European PP achilles heel?

[murphy_p_t]

Is there a fundamental/theoretical weakness in implementing a PP in Euro since no country has a central bank which can monetize to pay interest on LTT like the FED can in the US?  For example, Germany can't just print money to pay bund holders if they were short of money?

Japan, US, UK, Canada...other major countries, don't have this limitation?

[craigr]

The fundamental weakness of the Euro PP is primarily that the Euro currency has always been a tremendously bad idea. It is probably the most unstable currency of any first-world entity on the planet and will likely be that way until it finally (hopefully) goes away.

I suspect under it all if you held a basket of bonds and it were to end, the bond holders would probably be paid in the converted currency rate of whatever money the former members decide to revert to. Meaning German bond holders would be paid in the new German marks, etc. Just a guess though. I doubt they'd default on all bond holders.

[melveyr]

You could get away with it using German bonds, but it is not a robust solution. If I was in Europe I would try to run a US PP and then hedge the forex... not sure how difficult that would be though.

[murphy_p_t]

Thanks guys...I hope some people that have European PPs will weigh in also. (I suspect that many folks w/ Euro savings aren't hoping for the immediate collapse of their currency.)

[craigr]

Thanks guys...I hope some people that have European PPs will weigh in also. (I suspect that many folks w/ Euro savings aren't hoping for the immediate collapse of their currency.)

I don't think it will collapse in that sense. More like the Germans bring the Marks they almost certainly have sitting in pallets in the basement of their central bank out into the sunlight. They will then come up with some kind of conversion for Euro/Marks probably coordinated with the other European countries for their respective currencies. Then the Euro can finally go the way of the Edsel.

Not that I'm hoping for this, just that I believe it is just the reality of the situation and I felt it was going to happen within 20 years when the Euro came out about 10 years back. So we're halfway through my prediction, but I just don't see any possible way that thing is going to last. It was always a very bad idea to marry all those countries together under the same currency. It just isn't going to work. IMO.

[Jake]

You could get away with it using German bonds, but it is not a robust solution.

I did an interview with Marc De Mesel, who runs a European PP blog http://europeanpermanentportfolio.blogspot.co.uk/ and using German bonds is the solution that he goes for. He talks about the rationale behind his implementation of a Euro PP in the podcast:
Here is the link http://thevoluntarylife.blogspot.co.uk/ ... -marc.html
and here is the podcast mp3 http://thevoluntarylife.com/investing_in_europe.mp3

[murphy_p_t]

Thanks Jake...I had listened to Marc's interview...just don't recall that this specific point was addressed. (that Germany can't print money like the Fed, to pay bondholders, if push comes to shove)

[moda0306]

Defaulting whether by printing money or technically through haircuts is one in the same.

It really isn't.  First off, nobody truly expects their bonds to be paid back with existing dollars.  In fact, the market actually would be quite scared of that.  Secondly, if the government were to actually default on anywhere near the amount of debt it "monetizes," shit would hit the fan in ways we can't even fathom. 

Simply put, people have finally acknowledged both our dollars and debt as confetti given value by taxation, and great long-term recognition of property and facilitation of wealth creation.  Lets not act like one is more fiat than the other.  Our bonds our basically a velocity-slowing tool of the fed for the short term.

[Gosso]

You could get away with it using German bonds, but it is not a robust solution. If I was in Europe I would try to run a US PP and then hedge the forex... not sure how difficult that would be though.

It would be nice to run a US PP with a hedge, however there are several problems that I see with this. First, the cost to hedge is roughly 1% a year (based on the tracking errors that I've seen), which is far too rich for my blood.  Second, I don't like the idea of holding debt from a foreign government...even if the US has the mightiest printing press of them all.  If push came to shove and the US had to decide between not paying foreign creditors and default/hyper-inflation, I think they'd chose to not pay.

[Arturo]

@Gosso,

the scenario you are describing is not that imposible. But this situation is a little bit improbable, since one of the biggest bond purchaser is China. If USA decide not to pay foreign creditors, it would cause another world war. Nowdays USA has more than 14 trillion dollars in external debt.

