What would it take to cause you to lose faith in the PP?

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Maddy
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What would it take to cause you to lose faith in the PP?

Post by Maddy » Thu Feb 27, 2020 4:44 pm

Days like this literally make me vibrate with fear. The S&P 500 is down 5.18% as I write, and the 30-year bond is up only 0.59%. Gold is flat. I know you're not supposed to look at the PP on a daily basis, and I know the inverse correlations on which the PP is predicated are based on long-term movements rather than daily fluctuations, but holy smoke, this is painful. I can't help but think about the boatload of commentators who for the last several years have been warning that both stocks and bonds are in mega-bubble territory and that those two asset classes could come tumbling down in tandem.

Which brings me to my question: For those who do follow the charts on a daily basis, is there any economic condition or chart pattern that would make you begin to doubt the ongoing viability of the PP? Is there anybody that is pulling out and going to cash, even temporarily?
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Re: What would it take to cause you to lose faith in the PP?

Post by pmward » Thu Feb 27, 2020 5:31 pm

Everything is going to be fine. Seriously. Stocks may go down another 10%.... maybe even another 20% if things get really hairy. But they will rebound quickly. The Fed will do whatever it takes. I honestly would not be surprised to get an emergency 25-50bp cut in the next week or two. I also believe they will unsheathe QE the likes of which we have never seen if they have to. I also would not be surprised to see some emergency fiscal stimulus come down the tubes if it has to, because Trump is not going to let this virus ruin the economy for his re-election bid. Things will be fine. Gold and bonds do not pad every single day, but they have both been screaming higher since the outbreak first started in China. We got some of our defense pulled forward. The PP has worked exactly as it should in this situation. This is a time to check rebalancing bands to see if you might be able to lock in some gains in bonds/gold for stocks as when the stimulus does inevitably come stocks will scream higher and bonds and gold will likely pull back. I think this would be an incredibly poor time to go to cash. That's my .02 at least.
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Re: What would it take to cause you to lose faith in the PP?

Post by Cortopassi » Thu Feb 27, 2020 6:05 pm

pmward wrote:
Thu Feb 27, 2020 5:31 pm
Everything is going to be fine. Seriously. Stocks may go down another 10%.... maybe even another 20% if things get really hairy. But they will rebound quickly. The Fed will do whatever it takes. I honestly would not be surprised to get an emergency 25-50bp cut in the next week or two.
I think this is the big question. Cutting rates, in an environment where people and companies are ready to buy may help, but here? Now? Demand has dried up across the board. Products cannot be made, and therefore can't be sold. Travel has dropped like a rock.

I don't see how cutting rates or QE helps when all output and demand has dropped.
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Re: What would it take to cause you to lose faith in the PP?

Post by Cortopassi » Thu Feb 27, 2020 6:09 pm

Maddy wrote:
Thu Feb 27, 2020 4:44 pm

Which brings me to my question: For those who do follow the charts on a daily basis, is there any economic condition or chart pattern that would make you begin to doubt the ongoing viability of the PP? Is there anybody that is pulling out and going to cash, even temporarily?
Three days ago my portfolio was at the high for the year, up 5.97%. Agree that gold hasn't held up its end in the past couple days, but my portfolio is down a little over 3% (probably more once mutual funds are priced tonight). Comparatively, I feel great about where it is at. No thoughts about getting out, because I would have a 99% chance of doing it at the wrong time. I'll rebalance maybe once this shakes out some more and pick up some stock.
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Re: What would it take to cause you to lose faith in the PP?

Post by pmward » Thu Feb 27, 2020 6:12 pm

Cortopassi wrote:
Thu Feb 27, 2020 6:05 pm
pmward wrote:
Thu Feb 27, 2020 5:31 pm
Everything is going to be fine. Seriously. Stocks may go down another 10%.... maybe even another 20% if things get really hairy. But they will rebound quickly. The Fed will do whatever it takes. I honestly would not be surprised to get an emergency 25-50bp cut in the next week or two.
I think this is the big question. Cutting rates, in an environment where people and companies are ready to buy may help, but here? Now? Demand has dried up across the board. Products cannot be made, and therefore can't be sold. Travel has dropped like a rock.

I don't see how cutting rates or QE helps when all output and demand has dropped.
In an election year especially, it doesn't matter. They will literally do whatever it takes. The stock market will be back up at new highs by the election. Will the economy take a massive hit for the next 3-4 months? Potentially. But they will drop nuclear levels of stimulus if they have to. Both Trump and Powell's jobs are at stake.
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Re: What would it take to cause you to lose faith in the PP?

