TIPS & CPI: The Big Cheat
Treasury Inflation Protected Securities aren't living up to their name
for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.
Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank,
are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index.
Morgan Stanley says derivatives tied to inflation expectations are a better bet,
while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation.
Some analysts say CPI overestimates inflation. The measure overstates changes in living costs by 0.9 percentage point per year,
according to a 2003 report by Federal Reserve economists David Lebow and Jeremy Rudd.
Criticisms of the CPI center on the practice of understating price increases to account for quality improvements in goods like cars and computers.
The government also changes the basket of goods it uses to calculate CPI, replacing more expensive products with cheaper ones.
Bill Fleckenstein: "One reason why I've never owned TIPS is because I knew the CPI was a cheat.
I figured somewhere along the way people would revolt over these bizarre calculations and maybe someday TIPS would offer some value. So far they don't."
The Nattering One muses... Paid liars Lebow and Rudd have proved one of our mantras in spades:
ANYONE claiming that inflation is running under double digits is either a paid liar, a fool or both.
Hattip to Bloomberg
for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.
Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank,
are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index.
Morgan Stanley says derivatives tied to inflation expectations are a better bet,
while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation.
Some analysts say CPI overestimates inflation. The measure overstates changes in living costs by 0.9 percentage point per year,
according to a 2003 report by Federal Reserve economists David Lebow and Jeremy Rudd.
Criticisms of the CPI center on the practice of understating price increases to account for quality improvements in goods like cars and computers.
The government also changes the basket of goods it uses to calculate CPI, replacing more expensive products with cheaper ones.
Bill Fleckenstein: "One reason why I've never owned TIPS is because I knew the CPI was a cheat.
I figured somewhere along the way people would revolt over these bizarre calculations and maybe someday TIPS would offer some value. So far they don't."
The Nattering One muses... Paid liars Lebow and Rudd have proved one of our mantras in spades:
ANYONE claiming that inflation is running under double digits is either a paid liar, a fool or both.
Hattip to Bloomberg
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