The thing I like best about PP...

[Kshartle]

1. So now you're measuring inflation via the price of long-term contract financial assets?  Does that mean we had staggering deflation when the stock & bond market got hit in 1981, even though CPI still rose by 10 that year?

2. Does this mean that we have "inflation" because the bond prices rose?  That seems like a foolish way to look at it.

3. Does this mean every time they go down, we have deflation, and every time they go up, we have inflation?

4. It's not about whether gold hits $2k, $3k, or $10k, but how quickly the U.S. dollar is losing real value.  If the dollar is losing value fast enough (25% per year), one might want to consider putting a pause on their rebalances. 

5. So you might want to be more specific about the savers that are being punished (assuming that the fed is grossly setting interest rates too low).

So many points to respond to...I picked the top 5/25

The "moda....please" comment was I thought you were trying to educate me on how atrificially low rates spur gold up and artificially high pushes it down. Wait, are you now agreeing the fed creates "artificially" low or high rates? This is a breakthrough .

as to the others..........

1. 1981 saw a blow off top in gold crushing the latecomers to the party and a flush out of hope for stocks in a bear market before a 20 yearish bull run. The fed succeded in destroying inflationary expectations with double digit rates and slayed the inflation beast....at least for a while.

2. Seems foolish or is foolish? Bond prices rise for a lot of reasons. One of them happens to be the central bank printing trillions of dollars to buy them. Yes this is inflation and also suggests to the market a greater likelihood of more printing to come.....possibly a massive amount. Can't fight the fed so the smart money will front-run if it can.

3. No

4. If gold is slicing through 2k, 3k, 4k then the dollar is losing purchasing power in real terms, no question. How will you know it's dropping 25%? Do you think the government or media will tell you? :):)  The smart money will move first into gold and bid it up in anticipation. PPers will be selling to them on the way up before they know what hit them.....unless you are really savy or have  a rule in place like....I only rebalance every 2-3 years, not based on fixed rules like 15/35 bands. That last point I think is a much better option since we all know now (hopefully) that there's no such thing as a re-balance bonus.

5. Simple, short-term rates are lower than inflation and lower than the market would put them absent fed manipulation. Buying 30 year bonds to get 4% is NOT a solution. There's a lot more risk there that many people don't want. The artificially low rates discourage people from having savings accounts and CDs, really saving for a rainy day and making that capital available to grow the economy. Instead they might as well consume it or stick into stocks they don't want and maybe have no business buying.

[Kshartle]

Just think on this one thing guys........when gold hits 35% and you sell down to 25%...you are selling 40% of your gold. If this happens back to back without you adding significantly to your PP, that is, if it happens in say a one or two year span where smart money is getting in ahead of major inflation and what you think is just a gold bull run..........then the 100 ounces you have is down to less than 40oz.

That's my main point. It's not that gold will not rise in real terms during major inflation....it will. But it can't possibly rise enough to offset the complete wipeout of other areas AND overcome your selling, even if you only do it once or twice as the move starts.

As I said though...I think sticking to a policy of rebalancing every couple years is smarter than doing it everytime something hits 35%, but I think this has been covered.

[moda0306]

1. So now you're measuring inflation via the price of long-term contract financial assets?  Does that mean we had staggering deflation when the stock & bond market got hit in 1981, even though CPI still rose by 10 that year?

2. Does this mean that we have "inflation" because the bond prices rose?  That seems like a foolish way to look at it.

3. Does this mean every time they go down, we have deflation, and every time they go up, we have inflation?

4. It's not about whether gold hits $2k, $3k, or $10k, but how quickly the U.S. dollar is losing real value.  If the dollar is losing value fast enough (25% per year), one might want to consider putting a pause on their rebalances. 

5. So you might want to be more specific about the savers that are being punished (assuming that the fed is grossly setting interest rates too low).

So many points to respond to...I picked the top 5/25

The "moda....please" comment was I thought you were trying to educate me on how atrificially low rates spur gold up and artificially high pushes it down. Wait, are you now agreeing the fed creates "artificially" low or high rates? This is a breakthrough .