Post by Kriegsspiel » Thu Feb 27, 2020 6:27 pm

If the PP has negligible real returns for a couple years I'd be pretty concerned. All I really want from it are moderate real returns without wild swings downward. If the apocalypse is upon us, and everything is going to shit, I'll cut it some slack on the wild swing downward.
You there, Ephialtes. May you live forever.
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Re: What would it take to cause you to lose faith in the PP?

Post by blackomen » Thu Feb 27, 2020 6:51 pm

In late 2008, when the stock market was in freefall, it took a month before the LT bonds surged. And it makes sense: a lot of investors were quickly exitting stocks but needed some time to decide where to put that money next. Remember, the money coming out of stocks has to go somewhere eventually (including back into stocks if the economy looks alright) and the PP is designed to take advantage of this fact.
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Re: What would it take to cause you to lose faith in the PP?

Post by I Shrugged » Thu Feb 27, 2020 7:14 pm

I am happy with the pp right now. There’s no guarantee that every day is going to balance perfectly.
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Re: What would it take to cause you to lose faith in the PP?

Post by drumminj » Thu Feb 27, 2020 7:27 pm

I Shrugged wrote:
Thu Feb 27, 2020 7:14 pm
I am happy with the pp right now. There’s no guarantee that every day is going to balance perfectly.
And it gives me peace of mind. I look at all the red (MSFT down 7% today? Ouch!) and honestly it doesn't phase me. That's what's good about the PP. Even with all the carnage, I'm still up a good chunk of change on the year.
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Re: What would it take to cause you to lose faith in the PP?

Post by Hal » Thu Feb 27, 2020 10:49 pm

As a Non-US PP holder, significant inflation would cause me to lose faith.

In his radio show, HB said that if there was high inflation in the US, the volume of money moving into Gold would cause the price to rise to such an extent it would cover the losses.

However, in a small economy, such as Australia/New Zealand, in an inflationary event the funds moving into Gold would not boost the price to the extent it would cover the downside.
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Re: What would it take to cause you to lose faith in the PP?

Post by Kriegsspiel » Fri Feb 28, 2020 6:30 am

Hal wrote:
Thu Feb 27, 2020 10:49 pm
However, in a small economy, such as Australia/New Zealand, in an inflationary event the funds moving into Gold would not boost the price to the extent it would cover the downside.
Talk about this more, if you will. I've heard it fairly often through the years, but at face value it doesn't make sense. Gold would act as a store of value, and it's traded all over the world, so any inefficiencies should be arbitraged away. So if your currency is inflating, your gold would obviously be worth more in your currency. But the argument is that it wouldn't be enough to buoy the rest of the portfolio, in particular because it wouldn't be able to hold its value? Maybe it depends more on how productive a country is?

Is that how it's worked in the past, or is that a dogma that needs to be re-thought? I'd think that the PP would function similarly in every country, since gold is a stable, international currency/commodity. But I'm sure you have considered it more.
You there, Ephialtes. May you live forever.
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Re: What would it take to cause you to lose faith in the PP?

Post by sophie » Fri Feb 28, 2020 8:30 am

Maddy wrote:
Thu Feb 27, 2020 4:44 pm
Days like this literally make me vibrate with fear.
You should know by now what I'm about to say Maddy! No need to fear, at least not about your savings! They will be just fine. Tax loss harvest if you see the opportunity to do so, and if the market drops further check to see if you need to rebalance. Other than that...sit back and enjoy the ride.

The thing about gold and bonds is that they won't necessarily do their thing immediately. Gold WILL respond once it becomes clear how much of a correction we are in for, but it might not happen right away. It took a couple of months in 2008, as I recall. The speed of this plunge is faster than in 2008, and in fact is setting records. It's not surprising that gold and bond markets aren't quite able to keep up.
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Re: What would it take to cause you to lose faith in the PP?

Post by Maddy » Fri Feb 28, 2020 12:23 pm

Thanks, everyone, for the reassurance.
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Re: What would it take to cause you to lose faith in the PP?

Post by jhogue » Fri Feb 28, 2020 1:44 pm

Maddy,

I am not "going to cash." I am already in it to the tune of 25% of my portfolio. I hope you are too.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: What would it take to cause you to lose faith in the PP?

Post by Hal » Fri Feb 28, 2020 1:52 pm

Maddy wrote:
Fri Feb 28, 2020 12:23 pm
Thanks, everyone, for the reassurance.
Happy you feel confident again Maddy.
Always best to examine things before a large financial crisis so you can see it through with the least stress.

