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Guest Post: Time To Revisit An Old Friend

Tyler Durden's picture




 

Mark J. Grant, Author of "Out of the Box and onto Wall Street"

Time to Revisit An Old Friend

“Time's fun when you're having flies.”

-Kermit the Frog

I have suggested for weeks, I suggested in my piece yesterday, that you take some money off the table, sell some of your bullets, and re-deploy. Quantitative Easing is coming to an end and there will be ramifications for the bond markets and, eventually, for the equity markets. The days of free money, newly printed money, are coming to a close as America begins to right itself and as our banking system is mostly out of the woods. The longer end of the curve, hit hard yesterday, is heading to higher yields in my opinion. We will also begin to see inflation creep in for a variety of reasons and I point specifically to the price of gas at the pump which, while no one was looking, has hit its all-time highs this week as each penny of increase adds $1 billion to household spending and gasoline has risen thirty cents in the last month.

“Alot of people spend time talking to the animals but not that many people listen. That's the real problem.”
-Winnie the Pooh

TIPS

Maturity                    Yield

4/15/15                    -1.54%

1/15/17                    -1.16%

7/15/19                    -0.63%

1/15/22                    -0.11%

Inflation: The Robber of Barons (or Barrons) and the Rest of Us

It is highly likely, besides backing up the long end of the yield curve, that we are just approaching a bout with Inflation. I have presented, above, the yield of TIPS securities which are the government guaranteed alternative to dealing with Inflation and they have negative yields a fair ways out in maturities. This has been discussed before, some years back, as one of the positive attributes of CIPS (Corporate Inflation Protected Securities) which have a floor of Zero. Let me first be clear that I am touting no specific offering or security but making a positive comment now on the general class of CIPS ownership. As one example there was a recent deal presented that had a seven year maturity, the coupon, given the three month look back structure, is known at 4.69% which is +299/7 year and the float over CPI was +200 which is +263 to the corresponding TIPS. CIPS, in general, pay and float monthly and there are usually no calls or caps or any types of funny construction.  They are also generally senior debt, in-line with other senior debt, so that the credit component is no different in CIPS than in the issuer’s bullet maturities.  Given the realities of today’s markets I would also point out that a LIBOR floater at +200 would only yield a 2.47% so that this particular CIPS bond yields +222 to a corresponding LIBOR floater. Given all of these comparisons it now seems to me that this class of securities, CIPS, should now be re-examined with the thought to accumulate some of the offerings in this class either in the primary or secondary market. As yields rise and as your bullet maturities erode in price and as profits are lost, here is a decent option for capturing profits that you may have and re-deploying in CPI floaters that should not only retain their value but provide income that is superior to many bullet securities.

“Inflation is taxation without representation.”
-Milton Friedman

                                      

 

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Thu, 03/15/2012 - 08:15 | 2257138 Blue Dingo
Blue Dingo's picture

Inflation creep?  More like a sprint!

Thu, 03/15/2012 - 08:28 | 2257158 GetZeeGold
GetZeeGold's picture

 

 

MISSION ACCOMPLISHED!!!!

 

Thu, 03/15/2012 - 08:45 | 2257209 idea_hamster
idea_hamster's picture

Just be sure to get tax advice on TIPS investments.

If I recall correctly (no guarantee) the IRS treats the inflation-related principal increase as present-period income.  That means that you pay tax on the increase of principal this year, even though you get no available cash flow until maturity.

No idea whether CIPS work the same way.

Just a thought.

Thu, 03/15/2012 - 09:57 | 2257515 engineertheeconomy
engineertheeconomy's picture

Quanitative easing coming to an end? What, all the evil forces in the universe suddenly going to become good? Set down the crack pipe Tyler

Thu, 03/15/2012 - 12:43 | 2258333 Pinto Currency
Pinto Currency's picture

 

Two points from this article:

 

TIPS are the governments alternative for investors rather than dealing with their acknowledged CPI inflation.  You eat the spread between the rate of consumer goods inflation that they acknowledge and true goods inflation - the spread is currently about 7%.  http://www.shadowstats.com/alternate_data/inflation-charts

 

I missed the sentence about how $54 trillion of outstanding debt had been resolved and the ship has started to be righted:

http://www.federalreserve.gov/releases/z1/current/z1r-4.pdf

http://www.federalreserve.gov/releases/z1/current/

 

Step right up and get your bonds here folks!

Thu, 03/15/2012 - 14:02 | 2258673 akak
akak's picture

Bingo, and bingo!

Thank you for not falling for the disinformation of the financial wolves in sheeps' clothing.