By the way, for european members, sometimes we feel like starting an EU-PP will make us lose the oportunities of USA market. At least, makes me feel like i am going to lose more than 1% or 2% annual CAGR investing in EU in stead of USA, the biggest market and the one more capable to fight against crisis.

Obviously, from a EU point of view, we have the exchange risk, but with the right strategy, and looking at the long term, maybe 20 or 30 years, if you wait for the right window exchange opportunity, you can obtain even more return than the USA-PP. But this would be speculating, and not investing, since you will have to wait for the right year.

i will have to decide between getting the 'risk' (waiting for the exchange window), or accepting that in Europe i will obtain a couple of percentage points less in annual return.

@all,

by the way, in Germany negative bond interests have arrived again since september. It means Europe is selecting Germany long bonds to protect their capital (or at least, southerns), and not a europe diversification. From your point of view, if interests rates are in negative, and gold scaling up like a rocket, in which economic situation are we right now in Europe according to PP? deflation? inflation? recession?

thanks in advance.

[spark]

Hi,

I am french. Building a eurozone PP is really difficult.
Trying to evaluate the different possibilities it seems logical to have a eurozone index as the ishares euro stoxx de
that covers the eurozone part of the eurostoxx 600, eurozone long bonds 15-30 and eurozone short bonds 1-3 years.

Germany being the +/- the eurozone economic heart the PP can be also little bit overloaded with german assets, a tracker on the DAX, german long bonds 15+ and german short bonds 1.5-2.5.   

For gold one etf like VZLD seems ok but the zkb swiss etfs on gold seem more reliable.

I try to get these assets throught the xetra if possible.


Sincerely

[moda0306]

Slotline,

What I think I'm getting at is that typical budgetary terms like default simply don't apply to a currency issuer, so then the next questions is "what, then, do bonds and taxes accomplish, anyway?"

Taxes are one of the major tools to develop a natural demand for our currency.  It's not the only tool... you can't just tax your way out of bad government to help give currency strength by any means, but it creates the first of many rules around the game of economic life that makes us WANT to have dollars on our balance sheets.  The British actually did this in Africa way back in their colonial days... I don't have all the details, but the British taxed Africans not because they needed the tax money, but because they wanted them to WANT to hold Pounds to engage them more easily in economic trade.

So now that we know what role taxes play, bonds are next... Bonds are effectively "savings accounts" with our government, and they reward us for holding on to the dollars we have by giving us more dollars (risk free) in the mean-time.  This, combined with other aspects of how the fed interacts with banks, create a lending/saving environment that is (theoretically) supposed to lead to optimum results in the macro-economy.  Setting bond rates, though, is by far the most impactful fed tool in the private sector, so the treasury bond market basically serves as a huge piece of that tool.

The term "default" simply doesn't apply to the issuer of a currency.  Taxes and bonds play a very different role in a sovereign fiat environment.

[Arturo]

Hi,

I am french. Building a eurozone PP is really difficult.
Trying to evaluate the different possibilities it seems logical to have a eurozone index as the ishares euro stoxx de
that covers the eurozone part of the eurostoxx 600, eurozone long bonds 15-30 and eurozone short bonds 1-3 years.

Germany being the +/- the eurozone economic heart the PP can be also little bit overloaded with german assets, a tracker on the DAX, german long bonds 15+ and german short bonds 1.5-2.5.   

For gold one etf like VZLD seems ok but the zkb swiss etfs on gold seem more reliable.

I try to get these assets throught the xetra if possible.


Sincerely

Hi @spark,

i advise you to get long (up to 30 years) and short (up to 1 year) german bonds directly to its treasure at the secondary market through your broker, plus ZKB for gold (you can get paid in gold in stead of €, and its outside of Europe, so its 'safe'). For stocks, Europe EuroStoxx 600 index. If you do not want to deal with secondary market, i think the best options for long bonds is iShares eb.rexx® Government Germany 10.5+ (EXX6.DE), with an average maturity of 21 years, and for short bonds iShares Barclays Capital Euro Treasury Bond 0-1 (EUN6). Both of them 100% german.

your opinions?

