Fed Going Nuclear - Will the PP get radiation poisoning?

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ahhrunforthehills
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Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 1:46 pm

I hate to be doom & gloomish, but...

I know many of you (or at least some of you) have read Dalio's Principles for Navigating Big Debt Crises (for those that haven't, it is free on Bridgewater's website). Anyway, with every fed announcement I keep thinking about the final stage in the long-term debt cycle that he calls Monetary Policy 3 which includes helicopter money, increased debt financing, etc.

According to his theory, we hit a once every 80-100 year deflationary depression that will take a decade to come out of (i.e. "lost decade").

So here we are, the government is getting close to raining money, the Fed is buying Treasuries and mortgage-backed securities (MBS) to the tune of $125 billion PER DAY. It sounds like they are soaking up everything toxic in the investing world on their balance sheet. "Hey pension funds, wanna use some of those dangerous securitized subprime car loans that were about to go belly-up as collateral on a risk-free loan?!" "Anybody got some crappy securitized school loans they wanna hock in our pawn shop?!!?" $hit is crazy.

Anyways, things are obviously unprecedented.

Meanwhile, the US is going to print into infinity. It's citizens will likely feel much less hardship at the expense of the rest of the world (the benefits of diluting a strong US Dollar that the world needs to function).

However, I can't imagine how this plays out well for the long-term.

I think it is very reasonable to assume that China (and some other countries) will recover much quicker from the Coronavirus and be able to reap rewards in multiple ways. Meanwhile, the spike in animosity toward's the US's deficit spending would have to increase.

If Dalio's interpretation of history is correct, it certainly sounds like the US is headed towards a lost decade. One thing that DOESN'T seem to have ever happened throughout history is a country experiencing a lost decade (due to the end of a long-term debt cycle) while SIMULTANEOUSLY losing world reserve currency status over that decade.

IMHO, Americans are in no way prepared to live in a world where they are no longer special by birthright. A country that can no longer be financed by crazy deficit spending is vastly different then the world we know. Not to mention that higher taxes can be expected.

It makes me wonder if the PP could hold up to a situation where the US is steadily diluted out of being the world reserve currency while the long-term debt cycle comes to an end. If someone was in vested in a PP, it is easy to see gold being constantly rebalanced for increasingly devalued assets (making you less wealthy in real-terms overall).

And what will it mean for the PP when the difference between real inflation and "official" inflation increases? What is the average return of the PP? 8.5%? What's real inflation been (not counting accounting tricks like hedonics and geometric weighting), 7%+? Equities will keep going up, capital gains taxes will be paid, but you will be more poor overall.

Invest in a foreign market? Well, then you will get stuck paying an additional tax for the foreign currency appreciation. I hate to use the analogy, but it really does seem like reorganizing deck chairs on the titanic.

It seems like the only real option is to prepare another boat and find another continent to live on :o Even though I say that "tongue-in-cheek", I honestly am having a hard time seeing how else to dodge what seems like the inevitable bullet.

Thoughts?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Tue Mar 24, 2020 2:25 pm

A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here. It works in your favor. We have been getting a "hidden tax" the last few years for holding foreign assets, as our currency has appreciated vs the currency the assets are in. Second, as Dalio also says in that book, it is *impossible* for a developed country with all of its debt denominated in its local currency to go into a hyperinflation. So, if the Fed does overdo it (at this point we are in a deflation, so what they are doing is only trying to bring us back to homeostasis, not generate inflation) what happens? Using Dalio's model once again, inflation increases and growth may or may not follow suit. So let's look at each of those potential scenarios.

Inflation increases, growth increases: Stocks and gold do well. Cash remains inline with inflation. Bonds take a beating.

Inflation increases, growth decreases (or stagnates): Well this was the exact scenario in the 70's. The PP did well enough in the 70s. Gold would do very well. Cash remains in line with inflation. Stocks and bonds take a beating.

Either way, you're good. Nothing to worry about. This is just another day in the office for the PP.

