Financial topics

[John]

By coincidence, they were discussing the subject of T-bill backed
money market funds on CNBC this morning with a guy from Pimco. In
particular, they were discussing TIPS (Treasury Inflation-Protected
Securities)

TIPS are inflation-protected, in the sense that the amount you
receive upon redemption is increased by the amount of inflation
that's occurred since they were issued.

The discussion this morning had to do with deflation. TIPS are also
protected from deflation, in the sense that the amount you receive at
the is not reduced if deflation has occurred, so your principal is
protected.

However, this isn't true if you're invested in a money-market fund
backed by TIPS. Since you own fund shares, rather than actual TIPS
certificates, you will lose principal if there's deflation.

(There's apparently a technical reason for this. When you buy shares
in a MMF backed by TIPS, then you're investing in TIPSs that may be a
few years old, and have already accrued some value through inflation.
If deflation occurs from that point on, then the value already
accrued through inflation is not protected.)

So now the question is: How much deflation might we have?

I actually addressed this question in 2004.

** CPI data points to deflation trend
** http://www.generationaldynamics.com/cgi ... 17#e040717

At that time, based on long-term trends, I estimated that the CPI
would fall by 30% by 2010.

I would no longer be certain of the 2010 date, but I stick by the 30%
figure, probably by 2012 or so.

That would be a real disavantage of MMFs backed by TIPS, but
presumably is not a disadvantage for people who obtain TIPS from
TreasuryDirect.gov, as Ms. Bluebird and Mr. Higgenbotham suggest.

Sincerely,

John

[greghaught]

TIPS are inflation-protected, in the sense that the amount you
receive upon redemption is increased by the amount of inflation
that's occurred since they were issued.

it's important to understand the tax treatment before investing in tips. even though the inflation adjustment accrues until maturity, that adjustment is taxed every year. that wont be appropriate for some.

[John]

Art Cashin made some interesting remarks on CNBC this morning:

> I think we will know the course of the stock market by July 17,
> 2009. Whether we retest the lows or not, we will have an answer by
> the end of next week. As far as earnings go, I an discounting the
> earnings and focusing on the outlook.

> The first stimulus package was part illusion and hope, we misused
> it, we may not be able to help ourselves now the we actually need
> it.

What was interesting about Cashin's remarks were their specificity.
He is saying, definitively, that questions about the stock market
will be answered between Wednesday and Friday of next week.

Whew!

John

[Jack Edwards]

At that time, based on long-term trends, I estimated that the CPI
would fall by 30% by 2010.

I would no longer be certain of the 2010 date, but I stick by the 30%
figure, probably by 2012 or so.

A 30% drop in CPI in 3 years! I hadn't really thought about how fast deflation would occur before. I had assumed deflation in general things would be slow and gradual and would last for years. A 10%+ drop in a year though has all sorts of interesting (and painful) social implications.

What happens with the minimum wage? Can you imagine a politician proposing to lower the minimum wage by 30%? I could see a scenario where high skilled people are working for minimum wage (assuming it doesn't change) and low skill people simply aren't employable.

If CPI drops 30%, wages in general will need to drop about that amount. Imagine this conversation with your boss: "Well you did pretty well this past year, so we're only dropping your base salary by 12%, KEEP UP THE GOOD WORK!" I can also see a scenario where larger businesses are afraid to lower wages in fear of losing employees and then they see their competitors doing it and then a cascade of wage cutting occurs across the board. Folks that have most of their earnings allocated to paying off debt are going to find it quite the challenge.

The political response to everyone's wages dropping will be - .. interesting to say the least.

All I can really say is YIKES - I hope you're wrong on this one.

Best regards

J Edwards

[greghaught]

All I can really say is YIKES - I hope you're wrong on this one.

so Jack, with significant deflation, the cost of most everything will drop except debt service. that pops the credit bubble. no, wait... that already happened.

so, it will probably pop the housing bubble and cause widespread foreclosure and wreck the construction industry. no, wait... that already happened.

so it will probably, as you say cause increased unemployment. i don't really think anyone anticipates that unemployment will get better anytime soon anyway. most people think that it's significantly under reported and going to get much worse no matter.

so, a basket of groceries gets cheaper. clothing and energy get cheaper. all causing cheaper wages to be endurable. and we find a level of prosperity that's real, not synthetic.

easy, peasy, lemon squeezy.

[mannfm11]

This was in a Bloomberg article about the trading program theft from Goldman Sachs this week

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

http://www.bloomberg.com/apps/news?pid= ... Yw_ykTBokE

I don't know about your reading comprehension, but mine tells me this is a boldfaced statement that Goldman uses programs like this one to manipulate the markets to their benefit. Of course manipulating markets is against the law when it is done in unfair ways. Why aren't the Goldman in jail with this guy?

[freddyv]

> I think we will know the course of the stock market by July 17,
> 2009. Whether we retest the lows or not, we will have an answer by
> the end of next week. As far as earnings go, I an discounting the
> earnings and focusing on the outlook.

Art Cashin is taken as some sort of Wall Street wizard but that's only because he's a bit smarter and more honest than most of the bozo's on TV.

Just as it became apparent that we had been in a trading range for the month of June everyone starts talking about how to play a trading range and how we'l be in one for weeks/months/years and of course, what happens? We break out of the trading range, that's what.

A few months ago when everyone and his brother were getting all giddy about the rising market, talking about how we had finally bottomed, it became very clear to me how classic this bear market is and how it sucks people up and sweeps them along, using their own emotions against them. How much better than normal do you feel after after having been sick? How much more terrible is facing death when you have so much to live for?

