Comments on: Mutual Fund Cash Levels Adjusted For Inflation http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html Freshly squeezed market commentary & analysis Fri, 19 Mar 2010 20:18:20 +0000 http://wordpress.org/?v=2.0.2 by: Dspurr624 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-57468 Fri, 20 Nov 2009 11:18:48 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-57468 Supply and Demand moves prices, creates trends etc. If it were as easy as a formula then we'd all be rich. I don't doubt that the equation does reveal some data about cash levels etc., but I'd be cautious about using any historical numbers to draw conclusions about the future. When was the last time we were $11T in debt and the US Government was the biggest buyer of its' own debt ? New Day - Uncharted Waters without a map......"Caution Will Robinson" Supply and Demand moves prices, creates trends etc. If it were as easy as a formula then we’d all be rich. I don’t doubt that the equation does reveal some data about cash levels etc., but I’d be cautious about using any historical numbers to draw conclusions about the future. When was the last time we were $11T in debt and the US Government was the biggest buyer of its’ own debt ?

New Day - Uncharted Waters without a map……”Caution Will Robinson”

]]> by: Paul http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54978 Wed, 09 Sep 2009 13:27:15 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54978 Babak, I get it from Bloomberg. I use USGG5Y5Y Index to get the 5y5y forward (ie mkt's expectation of average inflation from year 5 to year 10). Now 2.48; pre-crisi range 2.25-2.75%. The instrument is called "US 5yr 5yr forward breakeven" if you want to look it up elsewhere. Babak, I get it from Bloomberg. I use USGG5Y5Y Index to get the 5y5y forward (ie mkt’s expectation of average inflation from year 5 to year 10). Now 2.48; pre-crisi range 2.25-2.75%. The instrument is called “US 5yr 5yr forward breakeven” if you want to look it up elsewhere.

]]> by: Babak http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54968 Wed, 09 Sep 2009 00:45:02 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54968 Paul, I'd like to get a gauge of the inflation/deflation from TIPS but the data has been <a href="http://www.clevelandfed.org/research/data/tips/" rel="nofollow">discontinued by the FedM</a>. If you know of another way or source for the data, let me know. Paul, I’d like to get a gauge of the inflation/deflation from TIPS but the data has been discontinued by the FedM. If you know of another way or source for the data, let me know.

]]> by: wayne http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54959 Tue, 08 Sep 2009 11:43:28 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54959 I think that I can agree with you, that deflation will not be the problem going forward that it was expected to be, but if you look at the CPI numbers, we had a bout of it in the recent 12 months. We are to some extent in agreement. I think cash levels remain a bit over historic norms, especially if you go to the trouble to adjust the % of cash in mutual funds by some factor to account for very low interest rates. Much like the 50's, I think that it is very possible that we may have a decade where the cash levels stay above historic norms due to a shift in savings habits by consumers. I can't really say with a high degree of confidence however. I think that I can agree with you, that deflation will not be the problem going forward that it was expected to be, but if you look at the CPI numbers, we had a bout of it in the recent 12 months.

We are to some extent in agreement. I think cash levels remain a bit over historic norms, especially if you go to the trouble to adjust the % of cash in mutual funds by some factor to account for very low interest rates.

Much like the 50’s, I think that it is very possible that we may have a decade where the cash levels stay above historic norms due to a shift in savings habits by consumers. I can’t really say with a high degree of confidence however.

]]> by: Paul http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54958 Tue, 08 Sep 2009 09:47:29 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54958 Yes, but these are not deflationary times, despite the assertion of many a blogger. Oil is up 70% from its Q4 low, gold is up 40%, copper up 40% etc. US medium term inflation expectations priced into bonds (the 5y/5y forward) now stands at 2.43%, back to pre-crisis levels. This measure stood at 0.5% back in Q4 when deflation fears were widespread and valid. That story is over. Inflation is normalising and since nominal interest rates are exceptionally low, that means that real interest rates are exceptionally low. Over the next few months, I think this cash in money market funds will gradually be invested in stocks (at the wrong time) as the acount holders realise that all this talk of deflation and high real interest is nothing more than idle chit-chat and scaremongering. Yes, but these are not deflationary times, despite the assertion of many a blogger. Oil is up 70% from its Q4 low, gold is up 40%, copper up 40% etc. US medium term inflation expectations priced into bonds (the 5y/5y forward) now stands at 2.43%, back to pre-crisis levels. This measure stood at 0.5% back in Q4 when deflation fears were widespread and valid. That story is over. Inflation is normalising and since nominal interest rates are exceptionally low, that means that real interest rates are exceptionally low. Over the next few months, I think this cash in money market funds will gradually be invested in stocks (at the wrong time) as the acount holders realise that all this talk of deflation and high real interest is nothing more than idle chit-chat and scaremongering.

]]> by: wayne http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54934 Mon, 07 Sep 2009 16:06:25 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54934 In deflationary periods, real interest rates take on a different dimension due to the fact that interest rates are bounded on the downside by zero and deflation is unbounded. My other comment was that mutual fund managers incentive for investing a portion of their assets in interest bearing securities is the net return they can show investors via the interest rate return, rather than a real interest rate return In deflationary periods, real interest rates take on a different dimension due to the fact that interest rates are bounded on the downside by zero and deflation is unbounded.

