POLL: How did you overcome the fear of tracking error?

[Kbg]

I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.

One of my favorite investment quotes is one you see from the folks at thinknewfound.com..."Risk can not be destroyed, only transformed."

On the whole TIPS thing...as Tyler noted, you swap some actual interest received for some inflation protection.

Just a quick data point...in the last 5 year auctions the median interest rates (July) were as follows:

-.96% 5yr TIPS (negative not a dash)

.28% 5yr Notes

1.0% July CPI

30 year .2% vs. 1.32%...and yes, no typos. These are the median auction rates for 30 years TIPS/Bonds.

4-52 week bills....08% to .14%

The above are as they say the facts. Not sure where the cutoff line is but the math says LTTs are not super attractive. To each his own, but I think it is hard to blame someone if they go short term only. Not advocating it, but I wouldn't try to dissuade someone from doing it either.

Back to the TIPS thing...none of these interests rates are hardly enough to matter. But let's assume everything just does nothing...at the end of the year your principal is going up 1% for a net nominal of .04% on the 30 year TIPS and 1.32% on the nominal bonds. Let's say we get a very modest 2% CPI then it's 1.04, 3% and it's 2.04 for TIPs. Probably at 3% everyone (TIPS/nominal B) is looking at duration related losses as bonds reprice...however, this simple math exercise should illustrate Bridgewater's basic argument. With TIPs flat interest rates and no CPI increases or deflation are the only losing scenarios comparatively speaking. Every other scenario you will do better with TIPS.

I'm not arguing for or against their advice, just explaining with some simple math why they are arguing what they are.

[Xan]

Many are (quite reasonably) down on LTTs right now. Can anyone shed any light on why the yield is so low, if these things are so unpopular?

Isn't the market saying that the current price is fair? I mean, if it weren't, it would be something different, right?

[Kbg]

Many are (quite reasonably) down on LTTs right now. Can anyone shed any light on why the yield is so low, if these things are so unpopular?

Isn't the market saying that the current price is fair? I mean, if it weren't, it would be something different, right?

Xan,

The market is doing what markets do and the sum total of all knowledge (with a gigantic assist on the short end of the yield curve from the Fed) says these yields are fair. In this respect, it really doesn't matter what any of us individually think...that's the price we are going to get.

The argument for those making a case for whatever it is they are making a case for are saying the market is wrong. For those making the case against LTTs right now, the basic argument is the reward is in no way commensurate with the risk being taken.

Moving on to my personal opinion, to someone open minded, it is an argument I believe has some merit. Let's just do some simplified math, use 1.36% as the LTT interest rate and throw out 24.5 years as the duration of an LTT (24.5 is roughly the duration of TLT) and then freeze everything to keep the example straight forward.

Interest rates go up .5%, LTTs decline by 12.25% while +1% results in a 24.5% decrease. It now takes 9 and 18 years of interest respectively from those bonds to simply get back to even.

In reality it's not going to be that bad over time as these things smooth out as bonds are being replaced at higher interest rates...but at an individual bond level the above math is what is going to be the end result. There's no guess work, that's the result, period.

So logically to hold an LTT you need to believe one of a couple of things. A) Bonds i-rates could go lower (and hopefully there isn't some natural floor to negative interest rates or B) that 1.36% is an acceptable reward for the risks you are taking that "A" is wrong...which I spelled out in the example.

Given the above, some have decided that they will go super short in maturity and accept the .0X return because if interest rates go up shorter maturities either don't take a hit (super short term) or it's a greatly mitigated hit.

Now let's do the short term math...duration is say 1 year on a .08% bond. Irates go up 1% my EOY return is -.92% and next year I replace with a bond that is making 1.08%. It will take a little less than 1 year's interest to make up the .92% hit.

There you have it. What will happen with LTTs and what will happen with STTs in the case of a 1% rise in interest.

None of us know which is going to be the best choice. I'm completely with HB on assuming I don't know the future. None of us do. But, the beauty of bonds is you can run a couple of scenarios and know exactly what will happen at least in nominal terms and then pick your poison.

[Henryinroad]

I think the idea that people will eventually look elsewhere if yields get too low is a legit observation. But I'd argue that's exactly what gold is for. So by holding both bonds and gold you prepare yourself for all outcomes. The best portfolios don't fold in adversity -- they thrive in it.

I think TIPS are good inflation hedges by definition, although I also think they're overrated because the tradeoff is accepting even lower yields than on nominal bonds. And personally, I think the most underrated inflation hedge is good old TBills.

Hi Tyler, these days keep reading ur pages and comtemplating what is most optimal asset mix for low risk and good return, and I came across a strategy that is quite different and seems to be doing a really good job (so far), and would really appreciate it if you could share ur view on this different strategy.

