[trod1234]

The problem is that most people don't know how to invest, and this has been done by purposeful intent. Financial education was removed from centralized education long ago.

Bonds necessarily need to exceed the yearly inflation to retain their purchasing power. People claim these are risk free, but they aren't, even when held to maturity. You lose money from the inflation when the rate of interest is below the inflation rate which it almost surely was given the several decades of almost zero low-interest rates in that time period.

There are some general rules that anyone should know. Rule #1 is don't lose your principal investment (don't lose money). Rule #2 is don't invest in a casino, always manage your risk, and know when its unmanageable. Rule #3 invest in yourself, understand the business, limit debt, and focus on value.

People today don't realize the market has been rigged through a number of convoluted ways into that of a casino.

Price discovery is gone because most transactions happen off exchange in the dark. In 2024, over 50% of transactions occurred off-exchange in dark pools. You then also have payment for order flow, synthetic shares via options through predatory middlemen, and no real law enforcement mechanism for when those big players break the rules; and they do on the regular as they did in GME/FRC, and too many other places to count. You've also got large banks pumping the prices up through non-fractional reserve based debt backing options contracts which they use to yield farm, and profits funneled away from businesses into stock buybacks hollowing them out of any value.

No visibility, no price discovery, no economic calculation. These things fail when about 1/4 of the market is off-exchange, its been at crisis for a long time.

There is no real opportunity for investment when you allow those rules to be broken. Its not an actual investment.

[kgwgk]

> several decades of almost zero low-interest rates in that time period

What are those “several decades” more precisely?

https://fred.stlouisfed.org/graph/?g=1JtLn

[trod1234]

The chart you linked isn't inflation indexed.

I believe the chart below is the one you should have been linking (at least one that's public, the reports I get are subscription only so I can't share those):

https://fred.stlouisfed.org/series/DFII10

Anything less than 4% for a real return of 2-3% after inflation falls under low interest rates, and as you can see 2003-2022 this period matches that criteria, with real negative rates 2011-2013, and 2020-2022.

Notwithstanding all the unstated shennanigans and other changes to try to make the numbers look more palatable on the surface, like the YTM reporting loophole, there is also the backroom deals between blackrock to swap old low rate treasuries for newer treasuries on the taxpayer dime (1), and the abandonment of the fractional reserve system (2020, reserves set to 0% for Basel 3) which call into question more foundational issues of the money system.

1 (https://www.bloomberg.com/news/articles/2020-05-21/how-larry...)

[kgwgk]

> The chart you linked isn't inflation indexed.

Neither was your comment. The alternative reading "You lose money from the inflation when the rate of interest is below the inflation rate which it almost surely was given the several decades of almost zero low-interest REAL rates in that time period" wouldn't have made much sense. The interest rate is below the inflation rate when the real rates are negative - not just low.

> Anything less than 4% for a real return of 2-3% after inflation falls under low interest rates, and as you can see 2003-2022 this period matches that criteria.

How does that support the claim that the rate of interest was almost surely below the inflation rate during and that made you "lose money from the inflation" during that period? That happened only very briefly as you notice.

Investing in bonds didn't "lose money from the inflation" in 1990-2020. Actually it was an exceptionally good period to have bonds!

Buying 10-year bonds one after the other in 1990, 2000 and 2010 you got coupons in excess of 8%, 6% and 3% respectively with inflation rates over those decades around 3%, 2.5% and 2%.

The inflation over the 30 years is below 2.5%. $100 in 1990 was $260 in 2020.

Investing $100 in 10-year bonds in 1990 without even bothering with reinvesting results in over $180 in 2000.

Investing $180 in 10-year bonds in 2000 without even bothering with reinvesting results in over $280 in 2010.

Investing $280 in 10-year bonds in 2010 without even bothering with reinvesting results in over $360 in 2010.

That's more than 4% per annum - compared to an inflation below 2.5%. (I didn't include taxes but there was no reinvestment either and everything is rounded down at every step.)

You also got similar (slightly better) returns if you rolled over the bonds to keep constant duration at 10 years (and even better if you had longer duration bonds). The annualized return of the IEF ETF (7-10 year bonds) since inception in 2002 to 2020 is 4.5% - it definitely didn't "lose money from the inflation" which was just 2.1%.

[trod1234]

> Neither was your comment.

The comment I made refers to the underlying process of inflation indexing a yield curve in loose terms. You seem to be nitpicking on semantics for no real reason.

You also seem to have messed up your math with regards to calculating the loss in purchasing power due to inflation of the principal and interest (coupon) of an investment.

Inflation in 1990 was 5.4%, the return was 8.2% for that year, but I see you rounded that down to 8% in your example, so I'll stick with what you rounded down to in my breakdown below but the real rate of return for that year without your adjustment was 2.8% without taxes. Taxes play an important part in figuring your breakeven.

In your 1990 example, you make $8 as a coupon payment in interest for that year at what appears to be an 8% interest rate. Inflation in that year was 5.4%.

Depending on your ordinary income capital gains bracket/investment you may be taxed on this payment anywhere from 10% to 37%.

That's between $0.80-$2.96 of that $8 in tax.

The real profit/gain after inflation losses was $2.60, absent taxes, but you have to account for your real investment which includes taxes. You are taxed on $8, not that $2.6.

We'll assume its the upper tax rate, which taxes amount to 2.96. $2.60-2.96=-0.36, it is negative so you lost purchasing power on your principal for that year but still made a real return of $5.04 in that years dollars.

