Investing in Inflation Protection
Anand S. Iyer and Jennifer C. Bender/MSCIBarra/Nov 2010
The current tug of war between inflation and deflation has created considerable confusion for investors. Consequently, in this report we explore the characteristics of inflation-protected bonds [IPBs] to see if, and to what extent, these securities have contributed to portfolio diversification and provided investors with protection from inflation and deflation… We find that IPBs have exhibited some distinct differences from other asset classes during the past decade:
1) IPBs as an asset-class-level inflation hedge: We find that IPBs provided reasonable protection against inflation during this period…
2) IPBs in a deflation scenario: Nominal bonds had stronger protection (or put optionality) on deflation relative to IPBs during the last decade…
3) IPBs for portfolio diversification: The correlations of IPBs with other asset classes have been relatively low for equities, commodities, and real estate, and only slightly higher than correlations of nominal bonds with those assets.
BOOK BITS FOR SATURDAY: 1.15.2011
● The Comeback: How Innovation Will Restore the American Dream
By Gary Shapiro
Interview with author via CNBC
The president of the Consumer Electronics Association, and author of the new book “The Comeback: How Innovation Will Restore the American Dream,” believes that America’s love for these products will help bolster the economy. “The U.S.,” he says, “is in trouble and innovation is the best path towards letting our kids have a better future.” The question is now whether there is enough innovation to jump-start things for 2011, especially after consumer confidence unexpectedly dipped in December. The Conference Board last Tuesday released a private report that said its index of consumer attitudes slipped in December. Shapiro says we will see improvement in 2011. “I do believe that consumer electronics has been a savior for the economy,” says Shapiro, noting that sales were down in 2009 but that 2010 actually saw growth. The Consumer Electronics Show, which had also seen declining attendance numbers over the last two years, is also predicted to be way up, according to Shapiro, “in every sector possible. There is phenomenal optimism.” The event begins January 5 in Las Vegas.
TODAY’S TRIO OF ECONOMIC REPORTS
Three major economic reports were released this morning:
1) Headline consumer inflation jumped sharply higher last month, the Bureau of Labor Statistics reports. On closer inspection, however, it’s all about energy. The so-called core reading of inflation (excluding the volatile energy and food sectors) still looks tame.
2) Retail sales in December continued forging higher, reaching a new all-time high, according to the Census Bureau.
3) Industrial product rose at a healthy clip last month, advancing the most since last July, the Federal Reserve reports.
READING ROOM FOR FRIDAY: 1.14.2011
►Uncle Sam Wants His AAA Rating
Two major credit ratings agencies warned Thursday that the United States might tarnish its triple-A credit rating if its national debt kept growing…But many economists say the reckoning, if it comes, is still years or even decades away. The bond market shrugged at Thursday’s news. Indeed, even some experts who want to see the deficit reduced said now is not the time to cut federal spending drastically, given the weakness in the economy and high unemployment.
New York TImes, Jan 14
►New Hit to Strapped States
With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.
Wall Street Journal, Jan 14
JOBLESS CLAIMS SURGE
Ouch! Suddenly the new year looks a lot less inviting. New jobless claims surged higher last week by 36,000 to a total of 445,000 on a seasonally adjusted basis, the government reports. That’s the biggest weekly gain since last July and the jump pushes the total to its highest in 10 weeks. Quoting the immortal question of every shell-shocked solider through history: Wha’ happn’d?
THE POLITICS OF THE DEBT CEILING
A new poll says the public’s against it, but the debt ceiling’s probably going to rise anyway. So much for representing the people’s wishes.
A mere 18% of citizens support a higher limit on the nation’s debt vs. 71% opposed to the idea, according to poll released yesterday by Reuters/Ipsos. The current ceiling is the tidy sum of $14.3 trillion. That’s a chunk of change everywhere else on the planet, but it won’t suffice in Washington for much longer.
MACRO SURVEILLANCE FOR WEDNESDAY: 1.12.2011
China central bank adviser sees Q1 interest rate rise
Another Chinese interest rate increase in the first quarter is likely, a central bank adviser said on Wednesday, but a vice governor cautioned against raising rates too steeply for fear of luring in hot money.
Reuters, Jan 12
China’s exchange reserves at issue
China’s central bank said Tuesday that Beijing’s holdings of foreign cash and securities amount to $2.85 trillion – a jump of 20 percent over the year before – despite Chinese promises to try to balance its trade and investment relations with the United States and other countries…The reserves are so large and the recent run-up so rapid that it’s casting new doubts over whether Beijing is reforming the handling of its currency and curbing its heavy reliance on exports as a source of jobs and growth.
Washington Post, Jan 12
WILL AUSTERITY BITE CONSUMPTION?
This may be the age of austerity, but consumer spending has surprised the pessimists and rebounded sharply over the past year. That’s no trivial revival, considering that personal consumption expenditures (PCE) represent 70% of GDP in the U.S. For good or ill, ours is a consumer-based economy. But is the consumer still up to the job?
STRATEGIC EYE CANDY
Strategic investment perspective is essential, but it doesn’t grow on trees. If you’re looking for context beyond the usual suspects, you’ll have to dig deeper. The good news is that there are lots of opportunities for mining strategic intelligence. Too many, perhaps. One of the biggest challenges in developing intuition about portfolio design and management is deciding where to cut off the analysis and start making actual investment decisions.
VIOLENT OUTCOMES
Political assassination and the United States aren’t usually discussed in the same breath, but they are now. In the wake of the Arizona shooting rampage on Saturday at a public event that critically injured U.S. Rep. Gabrielle Giffords, killed a federal judge, and left more than a dozen others dead or wounded, morning in America today has a sad new meaning.