I have argued that the fed sets rate floors on bonds for a long time... one measure of "natural" rate might be to ask "why does the government need to borrow at all, at any interest rate, if it needs to print money," but if we temporarily abandon that line of logic, there is a subsidy (1981) or a "taxing" (1979) of "short-term savings" that goes on when the fed raises or drops interest rates.  I don't think I've ever denied this.

I've said that the market should give us clues as to what's happening, but I've never said that somebody isn't being taxed/subsidized (I don't think!). 

In fact, I've attempted to come up with mental systems to identify which is occuring, and I try to look at how "savings" occurs outside of a government-influenced system....  At absolute best, a set-aside amount of risk-free savings should not deteriorate.  Gold is a good example.  It doesn't rust or deteriorate, so it should be as valuable 1 year from now as this year in a government-free world.  Now, if you save (in said currency) too much, you run into having to pay a third party to store it, so you could see a real loss, but in general, holding real value could be an expectation.

So figuring out whether "savers" of currency are being subsidized or punished, let's look at the risk-free rate someone can earn at a bank, i-bond, or (if above FDIC limits) a T-bill, and look at inflation or expected inflation, and if you end up beating inflation, you're being subsidized.  If you lose to it, you're being effectively taxed.

I don't know where you ever got the idea that I don't think the Fed sets interest rates, and that those rates can't artificially help or hurt certain people.

I HAVE said, however, that the fed/gov't sets expectations (when/why they'll raise/lower rates, what CPI-inflation level they want, whether your deposits are guaranteed, what interest you'll get paid on an instrument in nominal terms, and for what duration, etc), and once you understand these things, you have to be held somewhat accountable for your investments around them.  I can't predict hyperinflation due to low interest rates, and then get mad when the fed raises rates as inflation creeps up to 4-5-6-7%... you know what I mean?  That SEEMS foolish .



as to the others..........

1. 1981 saw a blow off top in gold crushing the latecomers to the party and a flush out of hope for stocks in a bear market before a 20 yearish bull run. The fed succeded in destroying inflationary expectations with double digit rates and slayed the inflation beast....at least for a while.

That's a bunch of nice commentary, but let's get into the details about the relationship between gold, interest-rates on super low (nominal) risk debt, and inflation.  That's what I was trying to get at for our analysis, without talking about "slaying beasts" and "late-comers."

2. Seems foolish or is foolish? Bond prices rise for a lot of reasons. One of them happens to be the central bank printing trillions of dollars to buy them. Yes this is inflation and also suggests to the market a greater likelihood of more printing to come.....possibly a massive amount. Can't fight the fed so the smart money will front-run if it can.

Seems foolish.... unlike yourself, I don't take things I believe to be true and claim them as absolute fact .  And if the smart money front-runs it, it would appear that the dumb-money tries to dream up reasons that the fed is going to destroy the dollar and/or hike rates . 

3. No

So only when the fed pushes rates in a given direction does the resulting change in bond prices measure inflation?  So if the fed brings rates down .25% on 30 year bonds, the resulting 8% jump in bond rates means we have 8% inflation?

I guess this begs a question... how do you ever determine the "natural" rate of interest at a given time?  Couldn't we always be saying that the fed is manipulating the market, and just not know which way?

4. If gold is slicing through 2k, 3k, 4k then the dollar is losing purchasing power in real terms, no question. How will you know it's dropping 25%? Do you think the government or media will tell you? :):)  The smart money will move first into gold and bid it up in anticipation. PPers will be selling to them on the way up before they know what hit them.....unless you are really savy or have  a rule in place like....I only rebalance every 2-3 years, not based on fixed rules like 15/35 bands. That last point I think is a much better option since we all know now (hopefully) that there's no such thing as a re-balance bonus.

I think CPI is pretty accurate.  If that fails, looking at the MIT BPI is a good substitute.

Obviously, any "rebalance bonus" or "rebalance penalty" in terms of RoR is going to completely depend on what different assets do.  Rebalancing is a risk-management move, first and foremost.  And it's a "modern portfolio theory" maximizing tool only in certain scenarios.  If we're focusing on RISK-ADJUSTED rate of return, rather than just gross-return, rebalancing can obviously have huge benefits, because you're significantly reducing risk if you're way out of wack, which is the whole point.

