The Permanent Portfolio May Be About To Break

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murphy_p_t
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Re: The Permanent Portfolio May Be About To Break

Post by murphy_p_t » Fri Mar 06, 2020 10:49 pm

I am also giving a little more thought to the portfolio recently. allow me to offer a devil's advocate perspective on your post.

If in fact the bonds are not going to react to the upside sufficiently as rates fall, it seems that you would require a greater percentage of US Treasury bonds, not fewer, to maintain the risk profile of the pp under a more normal interest rate environment. And roll the bonds over more frequently to stay close to the 30-year maturity.

I'm not sure that 1% is anything other than an arbitrary figure. For example, German 30-year bunds have already been trading at negative interest rates.

TLT, over the past 12 months, has returned over 40%. Not too shabby.

Your idea about trading in and out of the bond sure sounds a lot like market timing. I know my experience is less than favorable with timing.
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Re: The Permanent Portfolio May Be About To Break

Post by murphy_p_t » Sat Mar 07, 2020 2:19 pm

I suspect QE infinity is correct. I have heard at least one financial commentator predict the same. It makes perfect sense, considering our form of government. Politicians prefer to keep their jobs.

I hope others on the forum will weigh in.
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Re: The Permanent Portfolio May Be About To Break

Post by pmward » Sat Mar 07, 2020 2:25 pm

Might I introduce you to Tyler's wonderful article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Combine that with the fact that gold is highly correlated to negative real interest rates, and the fact that lower risk free rates correlate to higher stock multiples, and I don't think you have anything to worry about at all. This could actually be one of the BEST times to hold the PP.
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Re: The Permanent Portfolio May Be About To Break

Post by LittleDinghy » Sat Mar 07, 2020 5:39 pm

pmward wrote:
Sat Mar 07, 2020 2:25 pm
Might I introduce you to Tyler's wonderful article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Combine that with the fact that gold is highly correlated to negative real interest rates, and the fact that lower risk free rates correlate to higher stock multiples, and I don't think you have anything to worry about at all. This could actually be one of the BEST times to hold the PP.
Thank you pmward for linking Tyler's article, and thank you Tyler for writing it! About 10% of my Golden Butterfly cash allocation to Tbills matured this past week (in my Schwab rollover account in picture below). I then held my nose and bought a new tranch of Tbills at 0.3% interest (maturing late Jan 2021). Tyler, your reminder from your article "Portfolios like the Golden Butterfly use a “barbell” approach of two very different bond maturities, in part, to capture the declining rate upside of long term bonds with the rising rate safety of short term bonds" combined with pmward's statement "This could actually be one of the BEST times to hold the PP" give me some assurance that maybe I did the right thing. I really hope my GB is not "about to break" (the title of this thread) because my wife and I will be really relying on it pretty soon. Here's my asset allocation as of the end of Feb (any advice much appreciated!):
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Re: The Permanent Portfolio May Be About To Break

Post by craigr » Sun Mar 08, 2020 9:30 pm

pmward wrote:
Sat Mar 07, 2020 2:25 pm
Might I introduce you to Tyler's wonderful article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Combine that with the fact that gold is highly correlated to negative real interest rates, and the fact that lower risk free rates correlate to higher stock multiples, and I don't think you have anything to worry about at all. This could actually be one of the BEST times to hold the PP.
Bond convexity is a topic that eludes even professional financial advisors. A lot of people simply don't understand how powerful falling interest rates on non-callable long bonds can be.

I think Tex had a great way to explain it. He said something to the effect that short-term bond interest rates were like playing tennis. But long term bond interest rates were like playing ping pong. The movements in LT bonds is very fast and powerful and shouldn't be underestimated. Once I understood how it worked, it made total sense why the bond barbell (cash and LT bonds) in the Permanent Portfolio was chosen and I became comfortable holding them.