Now on to Kriegspiels query

<snip>
Talk about this more, if you will. I've heard it fairly often through the years, but at face value it doesn't make sense. Gold would act as a store of value, and it's traded all over the world, so any inefficiencies should be arbitraged away. So if your currency is inflating, your gold would obviously be worth more in your currency. But the argument is that it wouldn't be enough to buoy the rest of the portfolio, in particular because it wouldn't be able to hold its value? Maybe it depends more on how productive a country is?
<snip>

From HB himself on the radio show, an Indian caller enquired about the PP. He replied that it was useful for non-USA people and that if India's economy imploded they would still have 25% gold. Note that he did not say the gold would go up in value to cover the losses to the other asset classes as he did when discussing the US PP.

Another first hand experience is in the link below covering inflation in Romania

https://www.youtube.com/watch?v=2EZcB_F ... dex=5&t=0s

Holding cash didn't work
Bonds would have been destroyed
Shares may have increased in nominal terms but not in real terms (not mentioned in interview)
and Gold

So Gold would hold its real purchasing power (and even increased in nominal terms) but it did not increase in real purchasing power due to the 300% inflation in the Romanian currency. I use the terms loosely here, but there was not enough "wealth" in the Romanian economy to bid up the price of gold in real terms, in the USA "there is" enough wealth to bid up the gold price.

Have a look at the gold to oil ratio which is an indicator of golds real purchasing power over on Macrotrends and Belangp (YouTube)

Hope this answers your query - still very early down under.
Now off to get a cup of coffee and wake up.

Hal
Last edited by Hal on Fri Feb 28, 2020 2:12 pm, edited 1 time in total.
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Re: What would it take to cause you to lose faith in the PP?

Post by pmward » Fri Feb 28, 2020 1:54 pm

MangoMan wrote:
Fri Feb 28, 2020 1:14 pm
pmward wrote:
Thu Feb 27, 2020 5:31 pm
Everything is going to be fine...
because Trump is not going to let this virus ruin the economy for his re-election bid.
^I have been saying this on here for months, and am still convinced it is accurate. Although I think the Democrats will try their hardest to spin it.
Yeah, there was a reason why he capitulated on the trade war at the start of the year. He wants nothing to get in the way of the stock market this year. If he is re-elected, the trade war will be brought back to the front burner next year. If this virus were a year or two ago I wouldn't have as strong conviction that I do now that the mother of all stimulus would be unleashed without a moment's hesitation if it was needed. The Trump PUT is real right now. He hangs his hat on how well the stock market has done.
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Re: What would it take to cause you to lose faith in the PP?

Post by blackomen » Fri Feb 28, 2020 2:52 pm

If you guys are freaking out over the PP's declines, then imagine how much agony those with equity heavy portfolios are going thru now. Nearly everyone I know who invests or is saving for retirement has way more than 25% in equities, including my retired parents.
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Re: What would it take to cause you to lose faith in the PP?

Post by mathjak107 » Fri Feb 28, 2020 5:34 pm

But remember , those with much higher equity positions generally have way higher gains and a bigger balance as a cushion ,especially over an 11 year bull ... so you can’t compare dips apples to apples .

Many investors can fall an awful lot and still be a head of where they would be with no losses in fixed income instead of using equities.

It is like 100% equities in retirement has as high a success rate at 4% as 50/50 ..... the bigger up years without the weight of bonds and cash have much bigger gains ... the spending in down years is mitigated by the bigger up years .

You also have to consider the dollars invested ...I am looking at being down 100k as of tonight from the high yet I am only 25% equities and while I am down very little percentage wise , in dollars I am down more than many others with 2 to 3x the equities I do.

Dollars are dollars and what those dollars represent is the same no matter what your balance is .... no matter how big the portfolio that down represents about 5 years of 401k contributions at catch up so the point is lower allocations to equities can be just as painful to see as higher equity allocations would be on smaller portfolios...


Our brains tend to work in dollars not percentages when we associate a loss
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Re: What would it take to cause you to lose faith in the PP?

Post by dualstow » Fri Feb 28, 2020 7:02 pm

(mathjak) I am only 25% equities
I think about how much stock I’d need to sell in my vp to really be 25% in pp+pp (either pre- or post CoronaCrash) and wow- that would be a huge guaranteed tax bite for the sake of timing. Possibly ill timing.

I didn’t even sell large chunks of stock, like kriegs. Just some Coke and McDonald’s because I wanted to rebalance into VTSAX (Total U.S. Stock fund).
Last edited by dualstow on Fri Feb 28, 2020 10:06 pm, edited 1 time in total.
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Re: What would it take to cause you to lose faith in the PP?

Post by I Shrugged » Fri Feb 28, 2020 7:35 pm

As of today, my relatively unbalanced PP, stock-heavy, is down about 4% from its all time high a week or so ago. Not a big deal.

10 year IRR 6%
3 year 8%
1 year 14%

I think that's just fine.
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Re: What would it take to cause you to lose faith in the PP?

