bearfund

Comment Stream » CUT

Comment Stream
Filter comments by:
Highest rated Latest comments
Or filter by symbol:
AAPL AB ABK ABX AC ACF ACFN ADRE ADVNA AEM AET AFL AFN AGG AGO AHBIF.PK AIG AIR AKS AMR APA APC APOL ASTE AUY AWC AXP BA BAC BAIRY.PK BBI BBT BCS BG BGU BGZ BHI BIL BK BKC BLK BMI BMO BND BNI BNS BNZ BP BPO BRK.A BRK.B BSC BSV BVN BWX C CAKE CAL CAT CCC CCJ CCTYQ.PK CDE CDR CF CFC CGR CHK CI CLC CLF CLR CMA CMG.AX CNI CNQ CNX CNY COF COG COP COST COW CSCO CSX CUD CUT CVS CVX CX CYB DAL DB DBA DBB DBC DBO DBP DBS DBV... 
[+ show more]
  • Runaway Inflation: Do TIPS Really Help?
    The biggest problem with TIPS isn't the CPI. Don't get me wrong, the CPI is completely broken and useless as a measure of the cost of living. But some goods and services are actually tied to the CPI; for example, some cities with rent control limit rent increases to the CPI increase or some fraction thereof. As an asset to match against that sort of liability, then, TIPS would seem ideal.

    Unfortunately, the real crime of inflationary policy becomes apparent when one contemplates such a move. The nominal increase in principal value of a TIPS - the portion that the government agrees does not represent any real gain whatsoever - is taxed at the time it accrues! This is not only unconscionable, it also renders these instruments essentially useless for producing income to be matched with CPI-indexed liabilities.

    Let us take the example of a retiree in a 30% combined tax bracket living in a rent-controlled apartment with a current rent of $1000 a month and a control indexed to the CPI. Let us assume for the moment that the market's expectations are correct and a 233bp breakeven turns out to be in line with future reported CPI and that one intends holding to maturity. One would need to buy $723000 worth of TIPS to generate enough income to cover the rent. Already we have a problem - if one has that much cash, a better way to guarantee a residence would be to buy the place. But it gets worse - the tax bill on the interest income is $3600 - and the tax bill on the accretion is another $5054! The net after-tax income on this investment is a mere $3347, a far cry from the $12000 we need. In reality, we will need $2.592m in TIPS to provide a CPI-protected income stream of $1000 a month: a real after-tax return of 0.46%.

    Even in situations that would seem to favour TIPS, they simply don't work. To make matters worse, TIPS, like all Treasuries, are absurdly overpriced today. Those looking for income with protection from rising prices are advised to consider large-cap telecom equity, "too big to fail" bank preferreds, gold (cheap at any price, insanely cheap at $788) or dividend-paying miners, and oil&gas trusts. The risk-averse might consider this mix as 20-40% of a portfolio with the balance in CDs. It's far from perfect, but almost anything is better than TIPS.
    Aug 15 12:04 pm |Rating: 0 0 |Link to Comment |View article

bearfund is a Top 100 Commentor

  • 547 Comments, 73 , 17
  • Total Comment Stream rating - = 56