My other comment was that mutual fund managers incentive for investing a portion of their assets in interest bearing securities is the net return they can show investors via the interest rate return, rather than a real interest rate return

]]> by: Paul http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54932 Mon, 07 Sep 2009 14:54:57 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54932 Babak, I don't think you understood my point, and I take the blame for that. I will try to be more clear. I am talking about the use of "real interest rates". There are 2 ways to get a measure of this: 1) take a nominal interest rate and subtract a measure of inflation. Two problems with this: a) the notion of comining interest rates (which have a forward looking component to them) is convenient but is meaningless from a economic point of view and b)the choice of which inflation measure to use is arbitrary: CPI, PPI, core CPI, average earnings, GDP deflator etc? 2)take a real interest rate from a traded instrument, such as index linked bond. This is a real market price, and is not arbitrary in any way. To me, the second method is superior. If you take the real interest rate from these instruments, you find that real interest rates are at a generational low. That's my point. I just can't agree with your assertion that "we are currently experiencing real interest rates close to 6.5%". Babak, I don’t think you understood my point, and I take the blame for that. I will try to be more clear. I am talking about the use of “real interest rates”. There are 2 ways to get a measure of this:

1) take a nominal interest rate and subtract a measure of inflation. Two problems with this: a) the notion of comining interest rates (which have a forward looking component to them) is convenient but is meaningless from a economic point of view and b)the choice of which inflation measure to use is arbitrary: CPI, PPI, core CPI, average earnings, GDP deflator etc?

2)take a real interest rate from a traded instrument, such as index linked bond. This is a real market price, and is not arbitrary in any way.

To me, the second method is superior. If you take the real interest rate from these instruments, you find that real interest rates are at a generational low. That’s my point. I just can’t agree with your assertion that “we are currently experiencing real interest rates close to 6.5%”.

]]> by: wayne http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54882 Sat, 05 Sep 2009 02:54:06 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54882 Babak, my comment is that we are not buying the past and in the case of the stock market, we are attempting to buy a reasonable multiple of future earnings. It is difficult, but the analyst that are capable of making the best forward estimates will be the one's taking the prom queen to the dance. But you are correct it is very difficult to do. Standard and Poor's generally has estimates for earnings posted for the next four quarters and even they have missed terribly. Their current estimates are "under revision" and the truth is they probably don't have a clue. Looking at past earnings is only useful as one piece of the puzzle in estimating future earnings. It is where you start. But never in the last 50 years, have past earnings had so little correlation to future earnings. Babak,
my comment is that we are not buying the past and in the case of the stock market, we are attempting to buy a reasonable multiple of future earnings. It is difficult, but the analyst that are capable of making the best forward estimates will be the one’s taking the prom queen to the dance. But you are correct it is very difficult to do. Standard and Poor’s generally has estimates for earnings posted for the next four quarters and even they have missed terribly. Their current estimates are “under revision” and the truth is they probably don’t have a clue. Looking at past earnings is only useful as one piece of the puzzle in estimating future earnings. It is where you start. But never in the last 50 years, have past earnings had so little correlation to future earnings.

]]> by: Babak http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54869 Fri, 04 Sep 2009 21:31:03 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54869 Paul, forward looking estimates may be less dramatic but they are actually less meaningful because they are simply estimates. Similar to how forward earnings estimates always look better. But as we painfully know, forward data can be revised over and over again to bring it in line with reality. So why not just look at the actual real data? So I'm not sure I follow you when on the one hand you want to base calculations on 'real' data and then you go ahead and use arbitrary numbers which are nothing more than somone's estimate (!). Paul, forward looking estimates may be less dramatic but they are actually less meaningful because they are simply estimates. Similar to how forward earnings estimates always look better. But as we painfully know, forward data can be revised over and over again to bring it in line with reality. So why not just look at the actual real data? So I’m not sure I follow you when on the one hand you want to base calculations on ‘real’ data and then you go ahead and use arbitrary numbers which are nothing more than somone’s estimate (!).

]]> by: Paul http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54861 Fri, 04 Sep 2009 12:03:45 +0000 http://www.tradersnarrative.com/mutual-fund-cash-levels-adjusted-for-inflation-2938.html#comment-54861 This idea that we are experiencing interest rates of 6.5% is absolute nonsense. 90d tbills yield 0.12% and forward looking inflation expectations vary from -0.75% on a 1 year towards 2% for 20 year. It is not hard to find odd numbers right now, but forward looking estimates are more meaningful and less dramatic. Looking at it another way, 5y index linked bonds in the US yield 1%, a multi-generational low. That is a real market and you should base your calculations on real tradeable assets, rather than some arbitrary headline-grabbing mis-calcualtion. This idea that we are experiencing interest rates of 6.5% is absolute nonsense. 90d tbills yield 0.12% and forward looking inflation expectations vary from -0.75% on a 1 year towards 2% for 20 year. It is not hard to find odd numbers right now, but forward looking estimates are more meaningful and less dramatic. Looking at it another way, 5y index linked bonds in the US yield 1%, a multi-generational low. That is a real market and you should base your calculations on real tradeable assets, rather than some arbitrary headline-grabbing mis-calcualtion.

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