But in the end, RoR is just a big guessing game.  I don't expect gold to beat CPI in the long-term, nor do I expect t-bills to.  But they both have their roles in my portfolio, and if I'm going to take risk, it should be in something I control more than these markets we play in.

A deflationary period is 1) hard for the Fed to stop once it's started, and 2) hard for fiscal policy to stop if there's a bad taste in people's mouths about deficits, and we don't have a World War to get people to forget about them (For the record, I'm not advocating for war).

5. Simple, short-term rates are lower than inflation and lower than the market would put them absent fed manipulation. Buying 30 year bonds to get 4% is NOT a solution. There's a lot more risk there that many people don't want. The artificially low rates discourage people from having savings accounts and CDs, really saving for a rainy day and making that capital available to grow the economy. Instead they might as well consume it or stick into stocks they don't want and maybe have no business buying.

Ok, so some savers (savers in savings accounts, T-bills, CD's).  Others are being subsidized (people who hold their savings in real assets (especially those with the tendency to be leveraged), holders of long-term bonds, holders of equities, etc.

Your general statement that "savers" are punished is a bit too vague.  Saving is simply not spending income.  If you trade someone a car repair for a deck installation on your home, that is income, and it is saved in the sense that it is invested in property.

Lastly, if QE is usually started with an increase in bond rates (fall in prices), and followed by a decrease in bond rates (rise in prices), can you really say that it's the fed doing all the muscle work to keep rates low? 

Perhaps it's (gasp) the deleveraging environment we are in that generally (econ 101) results in very low prices (interest rates) for a given amount of loanable funds.

If rates wouldn't naturally be low, why on earth would bonds behave the way they do as QE is initiated and falls off?

[Pet Hog]

...when gold hits 35% and you sell down to 25%...you are selling 40% of your gold. If this happens back to back ...then the 100 ounces you have is down to less than 40oz.

I don't post much, but I'd like to run the numbers.  If gold is 35% of the PP, then the other three asset classes are 65%.  Let's say $35,000 and $65,000. Rebalancing takes you to $25,000 and $75,000.  That means you sold $10,000 of gold.  That's less than 30% of your gold (10,000/35,000 = 28.6%), not 40%.  If you did it twice, back to back, you would have slightly more than 50% of your initial supply of gold [(25/35)^2 = 0.510].  So, 51 ounces would remain of the initial 100 oz in the example above.

[Kshartle]

We're addressing too many topics to keep this coherent. I'll try to cut it down with a post or two.

Tell me what you think.

As long as the fed owns bonds it is distorting the market for interest rates because it's artificially increased the demand for bonds and removed supply, driving up their prices and lowering rates.

In that respect it is always distorting them down. However, since the fed is the cause of long-term inflation (Just ask the fed chair), the expectations of which can drive investors to flee the paper, we can't be sure that rates wouldn't be lower at a given point if we had a sound monetary system. They would only be artificially high when investors feared future inflation though. High rates would be a result of those fears. Those fears are not present so we can safely say that the fed is not causing artificially high rates in my opinion. It seems people are holding onto and not selling bonds because the fed promises monthly that it will keep rates down for a long time.

The price of money is completely screwed up because we are using slips of paper that don't function well as money because they are not a true store of value.


You made this comment :So only when the fed pushes rates in a given direction does the resulting change in bond prices measure inflation?  So if the fed brings rates down .25% on 30 year bonds, the resulting 8% jump in bond rates means we have 8% inflation?

I don't know what you mean here. The fed prints money to buy bonds and pushes their price up. The % increase in the price would not be the inflation rate though. How did you infer that from my one word answer "no"?

[Kshartle]

...when gold hits 35% and you sell down to 25%...you are selling 40% of your gold. If this happens back to back ...then the 100 ounces you have is down to less than 40oz.

I don't post much, but I'd like to run the numbers.  If gold is 35% of the PP, then the other three asset classes are 65%.  Let's say $35,000 and $65,000. Rebalancing takes you to $25,000 and $75,000.  That means you sold $10,000 of gold.  That's less than 30% of your gold (10,000/35,000 = 28.6%), not 40%.  If you did it twice, back to back, you would have slightly more than 50% of your initial supply of gold [(25/35)^2 = 0.510].  So, 51 ounces would remain of the initial 100 oz in the example above.