I can't say exactly how it will happen but I think that the next year will be a complete disaster for the U.S. economically. As I stated previously I think that it will be because things are finally getting real. Losing a job is real, losing a house is real, losing a car is real.

I still disagree with you, John, I don't think we will see that one big calamity that will be written about in history books, I think we have already seen enough of that. I think that we will now see a long, hard dose of reality and after decades of living in fantasyland I don't think most people are going to like it a whole lot.

Dow 6,000 and unemployment at 9.7%...

Dow 5,000 and unemployment at 10.5%...

Dow 4,000 and unemployment at 11.7%...

Dow 3,000 and unemployment at 13.2%...

...with lots of green shoots along the way, of course.

--Fred

[mannfm11]

Fred, that is how I see it too. I think we deflate and deflation will take the market down as it sucks up money. I am going to write a blog entry called the Revulsion of debt. I was reading the local paper yesterday and they mentioned that 7-11 was circulating a petition on Mastercard and Visa transaction charges, which they said were amounting to more than the convenience store industry was making. These are fixed charges for using a card in addition to the factoring charges. I can see the convenience store industry refusing credit cards in a couple of years. People are into next months check or 2 months out or even 3 or 4 months and running out. Congress is clamping down. It really scares the crap out of me from time to time when I comprehend what is going on. The entire world is on the inflation trade and we are going to liquidate all of them.

[greghaught]

So now the question is: How much deflation might we have?

I actually addressed this question in 2004.

** CPI data points to deflation trend
** http://www.generationaldynamics.com/cgi ... 17#e040717

At that time, based on long-term trends, I estimated that the CPI
would fall by 30% by 2010.

i just noticed something accidentally that i dont normally pay any attention to. this sure looks to me like deflation has been in progress for about a year.

Reuters/Jefferies CRB Index Weekly Chart

the index value of 100 equals 1967. this chart shows the peak last year during the week of june 30th was 473.97. it finished out today at 231.21. thats about a 50% drop. it's still definitely in a downtrend.

i think this index is a better indicator of deflation/inflation than the CPI because it includes the necessities food and energy in addition to industrial metals.

Reuters/Jefferies CRB Index Components

Crude Oil
Unleaded Gas
Heating Oil
Natural Gas
Corn
Soybeans
Live Cattle
Gold
Aluminum
Copper
Sugar
Cotton
Cocoa
Coffee
Nickel
Wheat
Lean Hogs
Orange Juice
Silver

EDITED TO ADD:

there are different versions of the crb index like there are different versions of the cpi. i checked out the other crb versions and the charts look interchangeable.

[aedens]

Higgie writes "A Treasury Bill only money market fund is safe.
There are a couple things I should mention though. I posted last Fall about a story in Jim Sinclair's blog where he got a call from an elderly lady who thought she had a t-bill only money market fund but really didn't. It turned out the fund had synthetic derivatives of t-bills in it instead of the real thing and she couldn't get her money out. Another thing would be the management fees. If t-bill interest rates go low enough it is possible that the effective rate of the t-bill only money market fund could go negative and I suppose in that case there might be small periodic deductions to cover expenses in the event that expenses exceed the interest paid on the fund."
***********************************************

Thank you, I was the reader who posted this question and registered to post my reply.
The Fund in question is my IRA holding Vanguard Treasury Admiral MMF (VUSXX). The prospectus says it is invested in 99.8% securities backed by the full faith and credit of the U.S. government. The semi-annual report shows these are all short term Treasury Bills. While this MMF appears safe, I worry that at some point in the future, the government may put holds on this account preventing electronic withdrawals, and the possibility the fund's rate could go negative. There is also the dilemma whether it is better to cash out of the IRA and pay the taxes, then use the proceeds to buy T-Bills directly via TreasuryDirect.gov. Now that I am registered, I will take some time to read more of the forum.
Thanks,
Bluebird

Trustees of the eight funds concluded that continued participation in the program would help further stabilize the short-term corporate and municipal credit markets to the benefit of investors in all money market funds.

Three Vanguard funds that invest primarily in high-quality, short-term U.S. government or government agency securities—Admiral™ Treasury Money Market Fund, Treasury Money Market Fund, and Federal Money Market Fund—will discontinue participation after April 30, 2009.

At the end of March, the portfolios of the two Treasury funds were invested exclusively in U.S. Treasury securities. The portfolio of the Federal Money Market Fund had 98% of its assets in Treasuries and agencies debt and 2% in repurchase agreements collateralized by government agencies.

How the program operates
The program provides coverage to shareholders for amounts that they held in participating money market mutual funds as of the close of business on September 19, 2008, in the remote case that a fund's net asset value (NAV) drops below $1.

If an investor redeems shares of a participating fund after September 19, the coverage extends only to the balance in the fund on the date it "breaks the buck." Also, coverage does not apply to any new money invested in a fund after September 19—increases in the number of shares acquired after that date wouldn't be covered.

Vanguard money market funds comply with ICI investment standards
Since the introduction of the Treasury Guarantee Program, Vanguard has been working with the mutual fund industry to help permanently enhance the safety and liquidity of money market funds.

All of our money market funds have adopted the investment-related recommendations recently announced by the Investment Company Institute's Money Market Working Group. Headed by Vanguard Chairman Jack Brennan, the group formulated new regulatory and oversight standards designed to further strengthen money market funds and help protect investors. All of Vanguard's money market funds have implemented all of the group's investment-related recommendations, which include prescribed liquidity, maturity, and quality parameters.

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