1) What is this strategy about?
This is a ETF called SWAN:
https://amplifyetfs.com/swan.html
https://amplifyetfs.com/Data/Sites/6/me ... N_faqs.pdf

Its strategy is simple: 90% in government bond in different durations, 10% in in the money S&P 500 LEAP option.

They called this stock replacement: replace the risk of stock by government bond while capture (most, 70%) return of stock market by the use of LEAP option (built in leverage: small amount of option premium to get exposure of the stock market)

2) What seems good about it?
No frequent rebalancing:
" At each semi-annual reconstitution date, the fund will rebalance the LEAP allocation that is expiring and purchase
an allocation equal to 5% of the portfolio in the following year (for instance, June 2019 calls move to June 2020 calls). "

Laddered U.S. Treasuries constructed:
UNITED STATES TREAS BDS 2% 02/15/2050 18.14%
UNITED STATES TREAS NTS 1.5% 02/15/2030 16.32%
UNITED STATES TREAS NTS 0.5% 04/30/2027 16.21%
UNITED STATES TREAS NTS 0.375% 04/30/2025 16.12%
UNITED STATES TREAS NTS 0.25% 04/15/2023 16.05%

It seems the "bond" part is the most important part of this strategy, this is what concerns the investors most.

Because if "bond" tumbles a lot, the whole strategy will crumble. As heavy use of bond is designated to "replace and reduce" the risk of 100% stock. Only when the bond part can remain stable, the whole strategy can provide an exceptional risk-reward ratio.

So on your page about convexity, one of the main idea is short and intermediate term bonds are much less sensitive to interest rates at all levels than long term bonds.

My first question is, do you think this laddered structure will survive any huge changes in interest environment?

3)Recent performance:

Pls click here

Despite the fact its a new etf only launched in 2019,
it seems that it has been doing quite well so far.

Monthly drawdown: -19.43% vs -2.34%
Return: 20.85% vs 20.6%
Sharpe ratio: 0.96 vs 2.71
Sortino Ratio: 1.47 vs 7.53

WHY it can have the same return as SP500, when it is said to only capture 70% changes of SPY?
Part of the reasons can be attributed to the risk control built in the use of option.

In the event of huge stock market crash,
the option it holds turns to be "rubbish paper" at worst.
The maximum temporary loss would be 10% of their capital
(while that if huge crash happens, holding market index directly will hurn badly more than 10%).

And while the stock market recovers,
the option become valuable again,
capturing most of the market gain,
outperforming market index which, at the same time, still recovering the "previous huge loss".

In general, it seems that this strategy have really limited downside, while it gets hold of most upside potential stock market can provide. which explain the sharpe ratio (regretfully this is a new etf) looks really good.

My second question, what is your overall opinion /impression of this strategy?

Thank you very much for you insight in advance.

[Kbg]

This is well known strategy and has been around for a long time. Things very similar are the basic strategy for annuities. It works pretty well when markets are moving and will lose money when markets are flat.

It works way better when internet rates real and nominal are high. The bond component is very important.

[ppnewbie]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny

One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.

[buddtholomew]

None of the assets have a theoretical ceiling so expensive is subjective. I recall thinking SPY at 190 was expensive and today it closed at 347. Same applies to Gold at 1150 and TLT at 100. Today’s high is tomorrow’s low

[vnatale]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny

One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.

Not at all being sarcastic. Take my words literally. I started a topic asking the same question as you. At some point I find it and point you to it.

Vinny

[vnatale]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny

One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.

Here it is. I think I asked essentially the same question. Generated 9 pages of responses. It'd be worth your while to read them.

VInny

viewtopic.php?f=1&t=10129

[ppnewbie]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

It definitely does pose a dilemma to your excellent investment thesis.

Vinny

One thing I really like about this forum is that there is an abundance of very helpful people on the forum and an absence of rudeness and sarcasm. I am hoping this response from vnatale was not meant to be rude or sarcastic.

I simply wanted to provide my perspective to Henryinroad that SPY is possibly highly overvalued and that TLT is potentially dangerously overvalued as well, and GLD is also at near all time highs. Even cash may be overvalued. Also all of these asset classes are positively correlating, which is at the very least unusual and at worst a massive bubble.

I know Tyler has written a article about bond convexity in a negative interest rate environment. Personally, I don't think negative interest rates are possible in the US. An entire consumer and debt based economy reversing so that banks start paying people to take money and depositors start paying banks. The system will freeze unless the government forces people to hold money in the banking system.

https://www.youtube.com/watch?v=4u5Ns4bdTYE - George Gammon discusses this starting at minute 5.

