Friday, February 21, 2014

Fed Agrees With Us About Deflation

From 2008!

BULLARD: In sum, I think we are moving to a Japanese-style deflationary, zero nominal interest rate, situation at an alarming pace.
Are we crazy for thinking what these people are saying in private, only to release 5 years later?!

It could just as well have been a Credit Bubble Stocks or "Stagflationary Mark" quote!


Stagflationary Mark said...

Remember the good old days when the 10-year TIPS yielded 1.6% and we weren't stuck in ZIRP?

November 29, 2007
The Death of Real Yields v.6 (Musical Tribute)

We dropped from ~1.7% to ~1.6%. Before you know it there will be almost no way to protect wealth. Hurray!

The key is the video selection though.


I'm the middle class mass.
Amid total defeat.
Call the mover.
Feels like Hoover.

CP said...

Their private conversations are awfully different than what they are saying in public.

Maybe they don't want too many people buying TIPs.

Stagflationary Mark said...


Maybe they don't want too many people buying TIPs.

They sure as heck didn't want people buying I-Bonds and EE-Bonds starting on January 1, 2008!

December 3, 2007
Extremely Bad News for I-Bonds!

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

I-Bond Rate set on 11/1/07: 1.2%
I-Bond Rate set on 5/1/08: 0.0%

April of 2008 was the last chance to lock in that 1.2% real interest rate in response to the @#$% officially hitting the fan. But the government didn't stop there.

On January 1, 2008, the amount of savings bonds one could buy was reduced by a whopping 83%.

So yeah, I think there were definitely some people in government who privately saw it coming (in pretty much real time since they announced the reduction the very month the recession hit).

Stagflationary Mark said...

As a side note, I've been buying I-Bonds since 2000 but I have also been buying EE-Bonds for the past 4 years (as interest rates fell, EE-Bonds became more and more attractive).

EE-Bonds bought today are guaranteed to double in 20 years. That works out to 3.53% per year. Only 0.1% per year if not held the full 20 years though.

I may not have enough to back up the truck this year. I'm already nearly fully invested. It's therefore going to be a tough decision one which bonds I want.

I think EE-Bonds are more likely to generate a profit (if we even remotely slide into Japan's situation).

I think I-Bonds are much safer though since they come with tax-deferred inflation protection. If I am wrong about inflation remaining tame, I would definitely want these instead.

No hurry to decide. Plenty of year left.

Nathan said...

Aren't EE bonds effectively non-marketable STRIPS? The yield on ~20 year STRIPS appears to be 3.6-3.7%.

CP said...

The Bullard comment is conclusive. We know. They know. We know they know.

The only people who don't know are mainstream asset gatherers and news media who keep insisting that interest rates are going up, real soon now.

CP said...

Yep, I think I will buy the STRIPs.

Janap 30y yields 1.63%. Do you know how well the 30y strip would do if the yield falls that much!

Stagflationary Mark said...


Aren't EE bonds effectively non-marketable STRIPS? The yield on ~20 year STRIPS appears to be 3.6-3.7%.

I'm not STRIPS savvy. How are they taxed? At maturity or each year?

I'm not taxed on the EE bonds until maturity (although you can choose to pay as you go if you want).

An additional consideration with EE Bonds is that if interest rates do spike you can cash them out with no loss of principal (must hold them a year and take a 3 month interest penalty).

Of course, you won't get the 3.53% rate if you don't hold to maturity.

It therefore only really makes sense if you have buyer's remorse very soon after the purchase.

Stagflationary Mark said...

Definition of 'Treasury STRIPS'

Although you receive no tangible income, you typically still have to pay federal income tax on the bond's accretion for the year.

For me, it generally makes more sense for me to defer my taxes since I am growing poorer over time (as I burn through my nest egg with intent to die broke).

Stagflationary Mark said...


From your link:

Quotes are as of 3 p.m. Eastern time based on transactions of $1 million or more. Yields calculated on the ask quote.

I wonder what the quote would be for someone with considerably less to invest. I don't have the resources to build a bond ladder out of million dollar bonds.

Anonymous said...


You can buy STRIPS (sometimes called "zero coupon bonds" or "zeros" for short) in ~$10,000 increments through Schwab, so it's a viable middle class instrument :)

Re: taxes

Yes, my understanding is that you must pay tax on the "imputed interest" on STRIPs annually, even though you don't receive any payments. That certainly makes it less attractive than EE bonds at comparable yields.

Anyway, based on your comments I agree there's still a case for buying EE bonds in some situations.

Stagflationary Mark said...


Yes, my understanding is that you must pay tax on the "imputed interest" on STRIPs annually, even though you don't receive any payments.

The same thing happens to my long-term TIPS of course. In theory, if inflation rises enough, all the interest I earn would simply go to paying the taxes on the inflationary gains (and the interest).

And inflation could rise even higher of course, which could force me to sell TIPS just to pay the taxes.

Here are some charts which show that in some cases, lower yielding I-Bonds could easily be better than higher yielding TIPS.

TIPS vs. I-Bonds

The data is old but the theory is still relevant.

CP said...

If you can put back the EE bonds at par minus 3 mo's interest, then that is a much better security than a STRIP.

Stagflationary Mark said...


If you can put back the EE bonds at par minus 3 mo's interest, then that is a much better security than a STRIP.

Just keep in mind that the interest rate (for EE Bonds purhcased today) is a pathetic 0.1% if not held to maturity.

That said, the 3-month interest rate penalty is a joke when interest rates are so low, lol.

If held 5 years, the interest rate penalty goes away. Of course, that's only 0.5% of accumulated interest.

I think 20-year STRIPS would probably win if you knew for sure that you were going to hold them for 10 years or more.

Cashing out an EE Bond that you expected to be making 3.53% each and every year over 20 years for just 0.1% each and every year over 10 years would definitely feel painful.

I still prefer EE Bonds though. There is something to be said for the added peace of mind in the years right after you buy them. If interest rates do spike up, it would be nice to have the option to walk away and reinvest that money at better rates. I'm not expecting it, but it could happen.

Anonymous said...

December 2008 - barrel of oil $46
February 2014 - barrel of oil $102

December 2008 - S&P500 - 879
February 2014 - S&P500 - 1797

December 2008 - silver - $10
February 2014 - S&P500 - $21

ZOMG!!!! DEFLATION!!!!!!!!!!

December 2008 is when that Fed quote was pulled.
You guys are smart, but weird.

CP said...

Yawn. Wait for the end of this "unfinished half-cycle" as Hussman calls them.