In this video, I discuss how TIPS (Treasury Inflation-Protected Securities) work, and why I think that they are such a terrible investment.
The principal for TIPS is adjusted upwards or downwards based on the Consumer Price Index (CPI). There are many problems with the CPI, including distortions caused by substitution effects as well as Goodhart’s Law (“When a measure becomes a target, it ceases to be a good measure”).
The Federal government is incentivized to understate CPI inflation, both because it is a major debtor and also because it will then have to pay out less money in the form of inflation adjustments for TIPS.
The break-even inflation rate is calculated by subtracting the TIPS yield from the regular Treasury yield for securities with similar maturities. The break-even inflation rate is often considered the market’s best estimate of future inflation, but I think rather it is the market’s best estimate of what the BLS (Bureau of Labor Statistics) will say that the CPI is over a given period of time.
For these reasons, I believe that gold and Bitcoin are much better hedges against inflation. Both allow an investor to preserve his purchasing power, without relying on the government to honestly assess actual rates of inflation.
Not investment advice! Consult a financial adviser.
CPI scam of the century:
Inflation, government lies, and the stock market:
CPI inflation:
Chapwood index inflation:
Goodhart’s Law:
Current Treasury and TIPS yields:
10-year Treasury yields:
10-year TIPS yields:
10-year breakeven inflation rate:
5-year breakeven inflation rate:
30-year breakeven inflation rate:
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#Inflation
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In two short years the perspective has changed from terrible to reasonable. No need to buy Bitcoin until the mayhem subsides.
The variable interest for TIPS in May 2022 is 1.2 % per month, expecting a TIPS interest rate for the year between 7% and 8% for 2022! The treasury bond for 1 year is around 2% per year. I do not see any bank providiing this rates…
For all your bashing of TIPS, they're 1) better than big bank interest and 2) virtually risk free. Yeah, blah blah blah, long term yields for stocks are higher (particularly if you're smart enough to park your ass in a broad index fund), but TIPS are still a reasonable way for the more risk averse to mitigate their inflation risks. Not totally eliminate, but at least mitigate a bit. You're going to lose less to inflation in TIPS than in a Bank of America savings or checking account.
You're right that the CPI is a joke! You really have to question how gullible someone is if they believe the CP LIE
if you take investment advice from a guy who is telling you that fartcoins is a good store of value I guess you deserve what you get
Just buy silver, or better yet, platinum. Don't give into the gimmicks.
Excellent video exposing the TIPS fraud. Another terrible investment was the Vanguard Precious Metals Fund which had zero gold holdings in it in 2008 when gold was soaring. The names of many funds are meaningless….need to look at what they hold and how they function.
TIPs/I bonds – here’s how I feel: they’re worse than the stock market. A pile of cash should be reserved when prices are historically high to inject during steep downturns. If there’s a steady yield and price, that’s all well and good, but if it’s locked up for 1 year or 5 years, it does me no good. TIPS etfs, there might be something there, but you lose a large portion of yield and in the event of a large correction or crash you might be stuck as everyone runs to the cash exit door.
I can respect your opinion about the government's conflict of interest when it comes to reporting data, but recommending gold or bitcoin as an alternative to TIPS it is too much to digest.
the anthony pompliano up next in his youtube viewing lmao, pomp is a dummy, buy gold & oil, maybe NIO & CLOV but mostly gold &oil right now
This is really bad
Long setup to push bitcoin
This is hilarious
Okay, but even if the government is underreporting inflation, TIPS give a better return than what you get at the bank.
I think scaring people away from TIPS as a safe haven is Bad advice!
Yes the government CPI lags real inflation and was Changed. However, can one trust the small local Bank that gives zero yield to hold one's money (deflationary hedge)? I think NOT.
tons of money going into TIPS right now
Question… will I be taxed on the increased principal valuations as they occur or only at cash out?
Would you say it’s a better hedge to diversify against inflation on top of having Bitcoin? Or should I just go all in on Bitcoin?
I think the video was interesting, but then you suggested gold and bitcoin as alternative to bonds… Volatility of both is through the roof comparing to bonds so I really don't know how that might make sense for any portfolio.