Welcome to the board spark.

@ Arturo,

Why so down on the EMU-PP?  As the #2 reserve currency, gold still holds its power in the EMU-PP.  Of all international PP's, it's probably the safest and closest to the original US PP.  On a real basis, there doesn't seem to be much difference.

If you look at the statistics, during the period 1999-2011, USA-PP got a return of 7,1%, while EU-PP got 6,4%. Since 1972, USA-PP got almost a 10%, while for EU-PP we do not have information. But is obvious that USA will always have more power in terms of growth and returns. dont you think so?

[Gosso]

@Gosso,

the scenario you are describing is not that imposible. But this situation is a little bit improbable, since one of the biggest bond purchaser is China. If USA decide not to pay foreign creditors, it would cause another world war. Nowdays USA has more than 14 trillion dollars in external debt.

By the way, for european members, sometimes we feel like starting an EU-PP will make us lose the oportunities of USA market. At least, makes me feel like i am going to lose more than 1% or 2% annual CAGR investing in EU in stead of USA, the biggest market and the one more capable to fight against crisis.

Obviously, from a EU point of view, we have the exchange risk, but with the right strategy, and looking at the long term, maybe 20 or 30 years, if you wait for the right window exchange opportunity, you can obtain even more return than the USA-PP. But this would be speculating, and not investing, since you will have to wait for the right year.

i will have to decide between getting the 'risk' (waiting for the exchange window), or accepting that in Europe i will obtain a couple of percentage points less in annual return.

Another risk of foreign bonds is currency exchange controls.  This means they will continue to pay the foreign currency interest payments, but you won't be able to convert it to your domestic currency.  Didn't this occur with the pound sterling during the 70's?

Maybe these scenarios are highly unlikely over the short-term for the USD, but I think there is a good chance it could happen over my investment career.  Personally, I want to hold cash/bonds in the currency that I use at the supermarket (as long as I live in a stable country).

[Arturo]

Another risk of foreign bonds is currency exchange controls.  This means they will continue to pay the foreign currency interest payments, but you won't be able to convert it to your domestic currency.  Didn't this occur with the pound sterling during the 70's?

what about ETF iShares Barclays 20+ Year Treasury Bond Fund? :-)

[spark]

@Arturo

I thought about using these etfs  
iShares Barclays Capital Euro Treasury Bond 0-1 (DE)
iShares Barclays Germany Treasury Bond (IDEU)

Instead of
iShares eb.rexx® Government Germany 1.5-2.5 (DE)
iShares Barclays Capital Euro Government Bond 1-3

The main problem is that the 2 first ones have no volume. Before electing etfs, you have got to be sure you can buy or sell them to équilibrate the portfolio. Also the iShares Barclays Capital Euro Treasury Bond 0-1 (DE) is not only german this is why i added the iShares Barclays Germany Treasury Bond (IDEU).

To have an idea of the etfs volume you have to get the financial time ticker (ie IS0L:GER:EUR for iShares Barclays Germany Treasury Bond (IDEU) ) if you look at price history on 6 month, you get an idea.


The company search page of FT is here http://markets.ft.com/Research/Markets/ ... 0L:GER:EUR.
once you have the ticker the link to look at historical prices is here :

http://markets.ft.com/research//Tearshe ... 0L:GER:EUR

the symbol must be the one you look for. In this example, i give the link for iShares Barclays Germany Treasury Bond. You canot go for etfs with too many days with zero volume.

GOLD

The zkb gold etf has to be the one quoted in euros. It is avalaible only on the swiss exchange and quotes at over 1500 euros for one share. It is usable only with a portfolio over 50K euros.

This link gives the list of the ekb etfs http://markets.ft.com/RESEARCH/Markets/ ... e=WSOD.ETF


I can mention also that i tried to use a mix of ETFLab etfs and ishares to have 2 etf providers but for the moment i canot get the etflabs etfs through my broker. I think as i said it is important to have the assets quoted on xetra in case of euro collapse, the will quote in marks.


