Feb

18

TIPS to Trade, from anonymous

February 18, 2015 |

Given the strong whiff of deflationary sentiment in the group and the extended thread about negative yields, I'd inquire if anyone else got a short term buy signal for TIP today? I am going to ignore my signal this time but not because I disrespect this crowd's sentiment.

Rocky's Ghost writes:

My models have demonstrated with statistical perfection that 100% of the TIPS that traded today were purchased by people who think they will increase in value on either an absolute or relative basis.

But regardless of the sophistication of my tongue-in-cheek model, a discussion regarding under what circumstances an investor/trader should ignore one's "signals" is a very worthy topic of discussion. I have found that ignoring an entry signal is more insidious than ignoring an exit signal. Missed opportunity cost doesn't show up in the P&L, hence it results in self-delusion.

Gary Phillips writes:

Missed opportunity can often end up costing you more than money, especially if it causes one to chase or revenge trade.

anonymous writes: 

One corollary question associated with the negative yield situation is as follows: how negative must yields get before managers of short-term assets decide that it is more cost-effective and return-supporting to cease putting assets in sub-zero instruments, and instead hoard physical currency in their own private vaults. Yes, it would incur security and insurance costs, and probably tempt personnel to engage in fraud, but one wonders about the extent to which significant and persistent negative yields would lead to disinternediation.

anonymous writes:

Samuelson discusses negativity in an opinion piece today

"A new economic mystery: negative interest

Stefan Jovanovich writes: 

"Negative interest rates" are no more unprecedented than the idea that the Federal government should be smaller than the combined bureaucracies of New York, Massachusetts, Ohio, Illinois and Pennsylvania - which was the case by the time Ulysses Grant left office in 1877. If you held money - either coin or U.S. notes or a demand deposit account at a bank that saw itself as an intermediary and not a lender, you paid negative interest rates; if you had bullion and you wanted to convert it to money, both the U.S. Mint and the brokers who still dealt in "gold" exchanges would charge you a fee. So would the depository you trusted. The closest you would come to not paying negative interest rates was to do as Charles notes and incur your own "security and insurance costs".

Under the Constitutional gold standard, you traded the costs of negative interest rates for (1) avoiding foreign exchange risk - your gold dollar would be worth exactly as much as its weight in pounds, francs and marks, and (2) the market risk that the fluctuations in securities and asset prices always holds.

In abandoning the gold standard, the United States joined other believers in central banking in the notion that foreign exchange could be "controlled" in a way that still allowed national governments to play credit roulette using their own debt as currency while, at the same time, administering "stable" prices and full employment.

La-di-da.

Gary Rogan adds: 

For the purposes of calculating the discount rate of future cash flows and for valuing the stock markets it seems like today's market-based negative (or low) interest rates are in a different category than being charged a fee for bullion conversion.


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