NFTRH+; TLT Revisited, TIP Reviewed

With reference to Michael Ashton’s post at Biiwii…

No Strategic Reason to Own Nominal Bonds Now

Mike Ashton is also known as the “inflation guy” and for good reason, his knowledge of the CPI, inflation indexing and hedging is second to none in my opinion.

That said, the NFTRH+ trade on TLT (a play on deflation, among other things), as with all NFTRH+ ideas, is about the chart (and insofar as dividend income, diversification and risk management come into play, so much the better).  Here is the weekly chart of TLT that was included in the original update.  It appears to still be on track and a break above last week’s high would target 136.  MACD and RSI look good.

tlt weekly chart

Using this chart of compounded inflation from the late 1800’s to the present, Ashton explains the following…

10 year compounded inflation

“The chart shows rolling, compounded 10-year inflation rates for as far back as we have reasonable data. And it shows the current level of 10-year inflation “breakevens.” What this means is that if you are long Treasuries, rather than TIPS, you will do better over the next ten years if inflation is below 1.34% and above roughly zero. If we have big deflation, TIPS will do just about as well since they are also principal protected; if we have any inflation over 1.34%, TIPS will do better.”

So again, I am holding TLT for its chart above during this particular short-term market phase, but it did prompt me to look at a couple other charts.  First the TIP-TLT ratio, which remains bearish (TIP is still technically bearish relative to TLT).

tip-tlt ratio

While nominal TIP has declined to a would-be support area but other than potentially bottoming MACD and RSI, has not made any hints in a bullish direction.

tip weekly chart

I wanted to revisit this (original TLT update) because Mike Ashton is a fundamental inflation guy and his analysis implies that the relative value is with TIP (vs. TLT), when looking out beyond the short-term.  For that part of your portfolio during a difficult market phase and insofar as one wants to own bonds, you might want to keep an eye on TIPs going forward.

Meanwhile, TLT appears to be doing just fine in this market on the short-term as inflation appears to be the furthest thing from peoples’ minds.  There will likely be a shelf life to that, whether measured in weeks or months.