Lets look at the next year (its a 10 year bond after all). You get 8%, inflation is at 4.8%, real is $0.30 after subtracting out the tax. You still haven't broken even in purchasing power from the previous year, and if you do the autosum each year you end up making an ever so slight profit because stars align, and only because you caught the top of the bond market.

Over the years rates dropped to 6% down to, 4% in 2001 which enters our low rate era.

Now the general consensus at the time in the 90s was it was a great time to buy bonds, but that was only because the stock market during that time on average lost 6% per annum (iirc), and gold was down too. Nearly everyone was losing some money in purchasing power.

Lets say you reup that bond, $100 in 2001, rates are at 4%, You invest 100 you get 140 at the end, $4 coupon payments per year. Inflation is at 2.8%.

Real gain for that year is $1.20, but you are taxed on $4, which is $1.48 in tax (@37%). Your net profit after taxes: -0.28 in purchasing power.

This gets worse later on when rates go negative as a result of inflation (2011, and 2020), you pay people at a loss for the privilege of loaning them money.

In the long-run you barely break even, maybe, and that bond bubble still hasn't popped yet.

Now these are pretty good estimates considering you don't need to know lot of financial math so long as you handle the calculations properly at the right time, there is some error but not much.

The exact gain amounts also greatly depend on how accurate that CPI calculation is and in most recent years its almost borderline fabrication to the point of uselessness. Shadowstats produces reports on CPI utilizing the older more accurate methods, and those reports show much worse losses which agree with subjective observations I've seen during that time.

The point of note is, percentages depend upon the basis they indirectly reference, you can't perform operations on them out of order and expect to get a accurate answer.

> The annualized return of IEF ETF ...

The annualized returns of bond ETFs cannot be relied upon because they all utilize shennanigans such as the yield to maturity loophole, and they do not mark to market the actual value of assets held in the ETF even when they expire.

There is also synthetic share manipulations on the options chains for those at times where the valuation and share price become entirely divorced from reality, also you don't get coupon payments on ETFs.

This is why, if you happened to be paying attention to the interest trends and purchased long-term inversely correlated contracts on a bond ETF like say... TLT ... well ahead of the FED announcing their intent to raise interest rates dramatically, you would have been significantly burned when the price didn't drop appropriately for the assets held in trust when they did actually raise interest rates.

Take a look for yourself, the TLT fund was ~99% 1.8 10YR treasuries trading at 120, FED raised rates in 2022. The value loss on the assets of the ETF put the ETF book value on a par ~$67/share in 2022 instead it remained between 120-110.

There are a lot of older people whose financial advisor told them to invest in bonds, and that market was teetering on the edge ever since 2020, and is now being backstopped through currency devaluation through blackrock/Fed partnership. This only creates more inflation, on top of the petrodollar/geopolitic adverse consequences.

[kgwgk]

> You seem to be nitpicking on semantics for no real reason.

I guess I didn't interpret your statement about "several decades of almost zero low-interest rates" between 1990 and 2020 loosely enough.

> You also seem to have messed up your math

Your only issue seems to be with taxes and I explicitly mentioned that I didn't consider them, just like I didn't consider reinvestment until the end of the ten years period and I used rounded down yields and rounded up inflation numbers.

You say taxes can be anywhere from 10% to 37% - but choose to apply 37% to show the "error".

Let's consider taxes. 40% if you want, why not.

You buy in January 1990 a 10-year bond with a 8.36% coupon trading at par for $1k [for simplicity I use the monthly averages from https://home.treasury.gov/system/files/226/tnc_qh_pars_1.xls]. You get $83.6 per year, after taxes at 40% you keep $50.2. Let's say you put them in a box because you are too lazy to reinvest them. You will get then the $1000 back for a total of $1502.

$1000 in January 1990 are $1325 in January 2000.

$1502 are more than $1325. (And that's with high taxes and without reinvestment.)

--

For 2000-2010 (6.88%) you have $1000 + 10 $68.8 (100%-40%) = $1413.

$1000 in January 2000 are $1284 in January 2010.

$1413 are more than $1284. (And that's with high taxes and without reinvestment.)

--

For 2010-2020 (3.87%) you have $1000 + 10 $38.7 (100%-40%) = $1232.

$1000 in January 2010 are $1190 in January 2020.

$1232 are more than $1190. (And that's with high taxes and without reinvestment.)

--

It seems that you agree that over the three decades being discussed bonds did better than inflation (even after taxes) so I'm not sure why do you think I messed something up or what were you trying to explain to me.

> You still haven't broken even in purchasing power from the previous year

You're ignoring that the bond has appreciated from the previous year keeping purchasing power intact.

[kgwgk]

> The annualized returns of bond ETFs cannot be relied upon because

The annualized returns are calculated from the prices you pay when you buy and the price you get when you sell. Whatever you think they do seems irrelevant. The fact is that you put $100 in 2002 and you get $250 in 2020 (if you reinvest the money they give you every month - if you spend it you will have only $140 left but that doesn't seem the right way to calculate things).

> also you don't get coupon payments on ETFs.

You get distributions. You know that, right?

> Take a look for yourself, the TLT fund was ~99% 1.8 10YR treasuries

That would be remarkable for an ETF that "seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years." Where do you suggest that I look?

The price of the TLT share has dropped more than 50% from July 2020 to October 2023. Imagine if they had not been manipulating the price! (In total returns terms it's slightly better but not that much: a 48% drawdown.)