Thanks pet hog. When I did the math in my head I stupidly divided the 10 by 25 for some reason.

Gee it sounded like an awful lot when I typed.

Good looking out.

[Kshartle]

Moda if there are one or two points you really want to hit please let me know. I tried to take 25 and condense down to five but it spawned back up to 15. It's just too many and cherry picking wouldn't be fair.

[Stewardship]

If you're laser-focused on hyperinlation then you'll be fine if it happens. What do you mean take profits? You mean sell your gold?

If necessary to re-balance.

I think you just buy stuff you want and go on with life as best you can. If gold shoots to 1 million an ounce because of hyperinflation you'll be using your gold to buy stuff....automatically taking profits. Maybe it will fall down some in normal dollar terms but so what? It'll be obvious that you can scoop up a lot of stuff you actually want with your gold. Buying it locks in your gain.

Many folks who are interested in the PP are those who followed that strategy of "just buy the stuff you want" and got burned.

I mean, who really wants a lump of metal....I really want other stuff that enhances my life.

Well, lots of people do.  They love it so much that they wear it.  Through their ear-lobes!  Weird, I know... 

Agreed on the last part, but you're kind of making my point that the PP won't protect you during hyperinflation. You'll sell out on the way up. That's why I say this strategy is not designed to protect you for an event like that. Even a 1/3 stocks, 1/3 gold, 1/3 ten-year would be safer if you're going to adhere strictly to in and not take into consideration the current economic situation. I think that's a reasonable assesment.

I thought HBPP is rebalanced once a year.  So if hyperinflation hits, you hold gold an average of 6 months before you even consider rebalancing, no?  And, if upon rebalancing, you realize that the USD is too much of a credit risk to be appropriate for the cash and bonds portion of your portfolio, you can rebalance into whatever currency you have access to that is considered to have the least credit risk at that moment.  That may mean that you delay rebalancing if you don't have access to any other currencies at that moment due to the current economic apocalypse...

[moda0306]

K,

Let's just keep it to the fed's actions in the bond market, but, if you don't mind, I think including FDIC insurance and savings bonds is a valid addition to the discussion of government control of the market.

If the fed just muddled in the bond market, that would be one thing, but there are other things the government does to meddle with money.  First, it protects up to $250,000 of your money in each bank from credit risk, and the fed essentially keeps the "market stable" by not allowing the treasury to default.  These actions give an artificial bump to savers that we can't ignore.

For instance, if I could invest in a ST bond with AAA-rating default-risk at 5%, or invest in a FDIC insured savings account for 4.9%, or a bond that has no default-risk at 4.9%, I'm taking the latter two options.

Wouldn't you?  Put another way, in a world where the fed purchased bonds, but also set banking rules and inflation targets such that you and I knew that if inflation approached 3%, the fed would allow us access to a 10% tax-free savings bond.  In this world, could we ever claim that the fed is "artificially lowering rates?"  There are so many areas where the fed can affect interest rates.  The window, inter-bank lending rates, IOR.  You are focusing on one.  And it seems that you're saying that even in 1981, 6% real rates were not "subsidizing savers," because the fed still owned bonds.

So you can't JUST look at the "tax" without looking at the subsidies within the banking system as well.  If our deposits are completely protected from nominal default risk, then we have to wrap the interest into the inflation analysis.

I guess I see this all as one continuous issue rather than 25 different topics.  Sorry for the differing way of looking at all this, but I think understanding gold's price movements involves a sober understanding of the "subsidizing" or "taxing" effect the gov't is having on the "safe money" market.

So let's stick to the fed and subsidies vs taxes within government support of banking, because no discussion of gold, IMO, is going to be very fruitful without first agreeing on the pressures put on "savers."

[Kshartle]

If you're laser-focused on hyperinlation then you'll be fine if it happens. What do you mean take profits? You mean sell your gold?

If necessary to re-balance.

I think you just buy stuff you want and go on with life as best you can. If gold shoots to 1 million an ounce because of hyperinflation you'll be using your gold to buy stuff....automatically taking profits. Maybe it will fall down some in normal dollar terms but so what? It'll be obvious that you can scoop up a lot of stuff you actually want with your gold. Buying it locks in your gain.

