Cash as an inflation hedge

Discussion of the Cash portion of the Permanent Portfolio

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Kevin K.
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Cash as an inflation hedge

Post by Kevin K. » Fri Jun 24, 2022 7:08 pm

Good article confirming Tyler’s view that cash is greatly under appreciated as an inflation hedge. :

https://www.morningstar.com/articles/1 ... ource=link
Kbg
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Re: Cash as an inflation hedge

Post by Kbg » Sat Jun 25, 2022 4:11 pm

Kevin K. wrote:
Fri Jun 24, 2022 7:08 pm
Good article confirming Tyler’s view that cash is greatly under appreciated as an inflation hedge. :

https://www.morningstar.com/articles/1 ... ource=link
So long as it is understood this is relative. I also think "this time is different." If the Fed wasn't so loaded up on bonds of all kinds interest rate for ST instruments would be quite a bit higher right now.
barrett
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Re: Cash as an inflation hedge

Post by barrett » Wed Oct 19, 2022 7:06 am

Kbg wrote:
Sat Jun 25, 2022 4:11 pm
Kevin K. wrote:
Fri Jun 24, 2022 7:08 pm
Good article confirming Tyler’s view that cash is greatly under appreciated as an inflation hedge. :

https://www.morningstar.com/articles/1 ... ource=link
So long as it is understood this is relative. I also think "this time is different." If the Fed wasn't so loaded up on bonds of all kinds interest rate for ST instruments would be quite a bit higher right now.
Kbg, Hoping you might update your thoughts on this now that almost four months have passed. Isn't the gap between inflation and short-term rates now diminishing slowly as the Fed "rolls off" many billions per month by not reinvesting that money?

Just pulling from this 5/16/22 Vanguard article:

https://advisors.vanguard.com/insights/ ... eetquickly

And specifically this part:

"The Fed plans to reduce its $8.5 trillion balance sheet beginning June 1, when it will no longer reinvest proceeds of up to $30 billion in maturing Treasury securities and up to $17.5 billion in maturing agency mortgage-backed securities per month. Beginning September 1, those caps will rise to $60 billion and $35 billion, respectively, for a maximum potential monthly balance sheet roll-off of $95 billion."

Not saying that "this time is not different" but we are at least headed in the right direction with the negativity of real rates decreasing, right?
Kbg
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Re: Cash as an inflation hedge

Post by Kbg » Wed Oct 19, 2022 9:43 am

I think it's important to realize we have two things going on now. 1, the continued run down off of debt purchases and 2, active and historically extremely large fed fund rate increases. Unrelenting .75% a step is a pretty steep path and I think the Fed is quite serious that they are going to do what they need to do to tame inflation. If I could predict interest rates accurately I'd be a rich man, but my personal guess is that we might end up around the historical "average" interest rate of around 5.5 - 6% again. I hope the aggressiveness of this round of rising interest rates prevents us from getting back into late 1970s/early 1980s mode (which we are but hopefully not sustained in duration).

A Fed chairman wants to be the next Paul Volcker or Ben Bernanke who got things right and did the right things. No one wants to be Roy A. Young or Arthur F. Burns who got it completely wrong during their tenure. Given the Fed seniors life spans/experience I imagine they are channeling their inner Paul Volckers vs. Arthur Burns. So, I'm hopeful things will normalize again (as much as it sucks for our portfolios right now). Economically, normal interest rates are hugely important to a well functioning economy. I was not a fan of the distortion that was done to i-rates in the way it was done (Cut the FFR to zero, fine. Buying as much debt as was bought, not fine.) However, if anyone thinks what is going on now is a Fed only thing they would be wrong. Both Trump/Republican congress and Biden/Democrat congress threw enormous amounts of money at everything in sight and we are now living the hangover. Of course the Biden team seems to think throwing more money at things is a good idea and I'm kinda amazed that, politically, they don't understand people are ticked off about high inflation and fanning the fire is making it worse as regards inflation and their political prospects. You would think the specter of Jimmy Carter would haunt them a bit.

A couple of links...the first is descriptive of what is going on. The second is mostly just numbers (which is always my go to).

https://www.bankrate.com/banking/federa ... -finances/ (decent article on what's going on)

https://tradingeconomics.com/united-sta ... erest-rate (change the chart in the middle to "max")

And let's conclude with a bonds in your portfolio tip...as is taught on the BH board, line up bond assets to cash flow needs. This is why you should always know your expiration date and/or your bond fund's duration and continue to reinvest. Then, patiently let higher bond yields repair the damage...which they mathematically will.
barrett
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Re: Cash as an inflation hedge

Post by barrett » Wed Oct 19, 2022 11:48 am

Kbg wrote:
Wed Oct 19, 2022 9:43 am
This is why you should always know your expiration date..
At first glance I thought you were referring to my date of death! O0

Thanks for the detailed response and the excellent links. How much did you say your newsletter costs again? Seriously, your contributions here are super valuable and much appreciated.

