Concerns Assets Are More Correlated

[senecaaa]

Be careful, the forum police doesn't like you to talk about alternative assets here. And ammunition? WTF!

[mathjak107]

I’m concerned the PP assets have become too heavily correlated with each other. Has HB discussed this possibility?

I have a proposed rationale for why it’s occurring but no solution other than stay the course.

Economy bad. Fed wants stimulus.

Gold goes up when the fed prints more money to serve as stimulus because inflation.

Stocks go up because economy kept alive by hand of the feds printing, putting money in people’s pockets to buy stuff and money in banks pockets to buy assets, like stocks.

Bonds go up because alongside printing money, fed buys government bonds, pushing yields down. If yields rise, then economy will crash so fed will buy as many bonds as necessary for yields to come down.

So I’ve been noticing all 3 assets move in tandem upward on either actual stimulus or increased probability of new stimulus. And when stimulus talks go sour, all 3 drop in tandem.

I’m concerned all 3 assets are in a bubble and cash won’t help because of devaluing the currency. Look at housing and food and healthcare prices. So if your 3 assets bubble pops and you have a bunch of cash that buys less stuff than before, you have all 4 down. I get that prices of some things are down slightly but housing, healthcare and food are 80% of my living expenses and at least half of the living expenses of most Americans.

There’s no better alternative to the PP, I guess. But I’m anticipating a 20% drop in my PP over the next year starting from right now.

I wish instead of the PP I had bought a house anytime in the last ten years and a few hundred thousand rounds of 9mm ammo. Because single family homes and ammo have outperformed every asset. 9mm up 400% in the last few months thanks to BLM rioting scaring people into needing guns. Or I mean the NRA brainwashing people that guns are the answer even though they’re more likely to shoot themselves than a bad guy, There, I covered both right and left views.

I read someone on Reddit telling how he bought his house 4 years ago and based on current housing prices in his neighborhood, his house has gone up so much in value that he made a profit of $1400 per month for the last 4 years to own his home after taxes/maintenance.

Actually... I do have the answer. Stock up on gold since that’s the one asset the fed can’t print. They can buy MBS and lower interest rates to prop up housing market, they can buy corporate bonds to prop up stock market, and make bubbles everywhere but the one thing that may not pop is gold. Since it’s actually rare.

Although gold miners do well in low interest rate environments since they can lease equipment more cheaply so maybe cost to mine gold will drop, leading to increased supply.

I guess we’re all just screwed lol

gov't certainly can manipulate gold prices via their central banks buying and selling gold

[Smith1776]

My proposal to ameliorate these very legitimate concerns has pretty much always been the same on this board: diversify by geography and by factors.

Make your fixed income and equity as global as possible. Don't just hold U.S Treasury bonds. Hold Treasury bonds from many sovereigns. This exposes you to multiple yield curves and gives you some measure of protection against any one central bank's actions. Yield curves tend to also not move in unison... at least not perfectly so.

Factor diversification in your equity, particularly towards value at this time (value/growth spread is huge right now), can help to mitigate valuation concerns. This is especially true with U.S. stocks. Combine that with international diversification and you should be fine.

[ahhrunforthehills]

This is especially true with U.S. stocks. Combine that with international diversification and you should be fine.

IMHO, this could be diworsefication instead of diversification.

A lot of people followed Peter Schiff's advice prior to 2008 and invested in gold and foreign stock. It was painful for them because, although gold performed well, international stock followed US stocks off the cliff (they actually fell even harder). Global markets seem highly correlated in today's age. Besides, by holding US securities you generally already have international exposure built in.

But more importunately, the US government can export inflation since the US Dollar is so largely used in international trade. It can then take that money and buy corporate bonds (and stocks if necessary) to support asset prices. Other major markets do not share that luxury.

So, generally speaking, it seems that by investing overseas you somewhat limiting your growth by what the US Market does... while simultaneously giving up the free insurance you get by having a "by any means necessary" fed that has world reserve currency status that can be leveraged to bail itself out.

The US ability to export inflation is incredibly powerful. In fact, the reason why the US could mail out all of those stimulus checks was because it could offset the deflation that was being caused by foreign demand for the US Dollar. Those checks ultimately found thier way into the market driving up asset prices.

The US simply has a lot of leverage in this world to turn a losing hand into a winning hand.

[mathjak107]

Except for special situations the govt can only buy debt instruments , not stocks .the govt is not allowed to buy up private or public companies ..that would be communistic ....it would require congress to pass a bill

[ahhrunforthehills]

I’m concerned the PP assets have become too heavily correlated with each other. Has HB discussed this possibility?

I have a proposed rationale for why it’s occurring but no solution other than stay the course.

Economy bad. Fed wants stimulus.

Gold goes up when the fed prints more money to serve as stimulus because inflation.

Stocks go up because economy kept alive by hand of the feds printing, putting money in people’s pockets to buy stuff and money in banks pockets to buy assets, like stocks.