Thu, 03/15/2012 - 09:56 | 2257505 whatsinaname
whatsinaname's picture

$4.35

Thu, 03/15/2012 - 08:20 | 2257143 battle axe
battle axe's picture

Wait until the dance of death with Iran starts, then you will see Inflation really take off. I bid $2000 for a horse driven wagon, what are my offers?

Thu, 03/15/2012 - 09:44 | 2257437 mess nonster
mess nonster's picture

A nice, rubber-tired Model A- framed wagon sells for this or more. Draft horses- 1500 ea. Mules, 900-1500 ea. prices will only go up.

Thu, 03/15/2012 - 11:17 | 2257815 xtop23
xtop23's picture

Go long mopeds

Thu, 03/15/2012 - 08:21 | 2257145 Conor
Conor's picture

Is it now time to short the 10 and 30 year bonds?

Thu, 03/15/2012 - 08:22 | 2257146 Miss Expectations
Miss Expectations's picture

Asheville, NC gets serious about cracking down on theft:

A city man is facing a felony larceny charge after police say he stole $6 from his employer.

http://www.citizen-times.com/article/20120315/NEWS/303150036/Asheville-m...|newswell|text|Frontpage|p

Jon Corzine be warned.  Stay out of Asheville.

Thu, 03/15/2012 - 08:27 | 2257157 chubbar
chubbar's picture

For those not aware. Please check out what this U.N. Agenda 21 is all about!

http://ppjg.me/2012/03/14/agenda-21-on-steroids/

Thu, 03/15/2012 - 09:21 | 2257330 Schmuck Raker
Schmuck Raker's picture

WTF is PPJ?

The site's 'About' page didn't say.

Thu, 03/15/2012 - 12:24 | 2258247 DosZap
DosZap's picture

chubbar

IF this is accepted HERE, the bullets will fly................................Civil War will once again hit the USA.

The states will NOT accept this...................period.

They are still 20yrs aways from getting the USA to sign onto this.

Any pol who signs onto it, will be unable to show their faces publically for the rest of their life.

Thu, 03/15/2012 - 15:50 | 2259092 WillyGroper
WillyGroper's picture

management of resources??? I was told several years ago that sooner or later my water well would be metered. Looks like with the monetization of water & soon to be shortages, this will be another new reality.

Thu, 03/15/2012 - 08:30 | 2257163 azzhatter
azzhatter's picture

he's probably the mayor

Thu, 03/15/2012 - 09:16 | 2257307 Alex Kintner
Alex Kintner's picture

I hereby nominate the Asheville prosecutor to replace Attorney General Eric Holder.

Thu, 03/15/2012 - 12:40 | 2258339 DosZap
DosZap's picture

Asheville, NC gets serious about cracking down on theft: city man is facing a felony larceny charge after police say he stole $6 from his employer.

This is worse than SICK............................ $6.00?, Felony?

His employer and the LE Dept need to be denutted.

Thu, 03/15/2012 - 08:26 | 2257152 Imminent Crucible
Imminent Crucible's picture

"our banking system is mostly out of the woods"

At that point, I stopped reading. This guy doesn't have a glimmer of a clue.

Thu, 03/15/2012 - 08:56 | 2257246 Toolshed
Toolshed's picture

Right you are sir!  +1

Thu, 03/15/2012 - 10:59 | 2257762 slewie the pi-rat
slewie the pi-rat's picture

he is trying tp persuade some "clients" that he is precognitive, so they should make this here "bet" and then...

Thu, 03/15/2012 - 08:27 | 2257155 disabledvet
disabledvet's picture

Great stuff. I would say "inflation is indeed represented" unfortunately "we call it government which is not repreSENTATIVE of the People's Will." So yes...indeed...while it is a tax...it pays nothing to the government and EVERYTHING to Wall Street. Anywho..."there's yet another history lesson" in this extraordinary Clash of Will's we have going on in this little tiny space called "Computer Land." Speaking of History i just received this video purporting to show the Birth of Tylers' Durden--obviously for fear that my sources may be compromised i cannot vouchsafe for its authenticity:
http://www.youtube.com/watch?v=nAIi3HDkw7E&feature=player_detailpage

Thu, 03/15/2012 - 08:32 | 2257171 ATM
ATM's picture

How can the government allow rates to rise when the added interest will create such a crater in the budget? The answer is they can not. If investment grade corp debt rates rise who will buy the treasuries? The answer is the same as it is today. The buyer of last resort - The Fed.

To me that means one thing - print. And with the continued overhang of housing the fed must do anything to try to reignite that market that is hellbent on deleveraging and collapsing. And if that market continues to collapse than the banks are toast unless the fed buys those junk CDOs for face value.

Printing is the ONLY way out and printing will keep rates low for a long time until it can not. Inflation yes, printing yes, higher rates? Not allowed.

