PP returns USA 2013?

[buddtholomew]

Thanks Craig… and yes, the above is true.  The difference in my mind is the vast amount of easing that has taken place in the last 5 years.  I think the assets can't help but move together.  Let's consider how QE has affected the pricing of the 3 risk assets in the PP:

- Equities - UP because easier access to capital for business, low rates, "don't fight the fed", etc. 
- Bonds - UP because of the inverse relationship of bond price vs interest rate.
- Gold - UP because the investing public views QE (rightly or wrongly) as inflationary

Admittedly gold is more of a wild card than the other two, but I suspect you'll see absolutely no protection from long bonds, and very little from gold, if the equity markets take a breather.  Just my opinion, but that June period seems to lend evidence.

But where is the money going to move if there is a sell-off in stocks? Cash? Emerging Markets? Housing?

I just don't think it's going to move to P2P and bitcoins.

In terms of real estate I have considered putting more REIT exposure in a variable portfolio in the past. But the stocks of companies I hold have tremendous exposure to real estate just as a matter of business. So I never really felt that I wanted to overweight it. But if someone was going to own real estate I don't have a particularly strong argument against it if they are aware of the risk/liquidity issues.

I can also see an argument for adding more global exposure to the portfolio. But again, U.S. companies have a ton of overseas exposure already. So that leaves the cash/bond assets. And why would I want to own Euros when they are in the same predicament as the U.S.? Or even the Chinese Yuan (if not controlled) has some bubbly aspects to it internally. Even international real estate in markets like Australia/New Zealand/etc. has inflated looks to it.

Basically it just comes back to spreading the risk against the unknown. There are too many ways for this all to go. Which is of course the status quo!

Craig,

When you say that there's a lot of real estate exposure in the US stock market, what do you mean by that?  I'd love to get my head around what this looks like... I can't really visualize for myself what kind of real estate holding there is in the S&P (or TSM).

Below are the top 10 holdings in the VNQ ETF (REIT ETF). Without confirming, I venture to guess that these holdings are also a part of the S&P500.

Stock/Ticker/% Holding in VNQ ETF
Simon Property Group, Inc. Comm SPG 9.20
Public Storage Common Stock PSA 4.68
ProLogis, Inc. Common Stock PLD 3.82
Ventas, Inc. Common Stock VTR 3.67
HCP, Inc. Common Stock HCP 3.62
Health Care REIT, Inc. Common S HCN 3.51
Equity Residential Common Share EQR 3.44
Boston Properties, Inc. Common BXP 3.02
AvalonBay Communities, Inc. Com AVB 2.95
Vornado Realty Trust Common Sto VNO 2.88

However; according to this article http://seekingalpha.com/instablog/53175 ... s-a-target, REITs only comprise 1.59% of the index.

[craigr]

When you say that there's a lot of real estate exposure in the US stock market, what do you mean by that?  I'd love to get my head around what this looks like... I can't really visualize for myself what kind of real estate holding there is in the S&P (or TSM).

Consider any company on the exchange. They own their property for their facilities, maybe they are leasing out property. Maybe they are selling property to relocate and grow. Maybe other companies are leasing space they no longer need and getting profits from that, etc. Then there are publicly traded REITs, home developers, etc.

What I am saying is when I drive down the road and see Coca-Cola, Intel, McDonald's, Walmart, AT&T, power companies, etc. they likely own that property. If they don't, they are leasing it and those owners are taking that money and likely investing it in a multitude of ways outside of just real estate. Etc.

So just because you only own stocks does not mean you don't own real estate. You own real estate through the companies you invest in because those companies need to exist physically somewhere to do business.

[moda0306]

When you say that there's a lot of real estate exposure in the US stock market, what do you mean by that?  I'd love to get my head around what this looks like... I can't really visualize for myself what kind of real estate holding there is in the S&P (or TSM).

Consider any company on the exchange. They own their property for their facilities, maybe they are leasing out property. Maybe they are selling property to relocate and grow. Maybe other companies are leasing space they no longer need and getting profits from that, etc. Then there are publicly traded REITs, home developers, etc.