Sincerely  

[Arturo]

Also, be sure you're comparing like maturities.  I only have 30 year yield curves for the euro region down to 2004.  10-year yields go all the way down to 99 (used for the above comparison).  I know Marc De Mesel's site is using iBoxx German Euro 10+ which isn't appropriately loaded compare to 25+ US treasuries.

If you were to use the 30-year German yields directly from Bundesbank, you get 7.23% with a Sharpe of 0.99. 

I just want to be clear that you mean the EuroStoxx index and not the Stoxx Europe 600.  I think spark's original selection of the iShares Euro Stoxx DE is the appropriate one.

Hi Slotine,

thank you very much for your time and advises.

1. Excelent point about iBoxx German Euro 10+. where could i get the historical data for long (>30 year) and short term german bonds? i would like to double check personally your 7.2% EU-PP :-)

2. I supposed you calculated your 7.2% including short german bonds (from treasury market) maturity of < 1 year?

3. What do you think about "Europe MSCI EMU index" (http://de.ishares.com/en/rc/products/EXSI) for stocks in stead of Eurostoxx 50 (best 50 blue chips like http://de.ishares.com/en/rc/products/EUE)? in theory, the diversification is higher, so it will be more stable and less standar deviation. I suppose that your 7.2% calculations included eurostoxx 50, but i really dont know why people is using the best 50 blue chips in stead of more diversification and stability for EU-PP, like Craig. Is like selecting in USA something like "big cap" in stead of VTI (USA Total Market).

4. If i had to use ETFs in stead of buying treasery german bonds (long and short) on the secundary market, what do you think about this ones for German bonds?

for short german bonds: http://de.ishares.com/en/rc/products/EXVM
                                  average maturity of 0.5 years.

                                  or

                                  http://de.ishares.com/en/rc/products/EXHB
                                  average maturity of 2 years.

for long german bonds: http://de.ishares.com/en/rc/products/EXX6
                                average maturity of 21 years.

[Arturo]

@Arturo

I thought about using these etfs  
iShares Barclays Capital Euro Treasury Bond 0-1 (DE)
iShares Barclays Germany Treasury Bond (IDEU)


I can mention also that i tried to use a mix of ETFLab etfs and ishares to have 2 etf providers but for the moment i canot get the etflabs etfs through my broker. I think as i said it is important to have the assets quoted on xetra in case of euro collapse, the will quote in marks.


Sincerely  

Hi Spark,

Have you reviewed my last propositions to Slotine? if you are looking for serious management company (iShares), ETFs, serious Total Net Assets, daily volumen, and 100% german assets, i think the bests right now are the ones i wrote to Slotine.

By the way, if you want to get better results and more security, i would advice you to buy long and short german treasury bonds to the secundary market. If you want to buy them directly to the treasury, the minimum amount is 10.000€, so you will have to invest a minimum of 40K€ EU-PP.

i am looking forward to hearing your thoughts :-)

regards

[spark]

Hi Spark,

Have you reviewed my last propositions to Slotine? if you are looking for serious management company (iShares), ETFs, serious Total Net Assets, daily volumen, and 100% german assets, i think the bests right now are the ones i wrote to Slotine.

By the way, if you want to get better results and more security, i would advice you to buy long and short german treasury bonds to the secundary market. If you want to buy them directly to the treasury, the minimum amount is 10.000€, so you will have to invest a minimum of 40K€ EU-PP.

i am looking forward to hearing your thoughts :-)

regards

in my first post i gave the etfs
http://de.ishares.com/en/rc/products/EXHB and http://de.ishares.com/en/rc/products/EXX6

i hold them currently

my portfolio is as follows : (bloomberg code & name)
SXXEEX:GR iShares EURO STOXX DE
DAXEX:GR ISHARES DAX DE
RXPXEX:GR iShares eb.rexx Government Germany 10.5+ DE
IBCL:GR iShares Barclays Capital Euro Government Bond 15-30
RXP1EX:GR iShares eb.rexx Government Germany 1.5-2.5 DE
IBCA:GR iShares Barclays Capital Euro Government Bond 1-3
VZLD:GR ETFS Physical Gold/Jersey
GZUR:GR ETFS Physical Swiss Gold

