TAPER TALK, THE FED AND THE FINANCIAL MEDIA: WHAT WOULD JESUS SAY?

12/19/13

Unless you’ve been living in a cave, you know that the Fed announced yesterday that “the taper” will begin, i.e., the Fed will cut back its $85 billion per month program of buying longer dated treasuries and mortgage backed securities (“MBS”) by $10 billion per month, with the cutback being split evenly between treasuries and MBS.  Obsequious Ben made a point, however, of “reassuring” the markets that short term rates will remain low for about as long as the eye can see and then some; see today’s other post, THE CAR BUSINESS AND CHEAP MONEY:  “HOW MUCH YA GOTTA PUT DOWN?   HOW MUCH YA GOT IN YOUR POCKET?” for the impact of this “easy money forever” policy on one vital industry.

It’s bad enough that money will stay easy seemingly forever; it’s even worse that this senseless, pointless “taper talk” will continue as long as Ben Bernanke, his successor, and their henchpersons continue to shovel money into the system (now “only” $75 billion per month) at about the same rate Flash Gordon and Doctor Zarkov were forced by Prince Vultan to shovel coal into the ovens of the Flying City of the Hawkmen.   For at least the last few months, there has seemingly been nothing else going on in the world of finance, or the world, for that matter, but a “potential for tapering,” if one gets one’s news from the financial media.  Now, with only a minor retreat on the monetary front from the Bizarro World, this talk of tapering will apparently never cease.

So, tiring of having the financial talking heads speak of nothing but tapering, I fell asleep on the couch the other day watching CNBC and Bloomberg TV, while reading the Wall Street Journal, and lapsed into a dream….

FINANCIAL REPORTER I:   Here with us today is Elon Musk, Chairman, CEO, and founder of Tesla.   Welcome, Mr. Musk.  You company, and its stock, has been one of the year’s major stories.

MUSK:   That’s right.  Our sales are increasing, our nationwide network of superchargers will soon make it possible to traverse the nation without the remotest fear of being stranded, the fires amounted to nothing, and it’s onward and upward.

FINANCIAL REPORTER I:   That’s great, Mr. Musk.  But do you think the Fed will start tapering in December or March?

MUSK:  Huh?

FINANCIAL REPORTER II:   Thanks for asking all the right questions, my esteemed colleague.  I have here with me Alan Mulally, chairman and CEO of Ford Motor Company.   Mr. Mulally, your stock has been on a tear this year.

MULALLY:   That’s right.   While we’ve had to cut back on Focus and Fusion production to keep inventories in line, that is, in reality, good news because now we actually have the flexibility to adjust production.   Sales remain strong, affordability is about as good as it’s ever been.   And our products are continually being updated to remain competitive.   Here we have the brand new Mustang….

FINANCIAL REPORTER II:   But, Mr. Mulally….

MULALLY:   You’re not going to ask me about my going to Microsoft, are you?   Because I’m saying nothing on that topic; I’m here to talk about Ford, whose shareholders I am proud to serve as Chairman….

FINANCIAL REPORTER II:   No, Mr. Mulally.  I wasn’t going to bring up Microsoft at all.  I want to know if the Fed will taper next month.

MULALLY:   How the heck am I supposed to know?

FINANCIAL REPORTER II:   Since Mr. Mulally has nothing of interest to say, let’s go over to our sports reporter with a special guest.

SPORTS REPORTER:   I have with me the uncrowned Heisman Trophy winner, Jordan Lynch from Northern Illinois University, a man who runs, throws, and even catches passes, for big yards, a man who has broken every MAC record that seemingly can be broken, a man who clearly should have won the Heisman Trophy.

LYNCH:   Thanks for the kind words.  But Jameis Winston is a great quarterback and deserved to win the Trophy.  I’ve had a great career at NIU and I look forward to playing QB in the pros.   They said I couldn’t play QB in Division I and I proved them wrong.  They now say I can’t play QB in the pros, and I intend to prove them wrong….

SPORTS REPORTER:   That’s great, Jordan, but I have something that everyone wants your opinion on.   When will the Fed start tapering?

LYNCH:   Who do I look like?   Maria Bartiromo?

SPORTS REPORTER:   Wait, wait.  We have to break in for what, if it’s true, appears to be at least the story of the century.   Now to our world affairs reporter….

WORLD AFFAIRS REPORTER:        We have in the studio Jesus Christ, who apparently just dropped in for a visit.   Mr. Christ, do you have anything you’d like to tell us.

CHRIST:   As a matter of fact I do.   I’m getting pretty sick and tired of the way people are celebrating My birthday.  I’m the Prince of Peace, for My sake, and yet everyone sees fit to commemorate my birth by getting all stressed out in the silly acquisition of material things, the type of stuff I always preached against.  It’s like I’m going to My birthday party and having the guests take turn slapping Me in the face!   You think I like that?   Why can’t we get back to the original point?   Peace on earth, goodwill to men, render unto Caesar the things that are Caesar’s and unto God the things that are God’s, how many people I fed with seven loaves and two fishes, the leaven of the Pharisees and all those things I was trying to tell you.  Where did everything connected with MY birthday go so horribly wrong?

