflation linked security simply be like a dog chasing its tail in the context of hyperinflation? It would simply spiral into worthlessness.
I think tptb can mess around with the urban CPI enough to hide inflation. We all know how, take out food and energy and call it deflation because the unemployed aren't buying enough for 55" 3D internet ready tv's at full price. I wonder if they can do that with the totally different animal, hyperinflation? I doubt it, but then it's probably game over at that point anyway.
Hey, how dare you jock Cheeky's style!
Yeah, I know. Cheesy. Velo is probably gonna be mad at me too. Oh well, her tips aren't too small, but they are crooked, just like the gubbmints...
Expect huge inflation on Chinese imported goods (particularly low-end goods such as clothing, toys, and discount store items) sometime a year from now. The question is what portion of the inflation will result in lower margins and what portion will be transferred to consumers. This xmas might be your last chance to buy clothing for cheap...
Someone should issue some 10 year TIPs that really protect against inflation. Attach inflation adjustments to the basket of consumables (non leveraged assets) like energy, food, clothing, insurance and medical. Remove the falling housing element and you have a real gauge of consumable cash flow inflation. Rough estimate the other 2/3 of consumer cash flow. These would be hot sellers.
One last thing; my TIP is bigger than yours.
TIPS were pumped hard by the BD's in '03 and here they are again. What a crock.
Well I am 6-6.5 erect, but the tip? I dont know
Well I am 6-6.5 erect, but the tip? I dont know
Wait wat
Really this is a great post from an expert and thank you very much for sharing this valuable information with us.
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