It also explains why you shouldn't replace LT bonds with callable bonds like munis or mortgages. You don't want the issuer being able to take the bonds away from you at the exact moment you are capturing the gains from falling interest rates. This is another thing I saw with people that were recommending portfolios with munis and mortgages. They didn't understand convexity either and what it would mean at the extremes in a falling interest rate environment like we have today.
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Re: The Permanent Portfolio May Be About To Break

Post by dualstow » Sun Mar 08, 2020 9:38 pm

viewtopic.php?f=1&t=8131&p=140483&hilit ... 9C#p140483
MediumTex wrote:
Tue Feb 02, 2016 5:40 pm
...

In terms of bond pricing, this is known as yield curve "convexity." 

If you use zeroes, all of this same stuff happens, it just happens with more volatility in the value of the underlying bond.  Go compare a chart of TLT and EDV and you will see what I am talking about.
...
I always think of a very low interest environment in the bond market as sort of like a game of tennis turning into a game of ping pong.  Everything gets faster and tighter the smaller the court becomes.
RIP Marcello Gandini
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Re: The Permanent Portfolio May Be About To Break

Post by craigr » Sun Mar 08, 2020 9:49 pm

dualstow wrote:
Sun Mar 08, 2020 9:38 pm
viewtopic.php?f=1&t=8131&p=140483&hilit ... 9C#p140483
MediumTex wrote:
Tue Feb 02, 2016 5:40 pm
...

In terms of bond pricing, this is known as yield curve "convexity." 

If you use zeroes, all of this same stuff happens, it just happens with more volatility in the value of the underlying bond.  Go compare a chart of TLT and EDV and you will see what I am talking about.
...
I always think of a very low interest environment in the bond market as sort of like a game of tennis turning into a game of ping pong.  Everything gets faster and tighter the smaller the court becomes.
Yep that's it. That is a great way to explain the concept to people. Falling interest rates leverage the gains greatly for LT bonds, as long as they're not callable.
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Re: The Permanent Portfolio May Be About To Break

Post by craigr » Sun Mar 08, 2020 9:53 pm

tomfoolery wrote:
Sun Mar 08, 2020 9:50 pm

Hi Craig,

Welcome back! Do you have any new thoughts to your 4 year old statement regarding selling long term treasuries at 1% yield? Have you changed your mind since?
I'm likely to just rebalance according to plan. I don't have any better options or ideas right now. Each person is different and I can't offer specific advice due to varying circumstances. Ask me again when they are 0%. ;)
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Re: The Permanent Portfolio May Be About To Break

Post by craigr » Sun Mar 08, 2020 10:06 pm

tomfoolery wrote:
Sun Mar 08, 2020 9:58 pm
craigr wrote:
Sun Mar 08, 2020 9:53 pm
tomfoolery wrote:
Sun Mar 08, 2020 9:50 pm

Hi Craig,

Welcome back! Do you have any new thoughts to your 4 year old statement regarding selling long term treasuries at 1% yield? Have you changed your mind since?
I'm likely to just rebalance according to plan. I don't have any better options or ideas right now. Each person is different and I can't offer specific advice due to varying circumstances. Ask me again when they are 0%. ;)
Futures are showing the yield has broken 1% in overnight trading. Let's schedule us for a chat on Thursday this week when they push through zero ;)
If they hit 0% we'll all be too busy rebalancing back into stocks and cash. That will be a massive haul.
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Re: The Permanent Portfolio May Be About To Break

Post by pmward » Mon Mar 09, 2020 8:57 am

craigr wrote:
Sun Mar 08, 2020 10:06 pm
If they hit 0% we'll all be too busy rebalancing back into stocks and cash. That will be a massive haul.
Truth!
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Re: The Permanent Portfolio May Be About To Break

Post by I Shrugged » Mon Mar 09, 2020 10:13 am

I'm in a box. I don't yet have 25% of LTT's, due to the outperformance of stocks in prior years, and my wide rebalance bands. So I'm sitting tight with the yield under 1%. But it's unsettling. I'd like to entertain more speculation about how this affects the PP.