Bonds go up because alongside printing money, fed buys government bonds, pushing yields down. If yields rise, then economy will crash so fed will buy as many bonds as necessary for yields to come down.

So I’ve been noticing all 3 assets move in tandem upward on either actual stimulus or increased probability of new stimulus. And when stimulus talks go sour, all 3 drop in tandem.

I’m concerned all 3 assets are in a bubble and cash won’t help because of devaluing the currency. Look at housing and food and healthcare prices. So if your 3 assets bubble pops and you have a bunch of cash that buys less stuff than before, you have all 4 down. I get that prices of some things are down slightly but housing, healthcare and food are 80% of my living expenses and at least half of the living expenses of most Americans.

There’s no better alternative to the PP, I guess. But I’m anticipating a 20% drop in my PP over the next year starting from right now.

I wish instead of the PP I had bought a house anytime in the last ten years and a few hundred thousand rounds of 9mm ammo. Because single family homes and ammo have outperformed every asset. 9mm up 400% in the last few months thanks to BLM rioting scaring people into needing guns. Or I mean the NRA brainwashing people that guns are the answer even though they’re more likely to shoot themselves than a bad guy, There, I covered both right and left views.

I read someone on Reddit telling how he bought his house 4 years ago and based on current housing prices in his neighborhood, his house has gone up so much in value that he made a profit of $1400 per month for the last 4 years to own his home after taxes/maintenance.

Actually... I do have the answer. Stock up on gold since that’s the one asset the fed can’t print. They can buy MBS and lower interest rates to prop up housing market, they can buy corporate bonds to prop up stock market, and make bubbles everywhere but the one thing that may not pop is gold. Since it’s actually rare.

Although gold miners do well in low interest rate environments since they can lease equipment more cheaply so maybe cost to mine gold will drop, leading to increased supply.

I guess we’re all just screwed lol

It is my understanding that this is historically normal. The lower bond yields become, the more people are pushed into riskier assets. They are pushed into stocks and real estate. This pushes those values higher and bubbles are the result.

We are still dealing with the dot-com crash. The solutions to the dot-com crash led to the financial collapse (making things worse). The solution to the financial collapse led to the past decade of stock buybacks (making thing worse for when the pandemic hit).

When was housing "safe"? Back when they required everybody to put 20% on a house many decades ago. Based on fundamentals housing is more dangerous now than it was before the last collapse.

Logically, I would think that you can cover your bases with a mix of Stock (the house of cards stay up) and Gold (the house of cards comes down). You could make it Gold and Real Estate (or other commodity) if you are highly concerned with Gold manipulation. I suspect this manipulation could get a lot more interesting as Russia and China continue to build up their stockpiles.

Here is one wikileak cable from China to the US:

"According to China's National Foreign
Exchanges Administration China 's gold reserves have recently
increased. Currently, the majority of its gold reserves have been
located in the U.S. and European countries. The U.S. and Europe have
always suppressed the rising price of gold. They intend to weaken
gold's function as an international reserve currency. They don't
want to see other countries turning to gold reserves instead of the
U.S. dollar or Euro. Therefore, suppressing the price of gold is
very beneficial for the U.S. in maintaining the U.S. dollar's role
as the international reserve currency. China's increased gold
reserves will thus act as a model and lead other countries towards
reserving more gold. Large gold reserves are also beneficial in
promoting the internationalization of the RMB."

Source: https://wikileaks.org/plusd/cables/09BEIJING1134_a.html

I seem to recall another wikileaks cable from a US embassy to China about it. The US was crying "foul" to the Chinese. The US complained that their increasing their gold holdings would upset the global economy because it would negatively impact the US's (and Europe's) desire to one day reinstate a partial gold standard.

This is not surprising... after all, Nixon did say that he was only closing the gold window temporarily.

I have read that China, instead of buying their gold on the market (which would drive up prices and benefit the United States since it has the largest stockpile) prefers acquiring gold mining companies and using the gold from the operations to add to their stockpiles under the radar. That way the price is not impacted.

But the golden rule still appears to be true: "Whoever has the gold, makes the rules".

[ahhrunforthehills]

Except for special situations the govt can only buy debt instruments , not stocks .the govt is not allowed to buy up private or public companies ..that would be communistic ....it would require congress to pass a bill

Theoretically, I agree. But this press conference did not exactly make me feel warm and fuzzy:

https://www.youtube.com/watch?v=HUDXP2F2pkU

Powell didn't exactly say "we can't do that". He said they need to have "broad applicability". They can't just single out a single entity. Whether or not they could do it to a broad market might be up to even broader interpretation. Then it is a question of whether or not congress would look the other way.

For a congress that doesn't even require a declaration of war for war, and a congress that allows the supreme court to legislate from the bench... I don't even know where the lines in the sand are anymore. (Note: that was not meant to be in anyway political. Both sides share blame.)

This ignores the underlying question... does the fed even need to buy corporate stock when it can just buy the corporate bonds?