Thu, 03/15/2012 - 08:40 | 2257193 casey13
casey13's picture

Exactly. When you spend twice as much as your revenue money printing is the only way you can cover the bills.

They have two choices. Economic collapse or QE to infinity. 

Thu, 03/15/2012 - 09:15 | 2257300 ATM
ATM's picture

And they will ALWAYS choose QE to infinity becaiuse it allows them the ability to blame others during the process. A collapse is easily directed at those in charge at the moment while QE sneaks up and causes disjointments here and there before it explodes. All the wile the rich are allowed to front run and get richer because they get te money first and can spend it on rel things before it is debased to zero.

It's a beautiful scam while it's working. 

Thu, 03/15/2012 - 09:20 | 2257324 Freegolder
Freegolder's picture

Either way ends up in economic collapse of course, but the QE route just wipes out savers along the way via currency collapse.

All things paper will burn, get some gold and hold it close til the storm has passed.

Thu, 03/15/2012 - 08:33 | 2257176 gmak
gmak's picture

I would argue that inflation is NOT the robber of Barons. Barons do quite well under inflation - as does anyone (relatively) whose wealth is based on owning things - and not on receiving an income flow in exchange for labour.

Prices move before wages. Inflation is the hidden taxation on the working class, and deflation is their friend. Conversely, deflation is the enemy of those who own lots of things (assets of all kinds including rare paintings and cars) because price moves before wages.

 

Inflation benefits those who get the new money first because they get to use that new money to buy things at old prices, and hurts those at the tail end of the money velocity big time - who are now stuck with old wages and new higher prices. Deflation restores the balance. Just ask the Japanese.

Thu, 03/15/2012 - 08:50 | 2257228 Sophist Economicus
Sophist Economicus's picture

Whenever one makes blanket statements one steps into doo-doo.

 

Inflation and deflation can have positive and negative effects, period.    It has nothing to do with 'class'.   It does have everything to do with where you are in the line of receiving the fiat (the government benefits greatly from inflation -- at the expense of the wealthy -- you could tax the 'working class' all day and get bubkus).    Bankers and welfare recepients - on a vastly different scale benefit from inflation well before factory owners, working Joes, etc.

 

Inflation benefits the debtor NOT the saver.    Using your stereotype, I'd guess that lots of 'working-class' folks with large debt to earnings ratios would welcome the relief that inflation provides over time.   Deflation benefits all who receive steady wages BUT erodes the productivity of marginal capital and makes debt more onerous (your 'working class' debtors would feel the pain here too, the welthy wouldn't auction off the Picasso - they's just stare at it a little longer).

 

There is no simplistic worldview.   Dump the 'intuition pump' reasoning, join the fray for righting the ship, not looking out the world with envy, deceiving yourself that you could be like 'them' too, if only you were connected

Thu, 03/15/2012 - 11:32 | 2257887 xtop23
xtop23's picture

So for all those people that were smart enough to blow up their credit by maxing everything then defaulting prior to a highly inflationary environment .......

Well done. You will soon be able to pay the collections agency in dollars that are worth pennies just like our government.

Assuming you were intelligent enough to buy PM's with those funds and didn't lose them in a freak boating accident like so many of us unfortunately have.

Do to the banks what they're doing to you.

Thu, 03/15/2012 - 21:24 | 2260255 Bill Shockley
Bill Shockley's picture

"Shit Tonto, I melted down all my silver bullets last year and maxed out the house and all my cards. The silver's under the bunkhouse.

 

I think it's gonna be OK!!!"

 

"Kimo Sabe...what about me?

   bill

Thu, 03/15/2012 - 08:45 | 2257212 kito
kito's picture

Finally, a post that gets it....

Thu, 03/15/2012 - 08:51 | 2257231 EvlTheCat
EvlTheCat's picture

What are you talking about?  You wrote it!

Thu, 03/15/2012 - 15:56 | 2259120 akak
akak's picture

You will have to forgive Kito, as he is a deflationary flat-earther, and is still hunting for that mythical appreciating fiat currency along with unicorns and Bigfoot.

Thu, 03/15/2012 - 08:46 | 2257215 tok1
tok1's picture

the format for the next QE is aslready in place... FED indicating rates to remain unchanged from  now until 2014..  So FED can look to borrow 2-3ys... and buy 7-30ys

(as their doing now).. The banks know they can buy unlimited FED borrowings in 2-3yr sector  (as they can borrow from FED at 0 via ZIRP in the overnight)  for next 2-3ys . So its a back door QE  FED expands balance sheet by increasing overnight ZIRP lending... and can claim it steralised twist.. operation.. ie no increase on balancesheet... I think its clear FED policy is aimed at supporting US issuance.. until  the Govt balance the budget.. and reduces the debt it will be difficult for FED to really retreat..