Post by mathjak107 » Sat Feb 29, 2020 3:25 am

dualstow wrote:
Fri Feb 28, 2020 7:02 pm
(mathjak) I am only 25% equities
I think about how much stock I’d need to sell in my vp to really be 25% in pp+pp (either pre- or post CoronaCrash) and wow- that would be a huge guaranteed tax bite for the sake of timing. Possibly ill timing.

I didn’t even sell large chunks of stock, like kriegs. Just some Coke and McDonald’s because I wanted to rebalance into VTSAX (Total U.S. Stock fund).
one thing i never do is let the tax tail wag the tax dog .

luckily over the months when i reduced from 50% to 25% most was in the retirement account . but whatever wasn't got sold anyway . the tax is now minuscule compared to what was preserved in dollars as well as what i will save rebuying back what i had next week .

once we fall victim to the down draft that window for reducing down closes . i had an amazing 2019 with 362k in gains and i was not going to leave the carrot on the stick waiting for it to start to evaporate so i bit the bullet and reduced ... any gains i missed by reducing would have evaporated at this stage so in retrospect it was a good move ...

i wasn't so sure when we were going up every day ...
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Re: What would it take to cause you to lose faith in the PP?

Post by dualstow » Sat Feb 29, 2020 6:34 am

That’s a good point, and I also don’t let the tax tail wag the rebalancing dog.
Above, I assume you meant to write the trading dog or the investment dog in general.
But still, I couldn’t make a drastic change in allocation like that based on a feeling.

I did *have* the feeling O0 because I hit a significant milestone earlier this month. The way the market was going, I’m sure most people did. And while I didn’t lose faith in the pp, I saw as everyone saw that all assets were climbing at the same time. As kriegs said, the everything bubble. I thought, would it be so bad to put everything into t-bills and just wait for a crash? I’m sure I’d miss the recovery doing that.
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Re: What would it take to cause you to lose faith in the PP?

Post by mathjak107 » Sun Mar 01, 2020 5:49 am

fridays plunging action in gold at a time stocks were plunging is a bit scary ....

one thing that has changed is that 90% of trading today is on autopilot and has no human intervention ... these positions are usually leveraged ...

the software usually takes on leverage when markets go up and sheds positions and leverage on the way down .

that breeds margin calls and more selling today and assets like gold seem to be the first to get sold to meet margin calls or buy plunging stocks .

so while it has been said even if equities fall 50% the most the pp would get hit is 12.50% and that would be offset by gains elsewhere .

well with the potential for assets like stocks and gold to fall together like they did , that really can make the pp a case of the emperors new clothes as it can get hit pretty hard . likely as hard as any balanced portfolio would .

in fact odds are the income model i use may fall less since the bond funds are quite docile compared to tlt and it holds no gold . so there is really just stocks and and a small high yield bond fund in the mix of funds to deal with . the other bond funds are ultra short term to intermediate term .

so in a mess like this , one may not be better than the other if multiple assets classes move against the pp
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Re: What would it take to cause you to lose faith in the PP?

Post by Hal » Sun Mar 01, 2020 8:50 am

mathjak107 wrote:
Sun Mar 01, 2020 5:49 am

in fact odds are the income model i use may fall less since the bond funds are quite docile compared to tlt and it holds no gold . so there is really just stocks and and a small high yield bond fund in the mix of funds to deal with . the other bond funds are ultra short term to intermediate term .

so in a mess like this , one may not be better than the other if multiple assets classes move against the pp
Hi Mathjak,

Your post brought to mind this chart from a few years back....
https://www.idiosyncraticwhisk.com/2014 ... short.html
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Re: What would it take to cause you to lose faith in the PP?

Post by mathjak107 » Sun Mar 01, 2020 9:54 am

i have a totally different view today of taking a mortgage when you have a choice of paying cash or paying off the mortgage then i did .
i used to think it was a no brainier to take a mortgage if i could make more on the money .. now i realize there is a risk premium i want for being leveraged as opposed to just investing .

it is a whole lot different then just investing because in effect we are leveraged . i don't know about others , but i want a substantial RISK PREMIUM to invest with what amounts to borrowed money .

if mortgage rates are 3-4% and a treasury bond with no risk is paying 2% i want a risk premium for investing with borrowed money that makes the risk of borrowing worth it . in down years i will not only have a portfolio down but in the early years of that mortgage you have thousands in interest adding to the damage .

i would never takea mortgage if i could pay cash if i was not going to be 100% equities .. i want enough of a risk premium over 6% in this case to make borrowing worth the risk and i would never do that to invest in a balanced fund ... i want the potential gains of 100% equities over the long term to borrow money to invest or it is not worth the added risk of leverage .

as kitces points out : https://www.kitces.com/blog/why-keeping ... -the-risk/
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