One way I used my "excellent" investment thesis of buying something that is cheap recently is to rebalance a bit into Silver instead of gold. So far so good.

Here it is. I think I asked essentially the same question. Generated 9 pages of responses. It'd be worth your while to read them.

VInny

viewtopic.php?f=1&t=10129

Thanks Vinny! - Read the thread you pointed out. Also got some good perspective in the thread you pointed out about cash actually being the down and out cheap asset at the moment from jhogue.

[glennds]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.

[jhogue]

@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.

[PrimalToker]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.

People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.

[glennds]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.

People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.

Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.
With a strategy like the Permanent Portfolio, I'm not quite sure how the concept of expensive is relevant. The idea is to have 25% =/- exposure to all four asset classes all the time. Unless I'm missing something, performing an analysis and making a decision about what is and is not expensive is not part of the process.

On the other hand, if you think something has fundamentally changed about one or more of the assets, and as a result the premise underlying the PP is no longer sound, then it seems to me you would be searching for a new strategy entirely and at that point it's a whole new ball game.

[mukramesh]

Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash

[perfect_simulation]

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash

when all assets are going down, are they going down or is it cash going up?

[mukramesh]

It's all relative. We only care about the 3 major assets being correlated/uncorrelated (stocks, bonds, gold).

How can you measure their correlation to the value of cash when they are measured by cash?

[glennds]

It's all relative. We only care about the 3 major assets being correlated/uncorrelated (stocks, bonds, gold).

How can you measure their correlation to the value of cash when they are measured by cash?

If I'm understanding you correctly, you're talking as though cash is a fixed variable against which the other three assets move. In recent years, due mostly to zero or near zero interest rate policies, this may indeed have been the case for practical purposes. But in principle, the Permanent Portfolio is built on the idea that there are four economic stages each of which favor one asset (or possibly more). Cash is held for the possibility of recession.

There have been years when cash has been the high performer. Over the long term, we cannot predict or dismiss whether this will be the case again.

So I would say we care about all four asset classes. I do agree that cash is not a growth asset. And I think it is fair to call it a hedge asset and as such it fulfills an important function in a strategy that pursues defensive growth.
But this is just my understanding from HB's book. If I'm missing something, please fill me in.

[ppnewbie]

It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.

Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.

In the case of Silver it was based on the gold / silver ratio. In the case of stocks I used the GDP / Market Cap ratio and the CAPE ratio - in the case of gold just its historical price also I looked at the FRED chart of M2 money supply for gold. None of these are perfect but help me to try to determine their actual value.

[ppnewbie]

Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash

Great point about the rebalance to cash.

[ppnewbie]

@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.

Do I have to hold the EE bond for 20 years to get that rate? I need to better understand how the yield is calculated if the bonds are sold they mature.

[mukramesh]

If I'm understanding you correctly, you're talking as though cash is a fixed variable against which the other three assets move. In recent years, due mostly to zero or near zero interest rate policies, this may indeed have been the case for practical purposes. But in principle, the Permanent Portfolio is built on the idea that there are four economic stages each of which favor one asset (or possibly more). Cash is held for the possibility of recession.

We (US investors) value the portfolio in USD. Cash is USD and is the yardstick by which the other 3 assets are measured. All 4 assets cannot all simultaneously be high and correlated with each other.

I agree, Cash is held for the possibility of recession. In this case, the other 3 assets would be correlated and all would be low. Hopefully cash will hit a 35% rebalancing band and BAM, you 'sell cash' and buy everything else.

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash

when all assets are going down, are they going down or is it cash going up?

I'm not sure if this is tongue-in-cheek, but yeah this is what I'm saying. It's all relative.

[perfect_simulation]

It's all relative.

That's the beauty of the PP. People love to hate on cash. In reality they just can't see the dollar bull when everything else is red.

[jhogue]

@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.

Do I have to hold the EE bond for 20 years to get that rate? I need to better understand how the yield is calculated if the bonds are sold they mature.

That's the kicker. EE bonds must held for 20 years to double in value, or 3.53%. See the Treasury website:
https://treasurydirect.gov/indiv/resear ... htm#eerate

[Henryinroad]

This is well known strategy and has been around for a long time. Things very similar are the basic strategy for annuities. It works pretty well when markets are moving and will lose money when markets are flat.

It works way better when internet rates real and nominal are high. The bond component is very important.

Hope there is a scientific method, like backtesting of decades' data, to assess the historic impact of real interest hike to Laddered U.S. Treasuries structure adopted by Swan etf. Unfortunately I dont have the tool. Not sure if the "assorted convexity" can neutralise the impact.

But at this moment it seems bond is in no danger given the latest speech of Powell who reinforce his hawkish view and pessimism..