It's probably fair to say that the "smart money" worldwide thinks US LTTs are the place to be right now. If so, is that encouraging? ???
I don't particularly like riding a wave of high velocity smart money. Then again, HB would say that's exactly what has to happen with one or more components during crazy times.
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Re: The Permanent Portfolio May Be About To Break

Post by pmward » Mon Mar 09, 2020 10:52 am

I Shrugged wrote:
Mon Mar 09, 2020 10:13 am
It's probably fair to say that the "smart money" worldwide thinks US LTTs are the place to be right now. If so, is that encouraging? ???
I don't particularly like riding a wave of high velocity smart money. Then again, HB would say that's exactly what has to happen with one or more components during crazy times.
You've been "riding a wave of high velocity smart money" in stocks for 12 years now. What's the difference? There will always be something being bid up, and you'll always own it. Isn't it funny how when stocks are going up and hitting all-time highs nobody questions anything. But the minute bonds hit all-time highs, we all start to question their very worth as an investment altogether (I'm guilty of questioning a bit myself in recent weeks). When bonds are down, we feel ok, but when they are up we feel panicked. Doesn't this seem backwards when we really step back and look at it? We will all likely do the same thing when gold finally hits all-time highs, whenever that inevitable day hits. We love stocks making us money, but we hate bonds and gold making us money. Why do we all (myself included) have this almost innate double-standard?
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Re: The Permanent Portfolio May Be About To Break

Post by Cortopassi » Mon Mar 09, 2020 11:43 am

pmward wrote:
Mon Mar 09, 2020 10:52 am
I Shrugged wrote:
Mon Mar 09, 2020 10:13 am
It's probably fair to say that the "smart money" worldwide thinks US LTTs are the place to be right now. If so, is that encouraging? ???
I don't particularly like riding a wave of high velocity smart money. Then again, HB would say that's exactly what has to happen with one or more components during crazy times.
You've been "riding a wave of high velocity smart money" in stocks for 12 years now. What's the difference? There will always be something being bid up, and you'll always own it. Isn't it funny how when stocks are going up and hitting all-time highs nobody questions anything. But the minute bonds hit all-time highs, we all start to question their very worth as an investment altogether (I'm guilty of questioning a bit myself in recent weeks). When bonds are down, we feel ok, but when they are up we feel panicked. Doesn't this seem backwards when we really step back and look at it? We will all likely do the same thing when gold finally hits all-time highs, whenever that inevitable day hits. We love stocks making us money, but we hate bonds and gold making us money. Why do we all (myself included) have this almost innate double-standard?
In order, the pp parts that stress me out the most:

--Gold, when it goes down.
--Stocks, when they go up
--Bonds and cash, I never even give a second thought

I know, strange.
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Re: The Permanent Portfolio May Be About To Break

Post by Kbg » Mon Mar 09, 2020 11:46 am

Cortopassi wrote:
Mon Mar 09, 2020 11:43 am
In order, the pp parts that stress me out the most:

--Gold, when it goes down.
--Stocks, when they go up
--Bonds and cash, I never even give a second thought

I know, strange.
I believe long bonds are going to be the most "interesting" part of the portfolio going forward, by a long shot.
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Re: The Permanent Portfolio May Be About To Break

Post by pmward » Mon Mar 09, 2020 12:10 pm

Kbg wrote:
Mon Mar 09, 2020 11:46 am
I believe long bonds are going to be the most "interesting" part of the portfolio going forward, by a long shot.
+1
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Re: The Permanent Portfolio May Be About To Break

Post by Tortoise » Mon Mar 09, 2020 12:41 pm

pmward wrote:
Mon Mar 09, 2020 12:10 pm
Kbg wrote:
Mon Mar 09, 2020 11:46 am
I believe long bonds are going to be the most "interesting" part of the portfolio going forward, by a long shot.
+1
Long bonds have already been the most "interesting" part of the portfolio for the past 10 years that I've been a PP investor.

