I was browsing the financial news today and ran across an interesting bit of data. The yield on 30 year TIPS was negative. This is unusual (to put it mildly). People are paying the U.S. Treasury for the privilege of owning securities that are hedge against inflation. Moreover, this is happening across the spectrum of terms to maturity (5, 7, 10, 20, and 30 years). A good chunk of the market is frantically hedging against inflation. That led me to do an inflation update.
I decided to take a closer look at the term structure of inflation expectations. I wrote about this a few months ago. But it seems like a good time to revisit this important topic.
Recent Data
First, some qualitative data. Between January 4 and November 8, 2021, U.S. financial markets were open 215 days. On 58 of those days the 30 year TIPS yield was positive (or zero). The other 157 days it was negative. For 47 consecutive trading days between February 19 and April 23, the yield was non-negative. Starting May 25, the yield was negative every day.
The timing of the shifts in term structure is interesting. First, here’s the data for the first business day of each quarter, 2021. (Data on the nominal yield and the real yield is from Treasury.gov.)
(click for larger image)
Something interesting happened during the first quarter. Let’s look at the data for the first business day of each month.
(click for larger image)
Inflation expectations rose steadily during the first quarter. That coincides with rolling out the Biden administrative team and stating policies. Markets perceive that these policies will be inflationary. This is consistent with my prediction last month and in March.
My Recommendations
Fasten your seatbelt. The next few years are likely to be very interesting (as used in the ancient Chinese curse). My advice:
- Keep your pantry and freezer full. Real assets, especially food and fuel, tend to keep up with inflation.
- Buy a house and lock in a low fixed-rate 30 year mortgage.
- Buy a propane grill. Keep several full tanks on hand. Charcoal is a good backup because the fuel is very storable.
- Might be a good time to buy precious metals (see below).
- Plant a garden. It will attract squirrels and rabbits. Fannie Farmer cookbooks from before World War II have good recipes.
- Make your house defensible. Video surveillance systems are very cheap these days. Other security measures are up to you.
- Buy a small home safe, preferably with a digital or combination lock.
Regarding Precious Metals
The current price of gold is $1,831.70 per ounce.
(click for larger image)
That’s pricey. But there are ways to lower the per-unit cost.
A popular vehicle for buying gold is the Canadian Maple Leaf series. I got the data from JM Bullion. But there are many other dealers.
The Canadian Maple Leaf has a long history and an excellent market reputation. They are known for consistent quality and purity. Probably the best deal is the one ounce coin with abrasions ($1,854.28). That’s just a bit above the market price of plain old gold.
One ounce maple leafs (click for larger image)
Still too pricey? Try fractional coins.
Fractional ounce maple leafs (click for larger image)
Then there’s our old pal, the Freddie Krugerrand.
The Freddie Krugerrand
Remember, I am not an investment adviser. Remember how much you paid for my opinion. Caveat emptor.