It's interesting that investors have been pining for higher rates on cash & short-term bonds for the last 15 years but, damn, getting there sure involves a lot of medium-term wealth destruction.

Personally I am laddering treasuries at 3, 6, 9 & 12 months. That has worked well, I guess, though I am (obviously) always behind the curve. Will wait a bit longer before extending those maturities.
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Re: Cash as an inflation hedge

Post by Kbg » Wed Oct 19, 2022 3:13 pm

barrett wrote:
Wed Oct 19, 2022 11:48 am
Personally I am laddering treasuries at 3, 6, 9 & 12 months. That has worked well, I guess, though I am (obviously) always behind the curve. Will wait a bit longer before extending those maturities.
I think going anywhere out to where the yield curve begins to dip the wrong way (IIRC around the 3 year point right now), one would be "risk to rewarded' in a good way and particularly if you are maturing bonds every quarter/month. Rationally, with known information, that's the best way to play it. Beyond that it's a play on where you think interest rates will go.

Side note: For a reason I haven't researched the treasury is offering 17 week T-bills for the next month or so. I bought some just cuz it was a weird periodicity. ;D
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Re: Cash as an inflation hedge

Post by barrett » Sat Oct 22, 2022 6:18 am

Kbg wrote:
Wed Oct 19, 2022 3:13 pm
barrett wrote:
Wed Oct 19, 2022 11:48 am
Personally I am laddering treasuries at 3, 6, 9 & 12 months. That has worked well, I guess, though I am (obviously) always behind the curve. Will wait a bit longer before extending those maturities.
I think going anywhere out to where the yield curve begins to dip the wrong way (IIRC around the 3 year point right now), one would be "risk to rewarded' in a good way and particularly if you are maturing bonds every quarter/month. Rationally, with known information, that's the best way to play it. Beyond that it's a play on where you think interest rates will go.
Curious about your thoughts, Kbg, about going out as far as three years but not longer. I mean, to a certain extent beyond, say, the next two Fed meetings in 2022, it's all an interest rate play, right? It's not inconceivable that the Fed sees things it doesn't like in early 2023 and concludes that it's been too aggressive in raising rates and then starts to drop them again. Here are the treasury yields I just pulled from Fidelity:

U.S. Treasury:
3 months - 4.11%
6 months - 4.35%
9 months - 4.50%
1 year - 4.54%
2 years - 4.52%
3 years - 4.51%
5 years - 4.38%
10 years - 4.22%
20 years - 4.64%
30 years - 4.37%

So, while I like the certainty of knowing what I am going to get in nominal dollars with my shorter maturity Bills, it's at least somewhat likely that that 4.64% yield on the 20-year could be seen as a great deal over the life of the bond. This is just a mental exercise for me at the moment but I'd love to hear your thinking on why going out beyond three years is likely not to be "risk to rewarded".
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jhogue
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Re: Cash as an inflation hedge

Post by jhogue » Sun Oct 23, 2022 2:15 pm

Bankers at the Federal Reserve do not know what the interest rate will be next year. How can the average investor?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Kbg
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Re: Cash as an inflation hedge

Post by Kbg » Sun Oct 23, 2022 7:51 pm

barrett wrote:
Sat Oct 22, 2022 6:18 am
So, while I like the certainty of knowing what I am going to get in nominal dollars with my shorter maturity Bills, it's at least somewhat likely that that 4.64% yield on the 20-year could be seen as a great deal over the life of the bond. This is just a mental exercise for me at the moment but I'd love to hear your thinking on why going out beyond three years is likely not to be "risk to rewarded".
I should probably be clear on what I really think...I think BHeads has it right. One should match bonds and time to maturity of those bonds to liabilities. None of us know where interest rates are going to go and the further out in the future the less so. Accordingly, ensuring you have the cash you need when you need it makes a lot of sense. Of course how perfectly do any of us know our expenses with great precision 10 year from now? LOL.

When I was mentioning risk vs. reward and length, the further you go out the more risky those bonds become in terms of what could happen for basically an equivalent return when looking at the coupon return. In other word, more volatility and possibility of larger loss if you have to sell before maturity.

However, there is a different type of risk that is also longer term and has to do with giving up the opportunity to lock in a higher interest rate for an extended period of time. If interest rates go down you miss out on that and this is what you are highlighting. Can you imagine having 30 year double digit interest bonds issued in 1980/1981 know what we know now?

All we know is what is available to us in terms of price/yield in the here and now...always a tradeoff. :-)
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