TAKE A TIP FROM THE TIPS

Any time government comes out with a program with the word affordable in the title you know you're about to get ripped.

If you buy an ounce of gold--something MSM is telling you not to do today because inflation and growth are DOA--there's a bid and ask, maybe even a dealer mark-up, in other words, a premium.

This is not about gold. It's about premiums. Usually, the greater the demand for something the greater the premium. Unless you're a gold bug, so goes MSM rhetoric, there's not much demand for having gold in your portfolio.

And following the same linear style of thinking, nor is their much demand for Tips.

In today's Financial Times," Long-term gauge for US inflation slides," the lead paragraph states:
 Long-term market measures of US inflation touched a three-year low yesterday with weaker oil prices and a stronger dollar dulling investor-appetite for owning inflation insurance.  

The article continues:

 The 10-year US  break-even inflation rate currenlty reflects an expectation that consumer prices will rise an average 1.86 per cent each year for the next decade. That is the lowest level since October 2011 and below the Federal Reserve's target of at least 2 per cent. 

During the past decade the US break-even rate, which reflects the difference between nominal Treasury and Treasury inflation protected securities (Tips), has tended to range between 2 and 2.5 per cent.

In turn the allure of US Tips, which help insulate their holders from the threat of rising consumer prices, has been eroded by the lack of inflation pressure.

To further buttress the point the article cites last week's University of Michigan's consumer sentiment showing "a drop in long-term US  inflation expectations from 2.8 to 2.6 per cent, the lowest level since 2009." 

That came as the Fed's preferred measure of inflation was up to an annualized rate of 1.4 per cent in September.

You can  bet the Fed's preferred rate is not necessarily yours or mine. All of this in the face of a new government offering this week of $13B 10-year TIPS. In short, these Tips essentially have no premium.  

So here's a question. Do you want to buy 10-years of inflation protection--notwithstanding the possibility of some opportunity loss--when there's zero premium or when the premium is much higher because the prospect of inflation is perceived to be much higher?

The fear of opportunity loss is greatly exaggerated. The premium you spend to protect your home or automobile could likewise be invested somewhere else and perhaps bring in a better return. 

But that's not why you invested it. And you never get that premium back unless the unexpected and unwanted happens.

As most avid American college football fans know, you can't predict what's going to happen on any autumn less-than-a-week-away Saturday let alone 10 seasons down the road.   

Who among us doesn't like cheaper insurance. So take a tip from the TIPS.