What I am saying is when I drive down the road and see Coca-Cola, Intel, McDonald's, Walmart, AT&T, power companies, etc. they likely own that property. If they don't, they are leasing it and those owners are taking that money and likely investing it in a multitude of ways outside of just real estate. Etc.

So just because you only own stocks does not mean you don't own real estate. You own real estate through the companies you invest in because those companies need to exist physically somewhere to do business.

I'd love to see what portion of the value of the S&P (or TSM) is book value real estate.

I don't consider leasing to be a good reason to consider me an investor of property.... no I'm essentially renting from an investor in property, not investing in property myself.

Just a thought... I don't care if who I pay rent to is investing somewhere else.  If I'm paying rent, I'm on the wrong side of the real estate ownership arrangement.

I do wonder, though, why people think real estate is so special.  It's just another sector where you can harvest some variable amount of earnings depending on where they end up every year.  It seems no fundamentally different to me than selling goods or services.  It may be more historically stable (downside nominal rent rigidity (to coin a Paul Krugman phrase haha)).  But there's nothing fundamentally different about it vs tech, cosumer staples, pharmaceuticals, etc, in my view.

[craigr]

I'd love to see what portion of the value of the S&P (or TSM) is book value real estate.

Consider also that real estate is not the real money maker for most companies. Intel for instance owns a lot of property, but it's the billions in revenue they produce each year in making chips on that property that really interests me. Real estate itself is rarely as profitable as the companies that occupy that piece of land. So given the choice, I'd rather own the companies sitting in the buildings than the building itself.

Just a thought... I don't care if who I pay rent to is investing somewhere else.  If I'm paying rent, I'm on the wrong side of the real estate ownership arrangement.

I'm just pointing out general examples. Large companies likely own property, not lease it. If they are leasing it and still making a profit I don't really care. I'll let the company bean counters figure it all out. Again if a Coca-Cola bottler is leasing their property doesn't matter to me at all. All I care about is each can of Coke produced is handing me money in excess of their costs.

I do wonder, though, why people think real estate is so special

I think it is a hard asset like gold that can produce income if managed well. So it does have some inflation protection built in that the stock itself may not have immediately if there is a price shock. I consider it a gold-like asset with less liquidity and potential to generate income and high inflation protection if owned directly.

But historically real estate, like gold, has been a bad investment for growing wealth. It mainly keeps up with inflation just like gold. There are exceptions of course...

http://www.maastrichtuniversity.nl/web/ ... gracht.htm

"The most important thing about Eichholtz’s work is that it contradicts the maxim of the real-estate profession: “There is a myth which says that real-estate values go up significantly over time, and that this is especially true for central city locations. The data I found in my Herengracht study appeared to challenge that myth. Several times over the years, the real estate market turned out to collapse completely. For example, in the middle of the seventeenth century, when the Dutch were frantically speculating on the financial market and when more or less at the same time the plague broke out.  In that period the house prices dropped 36%. The average real price increase after World War Two is about 3.2% of per annum. Nevertheless, the real value of the index in 1973 is only twice as high as it was in 1628."

[Reub]

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ironic as it may be, I have to quote Keynes here… "When the facts change, I change my mind. What do you do, sir?"

So what's the alternative?  Cash?  Serious question.

I just reread parts of HB's Failsafe Investing, aka the bible, and he talks about cash being the only winning asset during a tight money recession, where interest rates are rising. Would a tight money recession be on the verge of arriving when the Fed finally (and inevitably) announces QE tapering? Are we almost to the point where cash is the only good option?

[hedgehog]

I just reread parts of HB's Failsafe Investing, aka the bible

http://www.harrybrowne.org/Archives/Archives.htm

How does the Radio Show (dated 2005) compares to the book (dated (2001)? I am listening to the shows now, my assumption is Harry's latest knowledge arisen from the time he published the book went into the shows. But correct me if I'm wrong.

[Libertarian666]

Thanks guys, and yes, I guess I didn't think the whole "Peak2" and "Peakto" thing through very well

I like to set the detail level to 'daily' and run the YTD results. 