Also, losing world reserve currency status, while slightly painful in the near term, would be a blessing long term. Most of the reason why we keep having these liquidity squeezes every couple years since 2008 stem from our global reserve/trade currency status.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by sophie » Tue Mar 24, 2020 2:46 pm

Gold is the magic ingredient here. The answer is that Boglehead stock/bond portfolios, regardless of how they are sliced and diced, will get radiation poisoning. The PP or any variants that hold at least a 20% stake in gold will barely notice any problems. Lower gold stakes (e.g. the Desert Portfolio) will perform somewhere in between.

I've seen a few articles now predicting that we are in for a 1970s stagflation. That might be true. Or it might not. Either way, we will be fine! And as always, you have to ask this question: If you aren't in the PP, what will you invest in, and would that more conventional portfolio do better?
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I Shrugged
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by I Shrugged » Tue Mar 24, 2020 3:21 pm

I agree with Sophie.

The longer I go with the PP the harder it is for me to come up with better alternatives. I was using a half assed PP prior to 09, so this is the second big test for me personally. I’m willing to ride it like Slim Pickens riding the bomb in Doctor Strangelove. Yee Hawww!

I’m still open to the debate though.
ahhrunforthehills
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 3:30 pm

pmward wrote:
Tue Mar 24, 2020 2:25 pm
A couple things. First, if you invest in a foreign asset, and their currency appreciates, your asset appreciates by the currency spread. There is no "hidden tax" here.
The underlying foreign asset may appreciate in price by the currency spread, but not in your actual value, no?

Let's say that the value of Garbage Pale Kids Cards are stable. The price would go up over time due to targeting inflation.

2025: Value of my Garbage Pale Kids collection = $2500 USD, $2600 CAD
2026: Value of my Garbage Pale Kids collection = $3000 USD, $2700 CAD
2027: Value of my Garbage Pale Kids collection = $3500 USD, $2800 CAD

You can see that the value of the USD and CAD has gotten diluted compared to the value of Garbage Pale Kids Cards. However, CAD was diluted less because their currency appreciated in value again the USD.

If I bought it in 2025 and sold it in 2027 in America, I would pay tax on the $1,000 gain. If I bought it in Canada and sold it in Canada I would only pay on a $200 gain. But because I am an american, I owe additional tax on the currency side of the transaction since the currency fluctuation between 1:1.04 and 1:1.25

In other words, in 2025, I would have converted my USD to CAD to purchase the cards paying $2600 CAD. Then sold them 2 years later for a $200 CAD gain. But I still need to convert those $2800 CAD back to USD. I would pay the tax on the appreciation of the CAD to the USD.

Meanwhile, if I was simply a Canadian, I would have just paid tax on the $200 gain.

Now replace those cards with an ounce of gold.

Am I missing something here?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Maddy » Tue Mar 24, 2020 3:32 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 1:46 pm
the Fed is buying Treasuries and mortgage-backed securities (MBS) to the tune of $125 billion PER DAY. It sounds like they are soaking up everything toxic in the investing world on their balance sheet. "Hey pension funds, wanna use some of those dangerous securitized subprime car loans that were about to go belly-up as collateral on a risk-free loan?!" "Anybody got some crappy securitized school loans they wanna hock in our pawn shop?!!?" $hit is crazy.
Just as a thought exercise (and keeping in mind that I'm a real newbie when it comes to things economic), what would happen if the Fed were loaded up with garbage and then shot dead?
Last edited by Maddy on Tue Mar 24, 2020 3:47 pm, edited 1 time in total.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by dualstow » Tue Mar 24, 2020 3:38 pm

