The urge to buy inflation protection right now is fierce. It takes real courage to resist it.
And if your clients are like a lot of Americans, they've already surrendered. They're clamoring for a way to make sure their wealth at least keeps up with the cost of living.
At this point in the cycle, unfortunately, buying TIPS is not going to achieve that goal. More sophisticated solutions are needed.
Luckily, we'll be talking about a few of them on Wednesday with the investment team from Rareview Capital. You can reserve your seat HERE.
They'll come loaded with all the supporting arguments. I just want to hit the high notes right now from my point of view.
TIPS Are Trash
Nearly two years ago, when it became clear that the Fed was willing to print all the dollars it took to avoid a 2008-style credit freeze, Treasury became "trash."
There was simply no logic in buying debt that paid a lower yield than Jay Powell's official 2% inflation floor. The Fed would not tighten until inflation heated up to that point, leaving bond holders with the grim certainty that they'd sacrifice purchasing power if they held to maturity.
And while TIPS have held up a little better, enough people crowded into inflation-protection funds that yields have been compressed well below zero.
You're not going to keep up with the cost of living there. All you can do is mitigate the damage so you don't lose quite so much purchasing power along the way.
Remember, TIPS are a great way to protect against unexpected inflation . . . but they start to stink when everyone suspects that the Fed will need at least another year or two to get things back under control.
While markets might "only" price in 2.7% annualized dollar deterioration over the next five years right now, that's enough to make $100 on that side of a client portfolio feel more like $90 when 2027 rolls around.
That's what people who buy into funds like iShares TIPS can expect. It might be better than buying nominal Treasury debt, but it still isn't going to keep your clients from getting poorer nonetheless.
The Rareview team has noted that TIPS just don't provide more than a few points of additional return than nominal Treasury in periods of above-trend inflation. Going back decades, the spread simply never gets that wide.
At this point in the cycle, they'd shift toward various inflation-linked derivatives . . . swaps, futures, instruments that track the CPI. They'll be actively managing capital and not just crowding into TIPS.
The time for that, according to their fact sheet, was early in the cycle, before inflation has a chance to fester and well before the Fed starts tightening.
And as the cycle keeps turning, they'll keep moving with it. Inflation or deflation, they're prepared.
Of course deflation is unlikely in the immediate future. We'd almost certainly need to see the Fed get too far ahead of itself for that to happen . . . and even then, labor and energy markets may keep inflation alive for years to come.
Before that happens, we'll see inflation decelerate, at which point the urgency for protection will recede. But at this point, your clients have already suffered the first real price shock in a generation.
They're not going to forget this. And the longer it lasts, the deeper the lesson will be burned into their behavior.
They'll insist on renewing inflation hedges that were once allowed to atrophy. They'll pay what it takes for the best protection they can get.
I'm looking forward to hearing what the Rareview team has to say on Wednesday. That's Fed day. Our event begins right when the policy statement comes out.
Sign up HERE to attend.
