HI$TORY BUFFS . . . LITTA HELP, PLEASE

Everyone knows the ‘permanent plateau’ pronouncement just before the 1929 market crash. But do you have your own favorite Worst Financial Prediction of All Time? I need some link or reference so I can quote it accurately – whether a general market prediction or a prediction for a specific stock . . . anything from the last 2000 years (or the year 2000) that looks, with the benefit of hindsight, unbelievably inept. Jail time, bankruptcy, or defenestration a plus, but not required.

WILL UNCLE SAM UNDERSTATE INFLATION AND CLIP YOUR TIPS?

Gray Chang: ‘The U.S. Treasury is supposed to disallow any changes to the CPI that would be unfair to TIPS investors. This is what the Treasury has to say about it:

The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).

If, while an inflation-indexed security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.

You can read the whole thing here.’

Will Galway: ‘It’s strange Forbes would charge $2.95 for what they also give away for free, but a quick (free!) Google search turned up this link to the James Grant TIPS article you cited Wednesday.’

YTM

Jeff: ‘Yield to maturity. Can you define this term?’

☞ The annual rate of return you’d get from a bond if you held it to maturity. With a 5% bond that you buy ‘at par’ (100 cents on the dollar), the answer is easy: 5%. But what if you paid 110 for it ($1,100 for each $1,000 bond)? Then the 5% interest it pays ($50 a year on the $1,000 bond) is actually only 4.545% ($50 on the $1,100 you paid) . . . and it’s worse than that, because when the bond is redeemed for $1,000 at maturity, you will have suffered a $100 loss.

So YTM is that compounded annual return which best describes the series of cash flows that will derive from your ownership of the bond – namely, the semi-annual interest payments plus any gain or loss that will be realized when the bond is redeemed.

If a bond still has 10 years left until it matures and sells at 110 today, but pays $55 a year interest (5% on $1100), you might think the YTM is 4% . . . the 5% you get on your money each year, less the 1% a year you lose as it falls from 110 to 100.

But while close, the precise math is trickier than that and why God invented calculators. (Because of compounding, a bond need depreciate at slightly less than 1% a year to fall in 10 years from $1,100 to $1,000.)

SECOND THOUGHTS ON IRAQ

Remember the general who last year said things would turn out fine because ‘our God is bigger than their God?’ Lt. Gen. William Boykin? What I hadn’t realized is that he heads up Military Intelligence. Now I’m sleeping better.

Meanwhile – must reading – click here.

 

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