seajay wrote: ↑
Sat Dec 04, 2021 3:44 am
tomfoolery wrote: ↑
Fri Jun 04, 2021 4:46 pm
Seeing some interesting posts scattered about hinting at this, as well as YouTube videos about macroeconomics in general, that are leading me to question whether the PP only works in times of declining interest rates.
We've experienced 40 years of declining interest rates, and this started only shortly after gold was legalized for private ownership. This leads me to conclude that it's difficult to backtest the PP to times when we didn't have perpetual declining interest rates.
Recently, gold appears to be moving in tandem with LTTs. As interest rates rise, gold drops. The theory I've heard is as interest rates rise, the dollar gets stronger which then by comparison makes gold drop relative to a strengthening dollar.
Stock Market tends to move in tandem with LTTs. As interest rates rise, the stock market is negatively impacted because corporations have to borrow at higher rates.
So we seem to be in an environment where assets are correlated with interest rates in the same direction. Interest rates rise, stocks, bonds and gold all move down together.
Further, real inflation is somewhere between 5% and 20% depending on the basket of goods you're buying. If you owned a home before 2020, and are on Medicare, then your inflation is likely in the 5% range. If you are a renter who is paying for insurance, either through your employer (who is artificially suppressing your wages to pay your insurance), or paying insurance out of pocket, then your inflation rate is closer to 20%.
So we have a situation where LTTs and cash are yielding somewhere between negative 3% and negative 18% with respect to what you can do with your money.
If we have an environment over the next 10 to 20 years where inflation remains at 5%+, as interest rates slowly creep up, but still yield negative real returns, I don't see how the PP can survive. Although the next question is "compared to what?" and perhaps no portfolio can survive that environment.
Although it seems like an equity-weighted portfolio in commodity producers might do alright.
LTT's could lose a lot less than many believe, they reflect long term inflation rate expectations such that even a spike in inflation to 6% might still see LTT's priced to perhaps 3%.
The PP embraces long term trends whilst yielding short term low negative side volatility. Gold back in the early 1980's was today's LTT's, high/over-priced. The two options were to try and correctly time exit/re-entry, or to time-average and time-averaging worked out very well albeit a longer term factor. 50/50 stock/gold for instance would have seen around 10 times more ounces of gold having been accumulated by taking some of great stock gains across the 1980's/90's.
Backtest a PP with silver instead of gold and the deeper historic results indicate low portfolio value volatility and modest real gains - preservation of wealth in both gross nominal and real terms. The primary risk factors are taxation and magnitude of real gains provided.
There are three sources of gains/rewards, price appreciation, income (interest/dividends) and volatility trading. Forward time from present valuations/circumstances and perhaps volatility trading is the potentially more likely greatest of the three and the PP structure is well positioned to exploit that. The nature of volatility is that one asset might drop 25%, subsequently gain 33%, compound to 0%; When however you can capture the average rather than the compounded, then that has a +4% positive bias.
Some nominal stats using portfoliovisualizer 1978 to 2021 (part year to end of November 2021) ... and the average of the yearly best asset out of stock, LTT, STT, gold = 25%, average of the remainder three assets = 3.5%. Stocks were the years best asset in 50% of years, STT 4% of years, LTT 10% of years, gold 8% of years. If you had a portfolio where every year one asset gained +25% whilst another three assets each averaged 3.5% then that yields a near 9% portfolio average reward. Those stats will vary considerably depending upon what market/time-period you measure across but the fundamental characteristics persists. Consider 1978 to 1987 ten year for instance and the average of the best = 39%, average of the other three 5.6%, stocks were the best in 20% of years, STT 10%, LTT 30%, gold 40% of years. Somewhat like being the owner of a casino rather than a punter in the casino. Sell that casino and use the proceeds to go and punt in someone else's casino if you like, you may however live to regret that.
Good post. It reminds me of Harry Browne discussing how for a given economic environment the gain of the favored asset can far exceed the loss of the disfavored asset(s) so the overall portfolio steadily gains over time.
However, I was trying to follow your #s on PV and couldn't match some. For the 1978 to 1987 ten year period, I get the same average of the best = 39%. Also, percentage of years best for stocks 20% and STT 10% check out. But I'm seeing the other two assets swapped with LTT 40%, gold 30%.
For the full 1978 to November 2021 period, should not the percentage of years best add to 100% rather than 50+4+10+8 = 72? Again the yearly best at 25% checks out. But I'm getting the following percentage of years best for the full time frame: stock 48%, LTT 18%, STT 11%, gold 23%.
Example, for the 10 year period these are the #s I pulled from PV:
Year Stock LTT STT Gold Winner
1978 8.45% -1.55% 3.35% 37.01% Gold
1979 24.25% -2.10% 8.08% 126.55% Gold
1980 33.15% -4.99% 8.81% 15.19% Stock
1981 -4.15% 0.65% 14.26% -32.60% STT
1982 20.50% 47.10% 22.12% 14.94% LTT
1983 22.66% -1.29% 8.00% -16.31% Stock
1984 2.19% 16.24% 14.01% -19.38% LTT
1985 31.27% 36.90% 13.83% 6.00% LTT
1986 14.57% 30.87% 10.35% 18.96% LTT
1987 2.61% -2.92% 4.78% 24.53% Gold