Watch TIPs for Tops (or Bottoms)

1,677 views

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Over on his Crossing Wall Street blog, Eddy Elfenbein had a post about the most overlooked chart of the year. Pictured above, you can see that the 10-year TIPs spread (the market’s inflation expectations), in red, and the S&P 500, in blue, have been closely correlated over the past several years. Off of the major bear market bottom for equities in 2009, TIPs screamed ahead. Recently though, inflation expectations have lagged behind stocks since the October 4th, 2011 bottom.

While I am not crazy about performing rigid technical analysis on something like TIPs, it should be obvious from the weekly chart below that TIPs are in a sustained uptrend, consolidating over the past few months. In addition to a slew of unresolved divergences that I have discussed in recent weeks, I am watching to see in which direction TIPs break out of this consolidation, which history tells us should give us a good indication of where stocks want to go in the near future.

__________________________

13 Responses to “Watch TIPs for Tops (or Bottoms)”

  1. You need to see the Illusion of Prosperity blog, he nails this stuff!

  2. Interesting, your resistance line look much different then mine. I drew my line from the October 2010 high. My chart shows a rising wedge.

  3. […] Let’s keep a close on TIPs in 2012.  (chessNwine) […]

  4. Re: Illusion web site. The guy has his money in TIPS. If they do well, so will he and anyone attempting to follow him. If not, he and his followers are screwed. Beware. Investing one’s money in only one security is highly risky and not a good role model.

    • “The guy has his money in TIPS.”

      I’m the guy. I do. I have also been a big buyer of I-Bonds since 2000. (And owned gold and silver from 2004 to 2006.)

      “If they do well, so will he and anyone attempting to follow him.”

      I buy and hold to maturity. I pretty much know exactly what I will be getting. They will not do well from here. The real yield for new investors is pretty much zero. I’m okay with that though.

      “If not, he and his followers are screwed.”

      If I am screwed, then so are stock market investors. It will mean that our country has an extreme debt crisis and will not even honor its inflation protected debt. It is our debt that is holding up the stock market.

      “Beware. Investing one’s money in only one security is highly risky and not a good role model.”

      Inflation protected treasuries and I-Bonds may not be safe (nothing is), but they are safer than most alternatives. Put another way, I will not gain extra safety by diversifying into even riskier assets than TIPS.

      P.S. GYSC, thanks for the plug! :)

      • Thanks for the info. I can understand your thinking here. Still, I think that newer investors should be aware that it is generally considered risky to put all your money in one security. More seasoned investors are at least are aware of the risks, if they decide to do this.

        Stock market investors who have a variety of long and short positions with sound technical and fundamental reasons for them, probably have a lower risk than anyone else, on average, I would think. But it is true that every investment is risky in some way.

        I wish you good luck with your TIPS. I don’t see anything bad about that investment itself, only the 100% allocation into one area, especially for unaware newer investors.

        • Frog,

          For what it is worth, I have little advice for people thinking about buying TIPS right now. The rates are really low. Perhaps they are justified (World War II? 1970s?). Perhaps not.

          It was easier when Jeremy Siegel was claiming that TIPS were in a bubble back in February. In my opinion (and in the opinion of perfect hindsight), he was dead wrong. Interest rates did not rise. They fell dramatically.

          I was a big buyer when he was advising people to sell. I went all in. Now I am simply in the holding until maturity phase. That does not necessarily mean that today’s much lower yield is a screaming bargain though. Far from it. I do not offer advice that people should be backing up the truck at these levels.

          For maximum safety and relative value, I do suggest I-Bonds though.

          1. 0.0% over inflation is much better than 5-year TIPS is yielding (and should outperform most if not all savings accounts).
          2. I-Bonds are tax deferred up to 30 years, which could be very important if the inflation of the 1970s reappears.
          3. You never require a greater fool. If real (inflation adjusted) interest rates rise, you can simply cash them out and reinvest the proceeds at higher rates.
          4. I-Bonds offer excellent deflation protection. You can never lose so much as a penny from month to month.

          You do have to hold a year though and if you sell before 5 years you do take a 3 month interest penalty.

          I was fortunate to retire very early off of investing. I’ve already taken the big swings for the fences (and it paid off). Now I’m a saver much more than I am an investor. It is a different mindset.

        • Bonus Thought.

          I maintain a TIPS bond ladder and an I-Bond ladder for the bulk of my investment/savings and hold each bond to maturity. That’s how I control risk.

          Keep in mind that although higher real interest rates would hurt me on paper, they don’t actually hurt me in practice (since I hold to maturity). In fact, I root for higher interest rates so that I can reinvest at higher rates when my bonds mature.

          Further, although my bonds have inflation protection I root for less inflation. The less inflation the better. That way I don’t have to pay as much taxes on the inflationary gains.

          I liken it to having fire insurance on my home. I do not root for fires.

          If I am financially ruined by my decision, then heaven help everyone else. I will certainly not be ruined alone (nor will I likely be the first to be ruined).

  5. One more thought.

    I’ve been predicting the death of real yields since 2004.

    They are pretty much all dead now.

  6. […] Let’s keep a close on TIPs in 2012.  (chessNwine) […]

  7. […] began 2012 with this post about the tight correlation between the 10-year TIPs spread (the market’s inflation […]

Comments are closed.