They always seem to pop up out of nowhere and carry the portfolio when nobody expects them to. Each time, I think it's the last, yet it keeps happening.
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Re: The Permanent Portfolio May Be About To Break

Post by johntaylor » Mon Mar 09, 2020 7:38 pm

Very pleased to meet you Craig. Two years into german PP now and your book is always near me.
craigr wrote:
Sun Mar 08, 2020 9:53 pm
I'm likely to just rebalance according to plan. I don't have any better options or ideas right now. Each person is different and I can't offer specific advice due to varying circumstances. Ask me again when they are 0%. ;)
I can tell you from negative yielding Germany everything still holding strong ... sofar. But unlike you PP is keeping me up at night right now :(
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Re: The Permanent Portfolio May Be About To Break

Post by pmward » Mon Mar 09, 2020 8:22 pm

johntaylor wrote:
Mon Mar 09, 2020 7:38 pm
Very pleased to meet you Craig. Two years into german PP now and your book is always near me.
craigr wrote:
Sun Mar 08, 2020 9:53 pm
I'm likely to just rebalance according to plan. I don't have any better options or ideas right now. Each person is different and I can't offer specific advice due to varying circumstances. Ask me again when they are 0%. ;)
I can tell you from negative yielding Germany everything still holding strong ... sofar. But unlike you PP is keeping me up at night right now :(
Let me ask you this, is there a portfolio you would sleep better with? Is the the bonds specifically that keep you up at night? Or is it the negative interest rates in general, and other economic uncertainties that keep you up?
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Re: The Permanent Portfolio May Be About To Break

Post by johntaylor » Tue Mar 10, 2020 3:20 am

pmward wrote:
Mon Mar 09, 2020 8:22 pm
johntaylor wrote:
Mon Mar 09, 2020 7:38 pm
Very pleased to meet you Craig. Two years into german PP now and your book is always near me.
craigr wrote:
Sun Mar 08, 2020 9:53 pm
I'm likely to just rebalance according to plan. I don't have any better options or ideas right now. Each person is different and I can't offer specific advice due to varying circumstances. Ask me again when they are 0%. ;)
I can tell you from negative yielding Germany everything still holding strong ... sofar. But unlike you PP is keeping me up at night right now :(
Let me ask you this, is there a portfolio you would sleep better with? Is the the bonds specifically that keep you up at night? Or is it the negative interest rates in general, and other economic uncertainties that keep you up?
I guess it is a combination of it. And: I am new to investing. Till two years ago I just had my savings in a savings account.
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Re: The Permanent Portfolio May Be About To Break

Post by KevinW » Tue Mar 10, 2020 2:03 pm

Just stick to the plan. Weeks like this are where the adage about "you should be able to read the newspaper without worry" comes into play.
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Re: The Permanent Portfolio May Be About To Break

Post by belgo » Wed Apr 08, 2020 5:13 am

I am one of the few EU PP investors as well. I started in 2016 when the Long Term German Bond (2046) was already trading below 1% yield. It has been fascinating to see how a totally unpredicted event such as Corona proved PP works. Equity markets crashed and all equity gains since 2016 have been wiped out. But as Bunds have gone up 36% (adding coupons) since Jan 2016 and Gold +55% with cash at close to 0%, the average return has been 5.5% or 4.3% after inflation. You cannot expect more from a conservative portfolio. What is nice is that EU PP is down only 1.25% since Jan 1st whereas all mixed portfolios have lost at least 10-15%. So even at negative bond yields there is juice left, is it unlimited? Maybe not. But in Europe we also have a 100 Year Austria Bond we could use. That one certainly has firepower currently at 0.99% yield. Its price movements are extreme. https://markets.businessinsider.com/bon ... 0000a1xml2
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Re: The Permanent Portfolio May Be About To Break

Post by jalanlong » Thu Apr 09, 2020 8:59 am

I read a comment from someone on Seeking Alpha that characterized current markets as:

Good news = good news
Bad news = FED intervention = good news.
Really bad news = massive FED intervention = good news.
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