Many folks who are interested in the PP are those who followed that strategy of "just buy the stuff you want" and got burned. We're talking about hyperinflation here. Your dollars won't buy anything....like food or other stuff. If you have a lot of gold you might actually want something else and trade it with someone for stuff. In effect you are selling your gold.

I mean, who really wants a lump of metal....I really want other stuff that enhances my life.

Well, lots of people do.  They love it so much that they wear it.  Through their ear-lobes!  Weird, I know...    How many ounces of gold jewelry do you wear? 20?, 50? Do you swim in it like Scrooge McDuck? Again we are talking about hyperinflation here. Essentially almost all of your savings will be gold. Will you not spend any of it on stuff?

Agreed on the last part, but you're kind of making my point that the PP won't protect you during hyperinflation. You'll sell out on the way up. That's why I say this strategy is not designed to protect you for an event like that. Even a 1/3 stocks, 1/3 gold, 1/3 ten-year would be safer if you're going to adhere strictly to in and not take into consideration the current economic situation. I think that's a reasonable assesment.

I thought HBPP is rebalanced once a year.  So if hyperinflation hits, you hold gold an average of 6 months before you even consider rebalancing, no?  And, if upon rebalancing, you realize that the USD is too much of a credit risk to be appropriate for the cash and bonds portion of your portfolio, you can rebalance into whatever currency you have access to that is considered to have the least credit risk at that moment.  That may mean that you delay rebalancing if you don't have access to any other currencies at that moment due to the current economic apocalypse... If hyperinflation hits you'll be using your gold to buy stuff to survive, or maybe you'll see other opportunites that are more attractive than holding gold. Everything should be at fire-sale prices in gold terms. That's what I meant by you just carry on and use your gold like what it truly is....money. Maybe another paper currency will come along and you'll want to buy. Maybe you can quickly convert and buy some cheap stocks or other property. Who knows?

[Libertarian666]

Just think on this one thing guys........when gold hits 35% and you sell down to 25%...you are selling 40% of your gold. If this happens back to back without you adding significantly to your PP, that is, if it happens in say a one or two year span where smart money is getting in ahead of major inflation and what you think is just a gold bull run..........then the 100 ounces you have is down to less than 40oz.

That's my main point. It's not that gold will not rise in real terms during major inflation....it will. But it can't possibly rise enough to offset the complete wipeout of other areas AND overcome your selling, even if you only do it once or twice as the move starts.

As I said though...I think sticking to a policy of rebalancing every couple years is smarter than doing it everytime something hits 35%, but I think this has been covered.

I think there is a high probability that the purchasing power of gold will go up enormously in a hyperinflation, at least during the panic of the really bad part of the hyperinflation. If this is true, even a small gold allocation could result in substantial wealth if one cashes out some of it for other assets during the panic.

I'm not counting on this, but I think it is the most likely prospect.

[ns3]

As I said though...I think sticking to a policy of rebalancing every couple years is smarter than doing it everytime something hits 35%, but I think this has been covered.

I don't think HB said to re-balance when something hits 35%. I think he said to check the portfolio once a year and re-balance if something has hit 35%, unless there is something unusual going on in the economy and you happen to be paying attention. How else could he justify the "financial security in 30 minutes subtitle" of his book?

That's basically the strategy I'm following now that I've gotten over the inevitable desire to check frequently when you adopt a new strategy.

[ns3]

But back to the original subject of the thread ... The thing I like best about the PP......

When I read financial articles telling me I need to buy this or that, or sell this or that because of either dire trouble ahead or else the opportunity of a lifetime not to be missed, I can pay it no mind because I know I have all the bases covered. I think it actually takes a while for this to sink in (took me about 3 years) but I think I've finally gotten the simplicity of it.

[Stewardship]

Yes, I wish I'd made the title of this thread "What do you like best about PP?" because I'd like to see others' responses.

To expand on my OP a little, to see the type of people elected into office, the typical voter, even the Pope who thinks free markets are the cause of poverty... I'm glad that they're all irrelevant as far as my portfolio is concerned.  Nothing they can do can breach the PP's synergy.  Yes, they can and do tax it, but PP is also tax-efficient so it protects you in that way too.

Thank you, HB!  And Mr. Roland & Mr. Lawson, I can't wait to read your book.  It should be in my mailbox any day now...