Watch TIPs for Tops (or Bottoms)

1,677 views

__________________________

Over on his Crossing Wall Street blog, Eddy Elfenbein had a post about the most overlooked chart of the year. Pictured above, you can see that the 10-year TIPs spread (the market’s inflation expectations), in red, and the S&P 500, in blue, have been closely correlated over the past several years. Off of the major bear market bottom for equities in 2009, TIPs screamed ahead. Recently though, inflation expectations have lagged behind stocks since the October 4th, 2011 bottom.

While I am not crazy about performing rigid technical analysis on something like TIPs, it should be obvious from the weekly chart below that TIPs are in a sustained uptrend, consolidating over the past few months. In addition to a slew of unresolved divergences that I have discussed in recent weeks, I am watching to see in which direction TIPs break out of this consolidation, which history tells us should give us a good indication of where stocks want to go in the near future.

__________________________

13 Responses to “Watch TIPs for Tops (or Bottoms)”

  1. You need to see the Illusion of Prosperity blog, he nails this stuff!

  2. Interesting, your resistance line look much different then mine. I drew my line from the October 2010 high. My chart shows a rising wedge.

  3. […] Let’s keep a close on TIPs in 2012.  (chessNwine) […]

  4. Re: Illusion web site. The guy has his money in TIPS. If they do well, so will he and anyone attempting to follow him. If not, he and his followers are screwed. Beware. Investing one’s money in only one security is highly risky and not a good role model.

    • “The guy has his money in TIPS.”

      I’m the guy. I do. I have also been a big buyer of I-Bonds since 2000. (And owned gold and silver from 2004 to 2006.)

      “If they do well, so will he and anyone attempting to follow him.”

      I buy and hold to maturity. I pretty much know exactly what I will be getting. They will not do well from here. The real yield for new investors is pretty much zero. I’m okay with that though.

      “If not, he and his followers are screwed.”

      If I am screwed, then so are stock market investors. It will mean that our country has an extreme debt crisis and will not even honor its inflation protected debt. It is our debt that is holding up the stock market.

      “Beware. Investing one’s money in only one security is highly risky and not a good role model.”

      Inflation protected treasuries and I-Bonds may not be safe (nothing is), but they are safer than most alternatives. Put another way, I will not gain extra safety by diversifying into even riskier assets than TIPS.

      P.S. GYSC, thanks for the plug! :)

      • Thanks for the info. I can understand your thinking here. Still, I think that newer investors should be aware that it is generally considered risky to put all your money in one security. More seasoned investors are at least are aware of the risks, if they decide to do this.

        Stock market investors who have a variety of long and short positions with sound technical and fundamental reasons for them, probably have a lower risk than anyone else, on average, I would think. But it is true that every investment is risky in some way.

        I wish you good luck with your TIPS. I don’t see anything bad about that investment itself, only the 100% allocation into one area, especially for unaware newer investors.

        • Frog,

          For what it is worth, I have little advice for people thinking about buying TIPS right now. The rates are really low. Perhaps they are justified (World War II? 1970s?). Perhaps not.

          It was easier when Jeremy Siegel was claiming that TIPS were in a bubble back in February. In my opinion (and in the opinion of perfect hindsight), he was dead wrong. Interest rates did not rise. They fell dramatically.

          I was a big buyer when he was advising people to sell. I went all in. Now I am simply in the holding until maturity phase. That does not necessarily mean that today’s much lower yield is a screaming bargain though. Far from it. I do not offer advice that people should be backing up the truck at these levels.

          For maximum safety and relative value, I do suggest I-Bonds though.

          1. 0.0% over inflation is much better than 5-year TIPS is yielding (and should outperform most if not all savings accounts).
          2. I-Bonds are tax deferred up to 30 years, which could be very important if the inflation of the 1970s reappears.
          3. You never require a greater fool. If real (inflation adjusted) interest rates rise, you can simply cash them out and reinvest the proceeds at higher rates.
          4. I-Bonds offer excellent deflation protection. You can never lose so much as a penny from month to month.

          You do have to hold a year though and if you sell before 5 years you do take a 3 month interest penalty.

          I was fortunate to retire very early off of investing. I’ve already taken the big swings for the fences (and it paid off). Now I’m a saver much more than I am an investor. It is a different mindset.

        • Bonus Thought.

          I maintain a TIPS bond ladder and an I-Bond ladder for the bulk of my investment/savings and hold each bond to maturity. That’s how I control risk.

          Keep in mind that although higher real interest rates would hurt me on paper, they don’t actually hurt me in practice (since I hold to maturity). In fact, I root for higher interest rates so that I can reinvest at higher rates when my bonds mature.

          Further, although my bonds have inflation protection I root for less inflation. The less inflation the better. That way I don’t have to pay as much taxes on the inflationary gains.

          I liken it to having fire insurance on my home. I do not root for fires.

          If I am financially ruined by my decision, then heaven help everyone else. I will certainly not be ruined alone (nor will I likely be the first to be ruined).

  5. One more thought.

    I’ve been predicting the death of real yields since 2004.

    They are pretty much all dead now.

  6. […] Let’s keep a close on TIPs in 2012.  (chessNwine) […]

  7. […] began 2012 with this post about the tight correlation between the 10-year TIPs spread (the market’s inflation […]

Comments are closed.