I Shrugged wrote:
Tue Mar 24, 2020 3:21 pm
..
I’m willing to ride it like Slim Pickens riding the bomb in Doctor Strangelove. Yee Hawww!
..
:D I think things will turn out better for you and for the pp in general than they did for that guy.
loot "goods taken from an enemy, etc.," 1839, Anglo-Indian, from Hindi lut, from Sanskrit loptram, lotram "booty, stolen property,"fm. PIE root *reup- "to snatch"
curfew - early 14c., curfeu, "evening signal, ringing of a bell at a fixed hour" as a signal to extinguish fires and lights, ... from Old French cuevrefeu, literally "cover fire"
ahhrunforthehills
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by ahhrunforthehills » Tue Mar 24, 2020 3:43 pm

Maddy wrote:
Tue Mar 24, 2020 3:32 pm
ahhrunforthehills wrote:
Tue Mar 24, 2020 1:46 pm
the Fed is buying Treasuries and mortgage-backed securities (MBS) to the tune of $125 billion PER DAY. It sounds like they are soaking up everything toxic in the investing world on their balance sheet. "Hey pension funds, wanna use some of those dangerous securitized subprime car loans that were about to go belly-up as collateral on a risk-free loan?!" "Anybody got some crappy securitized school loans they wanna hock in our pawn shop?!!?" $hit is crazy.
Just as a thought exercise (and keeping in mind that I'm a real newbie when it comes to things economic), what would happen if the Fed--which I understand to be a private entity owned entirely by banks) were loaded up with garbage and then shot dead?
Ironically, it is my understanding that the Fed draws its operating income primarily from the interest it receives on government securities and Treasuries that it purchases through open-market operations (instead of from Congress so it can remain independent). I guess they will need a GoFundMe page soon?

But it is my understanding that the Fed needs to settle up at the end of the year with the treasury department. All gains/losses get transferred over to Treasury. I assume others here can confirm?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Maddy » Tue Mar 24, 2020 3:49 pm

ahhrunforthehills wrote:
Tue Mar 24, 2020 3:43 pm
But it is my understanding that the Fed needs to settle up at the end of the year with the treasury department. All gains/losses get transferred over to Treasury. I assume others here can confirm?
And if the Treasury Department, at the time of settling up, were to simply say "Not this time. . ." Then what?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Hal » Tue Mar 24, 2020 4:19 pm

dualstow wrote:
Tue Mar 24, 2020 3:38 pm
I Shrugged wrote:
Tue Mar 24, 2020 3:21 pm
..
I’m willing to ride it like Slim Pickens riding the bomb in Doctor Strangelove. Yee Hawww!
..
:D I think things will turn out better for you and for the pp in general than they did for that guy.
+1

https://www.youtube.com/watch?v=snTaSJk0n_Y
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by jalanlong » Tue Mar 24, 2020 4:27 pm

I have been contemplating this very thing. The Fed is now buying corp bond ETFs to keep that market afloat. I assume at some point they could elect to purchase stocks to place a floor under that market as well. That is when I start to get worried. It is like going to a casino and they tell you up front that the dice are weighted so as to never give you a bad outcome. And if things go bad they will just give you money to cover your losses. How long can that last?

But mostly I feel an uneasiness having my savings depending on a combination of public perception (either euphoria or panic) and market manipulation. As for what I could do instead, my only answer would be what my grandparents (and their parents) did which seemed to work out well for them. Keep my funds in the highest yield FDIC bank instruments I can find. Stay away from all debt. Use my cash to secure better terms on large purchases and buy in bulk for smaller purchases. Use cash back cards. In essence, try to maximize the use and return on my money wherever possible, putting the control bank in my hands instead of gambling my savings on events I cannot control.

Those are my late night thoughts. I haven't pulled the trigger yet on them.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by CT-Scott » Tue Mar 24, 2020 4:33 pm

jalanlong wrote:
Tue Mar 24, 2020 4:27 pm
As for what I could do instead, ...
Probably worth a thread of its own (like my 401k loan thread), but some believe (and it makes sense to me) that the Federal Reserve has basically locked itself in to keeping rates really, really low for a long time (feel free to disagree). If so, and you own a home, perhaps it could be worth it to refinance to a new 30-year loan, or even an ARM to lower your mortgage. Or similarly, get more cash out via a home equity loan.
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