[Arturo]

in my first post i gave the etfs
http://de.ishares.com/en/rc/products/EXHB and http://de.ishares.com/en/rc/products/EXX6

i hold them currently

my portfolio is as follows : (bloomberg code & name)
SXXEEX:GR iShares EURO STOXX DE
DAXEX:GR ISHARES DAX DE
RXPXEX:GR iShares eb.rexx Government Germany 10.5+ DE
IBCL:GR iShares Barclays Capital Euro Government Bond 15-30
RXP1EX:GR iShares eb.rexx Government Germany 1.5-2.5 DE
IBCA:GR iShares Barclays Capital Euro Government Bond 1-3
VZLD:GR ETFS Physical Gold/Jersey
GZUR:GR ETFS Physical Swiss Gold

Hi Spark,

could you specify the percentages if you dont mind?

my doubts:

1. why do you get two long bond ETFs, when the country with the less probability of default, and where everybody takes its money as a refuge, is Germany? iShares Barclays Capital Euro Government Bond 15-30 right now is holding bonds from countries that have the same credibility than Greece, like Italy or Spain.

2. Why did you select EuroStoxx 50 (the best 50 bluechips), when you can obtain better distribution and less volatility, like Europe MSCI EMU index?

regards!

[spark]

@Arturo

Hi arturo,

I do not use eurostoxx 50.
iShares EURO STOXX DE is the eurozone part of the euro stoxx 600.

I have 2 long bonds etfs and 2 short bonds etfs because in each case one is german and the other one is eurozone bonds.
i have 2 gold etfs to equilibrate with other assets.

Each asset is invested at 12.5% of the portfolio.

I explained in my posts why germans and eurozone bonds. Yes germany is currently the economic heart of the eurozone. I am in the eurozone but not in germany. You canot think only like if germany was the eurozone by itself. Harry Browne is unfortunately gone now but this situation did'nt exist when he was here so we have to try thinking with some logic about harry's statements.


Sincerely

[Arturo]

The stocks were using the OECD data which is based on the the Dow Jones EURO STOXX Price Index (320-plus companies).  There's no dividend information so it's going to underestimate the return.  I'd lean toward the MSCI EMU over the EURO STOXX 50 any day.  That said, Sparks is using the EURO STOXX DE (not 50) which is equivalent more or less to the MSCI EMU.

thank you very much for your info. Its curious why Marc used for its calculations Euro Stoxx 50 and iBoxx German Euro 10+ (average return of 6.5% since 1999 to 2011) in stead of Dow Jones EURO STOXX Price Index and german short and longs treasury bonds like you (7,23% average return).

By the way, maybe i can not find it but, are you buying short and long german bonds directly to the treasury for your personal EU-PP?

thanks in advance!

[Arturo]

I explained in my posts why germans and eurozone bonds. Yes germany is currently the economic heart of the eurozone. I am in the eurozone but not in germany. You canot think only like if germany was the eurozone by itself. Harry Browne is unfortunately gone now but this situation did'nt exist when he was here so we have to try thinking with some logic about harry's statements.

Sincerely

Hi Spark,

just saying that when i ask, is to obtain information about personal decisions :-).

By the way, from a personal way of thinking, maybe Harry Browen would have advised to invest in bonds with the less probability of default. In USA, UK o JPN, are state bonds backed up by central bank. In Europe, the strongest country that would be the last one defaulting is Germany. And the reality is that almost everybody in Europe right now is moving their savings to Germany, offering negative interest rates.

just saying :-)

[spark]

Hi Arturo,

It is true about the bonds like spain or italy but do you really think they would let them default ? Greece can default but it is unlikely the case of spain or italy or france. If one of these default the euro is finished and in this case i still have my german bonds. Anyway what will happen to german bonds if eurozone explodes ? no one knows exactly. Germany back to mark would cut all their sales to southern europe so difficult to be sure of anything.


Sincerely

[spark]

Arturo,

You mention VYETS where does it quote, what currency, what volume this is all we have to look at for choosing assets.


Sincerely