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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35344  
Subject: The Term-Premium Case for higher yields Date: 1/21/2006 3:40 AM
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Please take a look at this thread, on the Mishedlo Board.
http://boards.fool.com/Message.asp?mid=23587846

I am a firm inflationist. Mish is a firm deflationist. Mish believes that there will be a recession, and that interest rates will drop.

The question is really a Fixed-Income question: would it be better to buy Treasuries or TIPS. If TIPS, would it be better to buy at the April auction, or later in 2006?
Wendy
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15061 of 35344
Subject: Re: The Term-Premium Case for higher yields Date: 1/21/2006 1:09 PM
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Wendy,

The differential between TIPS and Treasuries, both 5 and 10-year, has crept up a little in recent days to around 2.45%.

http://www.bloomberg.com/markets/rates/index.html

If CPI-U adjustments over next 5 or 10 years are more than that, TIPS are the better choice, less than that Treasuries win. CDs still look better than either.

I am of the view that the risks of inflation and deflation are about the same. Unlike Greenspan, however, I see this as equal likelihood of one or the other happening, not that everything is basically okay. I just see strong pressures in both directions, and I think Mish, with whom I share deep concerns about the fundamentals of the US economy, is overly focused on the deflation side.

I continue to think Kent's "stag-deflation" is right. What he meant was there are strong inflationary pressures on necessities, such as health care and energy and commodities (I don't care about trader commodities, such as gold, but real commodities such as lumber). At the same time, real median wages and benefits are declining and, even if interest rates are low, there must be limits to how much refinancing equitity can be squeezed or stuff bought on credit.

There are some basic contradictions. The trade deficit certainly should lead to a declining dollar, though those who have bet on it haven't won yet. With a country so heavily dependent on imports, a declining dollar is inflationary. But the consequence of people spending less to compensate for higher cose imports could be cutting back on expenditures at home (e.g., vacations) which would be recessionary or deflationary domestically.

I'm afraid I can't see any clear direction. I do know that an economy in which only the corrupt and privileged are doing well is troubled.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15073 of 35344
Subject: Re: The Term-Premium Case for higher yields Date: 1/24/2006 11:43 AM
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Wendy,

There is an argument that the U.S. has returned to a more "normal" pre-1970's bond enviroment. This was an era of flatter rates because the long end wasn't a very high interest rate.

It may be a question of how you think this mid-east conflict/oil issue will unwind. If this is the fulcrum point all bets are off because we have no way of knowing how the political situation will unfold nor do we know how the world markets will respond.

jack

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15074 of 35344
Subject: Re: The Term-Premium Case for higher yields Date: 1/24/2006 12:50 PM
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Jack,

I'm yet to see an "argument" that we have returned to a "normal" pre-1970s bond environment. What I have seen is a flattened yield curve (which is quite recent: the yield curve when they issued the 5-year TIPS last April wasn't flat) and low interest rates for the last few years, much lower relative to inflation, by the way, than through most of that "normal" period, followed by the usual presumption that statistical resemblences must result from the same causes (with the usual ignorance of economics and history I've come to expect out of people in "finance").

During the pre-1970s "normal" period, there was a lot less borrowing, by individuals or government, i.e., much less demand for debt financing. Now the demand is much higher, and the low interest rates are due to there being a strong supply of capital for debt financing. Big difference. Then, there's the nature of supply of capital: much of it from foreign debt being plowed back into the US debt market, plus SS surplus that is going away and a lot of pension money, US and foreign, that will dry up with demographics.

I don't think any of this allows us to predict what will happen to yields. But, I'm sorry, it ain't the 1950s (and neither were the 1950s).

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15081 of 35344
Subject: Re: The Term-Premium Case for higher yields Date: 1/26/2006 2:50 PM
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During the pre-1970s "normal" period, there was a lot less borrowing, by individuals or government, i.e., much less demand for debt financing.

An interesting graph would be total annual debt compared to total annual GDP - that would illustrate the difference between then and now quite well! [I cannot find any such graph anywhere!!]

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