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Wednesday, June 20, 2007

1987 Ford R.I.P.

"A hundred years from now it will not matter what my bank account was, the sort of house I lived in, or the kind of car I drove. But the world may be different because I was important in the life of a child."

- Dr. Forest E. Witcraft, Within My Power


I junked my commuting car recently. I bought the car for $3,250 when it was already 10 years old, and I drove it for 10 more years. That one car saved me a lot of money for a long time.

My co-workers thought I was crazy for driving a "bomb". My relatives said I should have sold it long ago to a poor, starving college student. And considering the status of the paint job at the very end, I'm sure the neighbors were quite happy to see it go as well. My children, however, cried and cried as the tow truck drove away.

Small children are not so impressed by gloss and style and status. They saw only only thing: fun memories of traveling and being together in that car. Many people spend their whole life never really understanding things that are obvious to preschool children...

Friday, June 8, 2007

TIPS Rates Rising Fast

"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
- John Maynard Keynes

I am going to buy TIPS at these levels. (TIPS = Treasury Inflation Protected Securities) My general rule of thumb is that when TIPS real rates are over 2.5%, they are of interest to me. (Pun intended.) TIPS have not been above 2.5% on a sustained basis for a long time, but they've really smashed through that level in the last several days and are now sitting at about 2.7%.

The historical record over the last century is that over time Treasury bills return less than 1% over inflation, and even long term Treasury bonds return less than 3% over inflation. (In some studies, long term Treasury bonds return closer to 2% over inflation.) Thus, a rate of 2.7% plus inflation seems quite good to me.

Many investors and academics consider TIPS to be a separate asset class. I concur with this view, although not merely based upon the empirical fact that TIPS have low correlation with many other asset classes. I believe you can decompose TIPS into two parts: a standard coupon bond plus what is essentially a forward contract on the consumer price index (CPI). One doesn't often find a security directly linked to a macroeconomic number like the CPI, so I agree that TIPS are a different animal than other assets.

You can find general quotes for TIPS rates here: http://www.bloomberg.com/markets/rates/index.html