TIPS are one of the best performing assets in a disinflationary environment. Reason for this is they have much more duration than a comparable term Treasury security. When real rates fall, prices run up. Gold and Bitcoin work well in inflationary environments, not in disinflationary or deflationary times. Treasury TIPS may end up being the safest safe-haven asset when the next financial bubble bursts. I agree on the government’s manipulation of CPI. Just look at the substitution effect that has been baked into the calculation. If the price of steak goes up, then substitute steak for hamburger instead. This deranged logic attempts to condone the way retirees and middle class standards of living keeps deteriorating.
I agree that the CPI is not accurate for all people everywhere, but you have to remember that TIPS are sold on a global bond market: people and institutions know that they are buying bonds based on the CPI and they are priced according to the market for them. A more reasonable argument would be that all Treasury Bonds are crap, but I would not agree with that either.
My Schwab TIPS mutual fund SWRSX was up 10.88% last year, and my Vanguard VIPSX was up 10.90%. This was a good year for Treasuries in general, but the usual pecking order for returns is usually: Long term, Intermediate TIPS, Intermediate, Short term TIPS, Short term, with risk, of course, in the reverse order. My guess is that with higher inflation and still low rates ("negative" interest rates), TIPS are going to be the better bet.
What is your opinion on TLT?
exactly, The government equation makes no sense. If it's really suppose to be inflation protection than the payment rate should go up to match the inflation rate.
Who did the math, Lou Costello?
Hm… Was with you until you recommended Bitcoin as a replacement for bonds as a stable holder of value. Bitcoin is high in the running for the most volatile investment you can make.
Wasn’t the a TIPS ETF total return 10% this year?
Classic hedge against inflation Bitcoin Gold and Real estate.
If the inflation scenario plays out, buying 10Y TIPS and shorting 30Y long term bonds.
Long term nominal bonds yield will go up and price will decline as the market anticipate inflation.
So Gold, Bitcoin, Real estate and 10Y tips and short long term bonds (the latter is an alternative).
You said it the worst investment but then point out mostly good thing 1) Guaranteed to pay more than inflation
2) Free from state taxes
3) Guaranteed to get back your principle.
The only negatives
1) if there is deflation, which rarely happens and has always been short lived, 2) opportunity cost on the chance the banks might offer better rates ( but keep in mind those are subject to state and local taxes)
And 3) the CPI might be lying about inflation, which is relevant how?
Why does it matter if the CPI can be trusted? It's the CPI's determination of inflation that determines interest rates. The fed loweres interest to prevent inflation. As long as I'm earning more than inflation then why should I care if the stated inflation is true or not?
If I'm paid to chauffer Bill Gates around plus expenses then why would I care how much the expenses are?
good video, can someone explain why Ray Dalio likes TIPS then though?
Excellent video. Can anyone tell me how the coupon is determined? Why would a TIPS be issued with a coupon of 2%, as opposed to, say, 1% or 3% or anything else?
If all this crazy money printing causes a rise in inflation, then TIPS will be one of the few investments where your capital is preserved in terms of buying power. In that case it won't be such a terrible place to have parked some of your savings. Diversification. But yeah, the CPI calculation is very rubbery.
This is a great video, discussion. Makes me think of the "Hedonics" fuzzy number vid by Chris Mortenson (PeakProsperity). Makes sense that the CPI number is part of the "fuzzy numbers" pushed out by the US Treasury, FED. I have some TIPS currently, going to stay away from buying any more for the moment.
Goodhart’s Law, ironically true, a friend of mine who lives in Park City, Utah reminded me of wise words of wisdom from extraordinary men: “ "Nothing of what you hear, half of what you read, and very little of what you see". Thank you Matt for your educational videos, you are a great mentor and entertainer, I vote Matthew Kratter for Chairman of the Fed or the Treasury of the U.S.A
This reminded me of my worst investment ever. I was just starting to invest and NAFTA was being passed. I thought if the US is going to include Mexico as a real trading partner and the US government is backing it there would be no way, but up for the Mexican stocks. I invested in a mutual that concentrated on Mexican stocks. NAFTA passed and Mexico devalued the Peso as I remember it. I lost half my money over night. Left me thinking I should have listened to Ross Perot and made me skeptical and trying to educate myself about the markets ever since then. Thanks for the memories Matt.
Hi Matt, I noticed that I can't subscribe to your courses (trade university premium) since my country is not available so if I used a VPN it would work or the issue will persist?
As always Matthew, thank you!