WORLD AFFAIRS REPORTER:   Yeah, yeah, Mr. Christ.  Wonderful sentiments, I’m sure.  But what our viewers want to know is whether the Fed will taper, by how much, and when.

CHRIST:   I’ll be back…be assured, I’ll be back.

…as Jesus vanishes from the studio.

Blessed, holy, and wonderful Christmas with your families.  Remember the Man on His birthday. 

Hopefully, we’ll talk before the new year breaks, but, if not, prosperous and joyous new year to you and those you love.

YES, I’M STILL HOLDING ONTO MY TIPS…UPDATED EDITION

11/21/13

Today’s (Thursday, 11/21/13’s, page C1) Wall Street Journal featured a front page article in the Money and Finance section entitled “Inflation Linked Bonds Take a Hit.”   The paper reports, accurately, that Treasury Inflation Protected Securities (“TIPS”) have taken something a beating, in bond terms, this year, with a total return of negative 7%.  (While the article doesn’t specify where this number for “TIPS” came from, I’m assuming that it is measuring return based on the exchange traded fund (“ETF”) TIP; the ETF’s year to date return matches that negative 7% number.)   This miserable, by bond standards, performance has been the obvious result of two distinctly anti-TIP developments in the economy and the financial markets.  First, all bonds, or at least all treasury bonds, have had a bad year as the economy improves and the Fed hints at tapering (Oh, how I’ve come to hate this latest term from which one cannot seem to escape!  But I digress.) its bond buying program.  Second, there is no measurable inflation in the economy.   The CPI is increasing at a 1% annual.  Whether that number jibes with one’s experience is another issue; the inflation compensating increments to TIPS are based on the CPI, so that is the measure with which we are forced to live in this circumstance.

As regular readers know, I’m a big (for me; by most standards, I’m not a big holder of anything) holder of TIPS in my own accounts, and have been for years.  I have counseled friends and consultees to own TIPS for just as long.  I continue to both hold TIPS and advise people to hold TIPS despite some misgivings and hand wringing near the top of the TIP market; see 6/26/13’s TREASURY INFLATION PROTECTED SECURITIES (“TIPS”):  REPLACING PANIC WITH CALM PERSPECTIVE and 2/2/13’s YES, I’M STILL HOLDING ONTO MY TIPS.

Am I displeased, sullen and down in the mouth, about my large TIP holdings?   No.  The same Wall Street Journal article points out that, before this year’s debacle, in the three years from 2009 to 2012, TIPS returned 44%, which works out to an annual return of 12.9%, which, in bond terms, if a terrific performance.  Even after this year’s 7% hit, TIPS are up 34% over the last three years, which works out to an annual return of 7.6%.  This remains an outstanding return for a  credit instrument with no real default risk.   I’m happy, bordering on the ecstatic, with the four year return on TIPS and, if you’ve been holding them, you should be, too; this is investing, not trading!

Note also, in one of those “not for nothing” observations, that since I wrote the aforementioned 6/26/13 piece, TIPS are up a touch.  The ETF was trading at 110.72 then and it is at 111.23 as I write this, plus they’ve paid five dividends.

Why do I insist on holding onto my TIPS?   Aren’t we experiencing conditions that continue to argue against TIPS?   If I were inclined to trade major portions of my portfolio, I might, and only might, be tempted to get out of TIPS with the hopes of getting in again at a lower price.  But I’m not trading my TIPS because I decided long ago that TIPS make sense in our economic environment for long term investors who are either very risk averse or who simply want a buffer against several nasty possibilities in the financial markets. 

I agree that, at this juncture, those horribles, such as inflation or a plunge in the stock markets, do not look imminent, though I am starting to think the probability of the latter is increasing.   However, unlike those who pretend to be for a living, I realize that I am not clairvoyant.  The older I get, the more I realize I don’t know, especially about the short term movements of the financial markets.   I am about as likely to be right as I am to be wrong on any short to intermediate term call in markets, as are those who pretend they can see the future, and I am not willing to bet my long term investment results on such fuzzy odds.  If I were inclined to trade these things, I would be about as likely to get out at a bottom and in at a top as I would be to get out at a top and in at a bottom.

So, yes, I continue to hold my TIPS.   They have delivered a near spectacular risk adjusted return over the long period I have held them and I expect them to do nearly as well over the similarly long anticipated remainder of my holding period.   While economic and financial conditions right now do not favor TIPS, things change fast.  And, despite their high opinions of their own prognosticatory skills, the “experts” rarely can tell you, with any degree of consistency, when those changes will come.