The increased cost to Govt of 2-3% increase in rates (on rolling over 15+ trill plus new issuance) will be too great.. because you passed the 100% debt to GDP conditions change..

 

Thu, 03/15/2012 - 09:13 | 2257296 unrulian
unrulian's picture

until the Govt balance the budget.. and reduces the debt it will be difficult for FED to really retreat..

 

when will that be? ....by my calculations i place that somewhere in the vicinity of never

Thu, 03/15/2012 - 09:18 | 2257315 ATM
ATM's picture

You are assuming the Fed wants to retreat. I on the other hand beleive they are walking hand in hand down the same path.

Thu, 03/15/2012 - 09:18 | 2257316 youngman
youngman's picture

9:14 AM Jan. Treasury International Capital: Net foreign purchases of long-term U.S. securities were $94.7B, with net purchases by private foreign investors of $60.8B and net purchases by foreign official institutions at $34.0B. Taking into account both foreign and U.S. securities, the net foreign purchases of long-term securities were $101.0B. Foreigners trimmed their holdings of U.S. T-bills by $36.9B.

 

Foreigners trimmed by 36.9 billion.....hmmmmmmm...the selloff begins......slow at first..then a rush to the exit

Thu, 03/15/2012 - 09:19 | 2257320 semperfi
semperfi's picture

QE coming to an end?  Hahahaha!  What a buffoon!  Hahahaha!  Who do you think is going to buy up the US Treasury's debt you moron?  At a $1.x Trilliion per year clip, that sounds like a whole lotta bond buying (i.e., QE you moron) to me!!  Hahahaha!  What a maroon. 

Thu, 03/15/2012 - 09:26 | 2257354 tok1
tok1's picture

IF they do nothing they will fall into the same trap as Japan.. and risk long term slow growth and high inheritance tax ect (so Govt can get their bonds back as people die)... The US domestic economy may recover at some point as they have population growth.. and if housing construction normalises they maybe be able to get a balance.. 

The problem is the US is now at the point where raising rates is not just a means to slow the economy (as it should be).. and give investors a fair return.. It will also cause increased defecits due to the interest payments.. cause debt is so large I guess FED knows this. So problem is not FED or BOJ its the people;s inability to adjust to reality of what the Govt can provide with an aging population ect.. and flattening population potential. ie when US had say 100 mill people given the space it was easy to double population and get large growth .. but with 300 mill to go to 600 it will mean reduction in quality of life  given avaliable space ect.. so its not going to be so easy to grow from here on...

 

but its probably long term process.. the drag from the large debt might be more than people think..

Thu, 03/15/2012 - 09:27 | 2257359 SimpleandConfused
SimpleandConfused's picture

"....I point specifically to the price of gas at the pump which, while no one was looking, has hit its all-time highs this week..."

Are you drunk or simply ignorant?  No one watching?  It is all you see and read no matter the medium.  Gas prices are "the news" of the day.

Maybe you care nothing for your credibility; your choice I guess. 

Thu, 03/15/2012 - 10:06 | 2257557 cranky-old-geezer
cranky-old-geezer's picture

 

 

The days of free money, newly printed money, are coming to a close as America begins to right itself and as our banking system is mostly out of the woods.

That's where I stopped reading.  Author is a complete moron.

No more printing?  Who's gonna buy $150 billion of new treasuries each month?

America righting itself? The moron apparently doesn't buy groceries nor gas nor have an underwater mortgage. 

Wall Street is doing fine after trillions of bailouts with printed money.  But the rest of America is collapsing from inflaiton caused by all that money printing.

Banks out of the woods?  Yea, I would be too if I got a $300 billion bailout from the Fed, and I could get more anytime I want it.

I'd be fine if I could loot taxpayers anytime I need money.

Thu, 03/15/2012 - 12:17 | 2258206 Hedgetard55
Hedgetard55's picture

cranky,

 

     +100 greenies.

Thu, 03/15/2012 - 10:17 | 2257600 Silveramada
Silveramada's picture

what? QE to infinity!!! BEN SHALOM BABYFACE will go CONTROL+P and inflate the shit out of this monopoly dollar in an orgy of fiat currency charade!!!

Thu, 03/15/2012 - 10:29 | 2257660 dwayne elizando
dwayne elizando's picture

BEARTRAP

Thu, 03/15/2012 - 11:06 | 2257789 loveyajimbo
loveyajimbo's picture

This must be Jim Grant's retarded bro... what a maroon! Jim thought he was safely locked in the cellar...

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