What I find most concerning about the 2013 results isn't the 3%-ish loss, but rather that the correlation of the 3 risk assets in the portfolio goes nearly to 1 during the "taper" drawdown in June.  This leads me to the (admittedly unscientific) conclusion that the 3 risk assets are at the upper end of their ranges largely due to quantitative easing and that they will not provide the uncorrelated protection we've witnessed in the past in the portfolio.

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ironic as it may be, I have to quote Keynes here… "When the facts change, I change my mind. What do you do, sir?"

Hi,

depending on the quantity of money you can invest in some other physical things, like land, house, apartment, ...

No?

An investment in "land" is actually an investment in a piece of paper called a "deed". If you doubt this, think of what happens when a government invalidates deeds and/or transfers them to other people. What happens to your "land investment" then?

[Peak2Trough]

An investment in "land" is actually an investment in a piece of paper called a "deed". If you doubt this, think of what happens when a government invalidates deeds and/or transfers them to other people. What happens to your "land investment" then?

Complete non-sequitor.  There is NO investment safe from the government.  Not.  One.

[Libertarian666]

An investment in "land" is actually an investment in a piece of paper called a "deed". If you doubt this, think of what happens when a government invalidates deeds and/or transfers them to other people. What happens to your "land investment" then?

Complete non-sequitor.  There is NO investment safe from the government.  Not.  One.

There is no investment safe from every government.

[Peak2Trough]

Really? How interesting.

You're welcome to provide an example if you disagree.  If your argument against one asset class applies to all investable asset classes, the argument is neither valid nor relevant to this discussion, wouldn't you agree?

[Kshartle]

What about risk-free treasuries?

J/K - Couldn't resist

[Libertarian666]

Really? How interesting.

You're welcome to provide an example if you disagree.  If your argument against one asset class applies to all investable asset classes, the argument is neither valid nor relevant to this discussion, wouldn't you agree?

There is no absolute safety in anything. However, as an example, if you have a safe deposit box in a country other than the one you live in, it is generally very difficult for the government in the country you live in to seize its contents.

[frommi]

But where is the money going to move if there is a sell-off in stocks? Cash? Emerging Markets? Housing?

I read this kind of statement often and thought that way in the past too, but it is wrong thinking.
There is no money in the stock market or the bond market etc. When you buy a stock your cash gets directly to the seller of the stock. So the money is still money and the stock is still the stock, for each seller there is a buyer.

[Kshartle]

But where is the money going to move if there is a sell-off in stocks? Cash? Emerging Markets? Housing?

I read this kind of statement often and thought that way in the past too, but it is wrong thinking.
There is no money in the stock market or the bond market etc. When you buy a stock your cash gets directly to the seller of the stock. So the money is still money and the stock is still the stock, for each seller there is a buyer.

Preceisly. When the dollar price of something goes down, dollars aren't going anywhere, people are just willing to trade fewer of them to buy stocks (and probably a lot of other things). In that sense the dollars are gaining purchasing power in terms of stocks.

It's a tricky concpet because we think of the dollar as constant and everything as fluctuating but they are all fluctuating.

I've described the entire concept to a Merrill Lynch "financial advisor" - scary.

I think if would be interesting to see how the HBPP performace would look if the assets were priced in terms of gold. Like you start in '71 or wherever and say Gold is $40 and the S&P is $400. So The S&P costs 10oz. At the end of the year gold is $60 and the S&P is $300. So now it's only 5 oz. It's lost 25% in dollar terms but 50% in gold terms.

Basically the gold would always be constant....essentialy the returns and std dev are zero.....everything else would be volitile (including USD) and have different return/std dev characteristics. Cash and stocks would probably have very similar volitility...hmmmm

It might be useless but it might be interesting. Maybe I'll try and slap it together in Excel.

[hedgehog]

I just reread parts of HB's Failsafe Investing, aka the bible

http://www.harrybrowne.org/Archives/Archives.htm

How does the Radio Show (dated 2005) compares to the book (dated (2001)? I am listening to the shows now, my assumption is Harry's latest knowledge arisen from the time he published the book went into the shows. But correct me if I'm wrong.

