I agree that the entire distribution needs to be considered. But the 3.3% figure was presented as an expected figure, not a risk adjusted one. Expected inflation should be based on what the market expects and the market is aware of historical trends in inflation.For the simplest test case, assuming current conditions is reasonable. However, when purchasing an annuity for a long-term nominal cash flow, historical trends should also be considered. Inflation assumptions 5 years ago were quite a bit different from today.One more note, this time regarding inflation. I'm clearly missing something, so feel free to direct me to what you have written previously, but I don't understand using 3.3% inflation as the baseline when, based on the TIPS spread, the market is projecting something in the range of 2-2.5%. If the market is mispricing TIPS that badly, then of course TIPS are going to be a great deal. (TIPS spread below)Code:
| Date | 5 YR | 7 YR | 10 YR | 20 YR | 30 YR ||-----------|-------|-------|-------|-------|--------|| 6/17/2024 | 2.11% | 2.14% | 2.18% | 2.37% | 2.20% |
A visual depiction of some reasonable time periods (data from Multpl.com):
Some summary statistics:
Note that once you get into the fiat-currency world, there's not a lot of difference in the reasonable range (<= average + 1 standard deviation). Anything less than the median is a pretty dangerous bet. I think McQ is using a different data source, but it looks like a reasonable match to this.
Statistics: Posted by GoWithTheCashFlow — Tue Jun 18, 2024 11:00 pm — Replies 135 — Views 8144