EmptorMaven

Treasury Inflation Protected Securities (TIPS) are a unique asset class ideally suited to investment in tax-exempt accounts (e.g., retirement accounts like IRAs and 401ks).  TIPS pay interest like regular treasury bonds, but they also appreciate in line with inflation.  The mechanisms by which they pay out are somewhat convoluted and undesirable from a tax perspective, which may contribute to the discount they currently carry in the market.  If you can buy TIPS in a tax-exempt account you don’t have to worry about these nuances.

The clearest way of valuing TIPS is in terms of the “break-even rate of inflation,” which is the inflation rate at which an investor would earn the same from TIPS as from regular treasury bonds of the same maturity.  If realized inflation exceeds the break-even rate then investors in TIPS earn more.  If inflation is lower than the break-even rate then investors in regular treasuries earn more.

Considering the break-even rate, TIPS are extremely cheap.  For example, the break-even rate on 5-year TIPS is 1.12% — well below current inflation, historical inflation, and even the Fed’s target inflation rate.  The dollar faces a number of inflation risk factors, and the current market bailout by the U.S. Treasury only adds to these risks.

Since TIPS are an undervalued, tax-inefficient asset that offer inflation protection they make an ideal investment for tax-exempt retirement portfolios.  Investors who want heightened exposure to these characteristics can buy leveraged CEFs that invest in TIPS: E.g., WIW and WIA.

There is no better time to invest than when lots of other investors need their money back.  During market crises like the present the premium on liquidity skyrockets.  I.e., if you have cash on hand that you can commit to investments for an extended period then the people who don’t will let you scoop up assets at firesale prices.  Hence, the rules for investing in a market crisis:

1. Don’t abandon investments unless you need cash.  If you sell during a liquidity crunch you become one of the people paying the liquidity premium.

2. If you buy during a liquidity crunch you collect the liquidity premium.  Therefore you should revisit your asset allocation and consider reallocating your investments to increase your exposure to distressed assets.  (Don’t try to pick stocks or sectors — the information premium during a market crisis can also skyrocket, which means if you don’t have extraordinary information you are at a heightened disadvantage.)  For example, last week a lot of institutions needed to move into short-term treasuries.  They were dumping corporate bonds, stocks, and just about anything else to do it.  Demand for treasuries got so high that buyers were literally paying out for the right to own them (i.e., interest rates went negative).  If you held treasuries and didn’t need the exceptional margin of security they provide it was a good time to cash them in and buy the things everyone else was selling.

In general your portfolio should reflect your investment time horizon and risk aversion — i.e., how long you can keep your money invested, and how much interim “pain” you can tolerate.  The more pain, the more (potential) gain.  During a liquidity crisis you may perceive that risks have gone up and thus be inclined to sell risky assets and move to more liquid assets.  That is exactly the wrong course of action, because it turns you from a liquidity provider into a liquidity demander.  If you succumb to the urge to pull money from the markets you will find yourself in the notoriously underperforming pool of retail market timers who always buy near the top, when everything seems great, and sell near the bottom, at the point of “maximum pain.”

When you see falling asset prices during a liquidity crisis do not think, “Shoot, those assets are riskier than anyone thought, I had better get out too.”  Instead think, “Wow, the market is willing to pay me even more to move into those assets.  Last time I considered those I didn’t think the extra return was worth the risk.  But since that return potential is even higher maybe now it is worth owning them.”

How can you collect the handsome liquidity premium that exists in the current market?  If you own CDs, consider paying the early-withdrawal penalty and putting the money into corporate or muni bonds, whose spreads over treasuries have spiked to record levels.  If you already own bonds consider moving to higher-risk asset classes, or else consider leveraging up using bond CEFs.

Outside of the military, I have taken commercial firearms training courses at both the SIGARMS Academy in New Hampshire (now called the SIG SAUER Academy) and at FrontSight in Nevada.

My experience at SIG consisted of a 3-day Concealed Carry Pistol course.  They have a great indoor range where they shoot only lead-free frangible ammo, which means you can get up close with the reactive metal targets.

At FrontSight you generally have to contend with outdoor courses where you are exposed to all of the rigors of weather in the Nevada desert.  In return you get access to some very long ranges and simulators.  My first experience at FrontSight began with a promotional half-day submachine gun course.  Subsequently I have done one-day assault rifle and shotgun courses, as well as a two-day practical rifle course.  In every case I drove up each day from Las Vegas.  My best experience was with the one-day courses, which you can custom schedule almost anytime one of the longer courses isn’t in session: My wife and I had an instructor and a range to ourselves, and all ammunition was provided.  List prices for Front Sight can seem very high, but the institute’s director, Ignatius Piazza, is constantly running promotions so I would be surprised if anyone pays full tuition.  You can usually find discounted course “certificates” that cover tuition on Ebay.

The single most important variable in your experience at either institute will be your instructor.  On the whole I have been quite satisfied, though not every instructor is equally engaging or capable of adapting the content and pace of instruction to the students.  Both institutions keep a decent instructor/student ratio, so incompetent students tend not to bog things down.  One other thing you have to deal with at Front Sight is Ignatius Piazza’s cult of personality: Classroom time will include details of his personal philosophies as well as extended pitches for you to buy Front Sight membership and more courses.