Anyone has any idea on this? Sorry for self-bump.

[HB Reader]

I just reread parts of HB's Failsafe Investing, aka the bible

http://www.harrybrowne.org/Archives/Archives.htm

How does the Radio Show (dated 2005) compares to the book (dated (2001)? I am listening to the shows now, my assumption is Harry's latest knowledge arisen from the time he published the book went into the shows. But correct me if I'm wrong.

Anyone has any idea on this? Sorry for self-bump.

Yes, that's basically correct.

HB's book "Fail Safe Investing" was formally published in 1999.  He revised it in an e-book only format in 2003.  Buy the 2003 version if you can.  Aside from the removal of a few mistake-laden tables, one of the principle differences between the 1999 and 2003 versions was that he began embracing the use of S&P stock index mutual funds, instead of a group of "growth" mutual funds (as he had advocated in his newsletter since the early 1980s), for the stock portion of the portfolio.  In his later 2004-2005 radio shows, he seemed to warm up to the use of certain ETFs for both the stock and Treasury bond portions of the portfolio, although I think he still clearly preferred direct ownership of LT Treasuries when possible.

I think it is important for people to understand that HB's embrace of index funds and ETFs evolved only as they became increasingly accepted and proven instruments over the years.  In short, he was open to adapting to changing market conditions and new financial instruments as long as they were consistent with his basic rules and offered understandable track records. 

             

[MediumTex]

As far as the question about how to place property outside of the reach of the government, this is a really interesting thought exercise, and I would suggest that the following points begin to emerge as you really think it through:

1. Trying to erect any kind of active personal defense intended to resist the power of the government is stupid and pointless.  If you are focusing on this kind of stuff, you've already lost.

2. There are really two types of risk to private property from the government: The risks that come from YOUR government, and the risks that come from OTHER governments.  You have to think about both of them. 

3. A very effective way to protect your property from the government is to align your interests very closely with the government.  In the U.S., one way to do this is to buy treasuries.  Another way is to own a business that provides critical resources to the government (though make sure you don't get nationalized!).

4. You should try to become part of a community that has strong political representation.  Governments are less likely to confiscate the property of people who are politically influential.

5. Don't think of the government as the neighborhood thug who might come into your home or business at any moment and demand that you hand over everything to them.  Rather, think of the government as a provider of thug services to a certain constituency, and try to become part of that constituency, or at least a friend of that constituency.

***

Once you have mastered the concepts above, you can move on to the following NINJA tactics when it comes to your property and the government.

1. Rather than thinking in terms of protecting your property from the government, a more ideal setup would be for the government to protect your property for you from everyone else. 

2. What would be even better than the government protecting your property for you would be if the government also assumed any risks associated with your property so that if something bad happened the government would assume all associated liability.  If, OTOH, everything worked out okay you would get to keep all the profits and the government would provide law enforcement, litigation support and a regulatory structure, all geared around making sure that your property remained 100% safe.  In other words, the government would essentially be working for you, and would even take property from others on an as-needed basis to make sure that your property remained safe.

3. You would also want the government to protect your property from any other government as well, so you would want to pick a very powerful government to protect your property for you.  The U.S. government is the perfect choice for this role.

When you think about the the points above, you see how the U.S. banking industry has basically turned the government into an all-powerful lobby guard that is used to protect ALL of its interests.  Occasionally, this lobby guard will flex its muscle and take out a few bank executives on a more or less random basis, but for the most part the lobby guard just stands there in the lobby mindlessly and obediently.

I remember watching Lloyd Blankfein testifying before Congress around 2010 and marveling at the way he carefully concealed the smugness that he must have been feeling.  I mean, really, what would a bank president say to the security guard if the security guard started making suggestions about how the bank should be run?  At best, the bank president would probably smile politely and hear him out, and then tell him to return to his post in the bank lobby.

[Reub]

MT, that makes so much sense I'm tempted to sign up for Obamacare, welfare, food stamps, and a free phone just to align myself better with the forces that be.

[Libertarian666]

Ok, so the solution is to become a powerful and well-connected banker. Why didn't I think of that?