ultra low / negative interest rates in Germany

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Pfanni
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ultra low / negative interest rates in Germany

Post by Pfanni » Mon Feb 01, 2016 9:55 am

Hi
German government bonds have negative rates up to 7 years now.

1 year: -0.44%
7 year: -0.05%
30 year: +1.08%

I refuse to buy a 30 year bond yielding 1%. I just refuse to do that. No thanks.
Physical EUR cash seems better and better for half the PP portfolio (cash & bond portion).

Does anybody have an idea for European PP investors what to do?
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buddtholomew
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Re: ultra low / negative interest rates in Germany

Post by buddtholomew » Mon Feb 01, 2016 10:05 am

I sympathize with the low yields.
Text book answer is we hold LTT's for their volatility and not yield.
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Greg
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Re: ultra low / negative interest rates in Germany

Post by Greg » Mon Feb 01, 2016 10:27 am

IDrinkBloodLOL wrote: You could consider PP this way:

Stocks and bonds are two types of money factories, while cash/gold are two types of stable money storage. Each does well in different circumstances, but depending on your beliefs you may have a different opinion on what circumstances are safe/advisable.

For example, I personally do not believe we will ever see real deflation again. Based on charts I have dug up, I believe the second we left the gold standard our choices were moderate inflation or hyperinflation. Therefore, I entirely skip the cash portion of the portfolio because I believe it's designed to thrive in an economic cycle we won't ever see again.

Depending on what you believe, you might add or remove things from the wealth generation or wealth storage half of your portfolio. In backtesting it's usually all the same. 50/50 REIT/gold, stock/gold and other breakdowns still pretty well line up with PP performance because as far as I can tell, the mechanism is the same.

In my view that means holding 50% cash, 25% gold, 25% stock would be the wrong thing to do. I would go 50% stock, 25% cash, 25% gold or maybe even thirds. Just my POV.
If you believed deflation wouldn't happen again, wouldn't that indicate that you don't need to hold long-term bonds? Don't you hold cash due to recessions?
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dualstow
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Re: ultra low / negative interest rates in Germany

Post by dualstow » Mon Feb 01, 2016 10:43 am

Japan's yields have gone negative, too.
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jafs
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Re: ultra low / negative interest rates in Germany

Post by jafs » Mon Feb 01, 2016 10:46 am

My understanding is that cash is held in case of deflation, while long bonds are supposed to do well in recessions.
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Xan
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Re: ultra low / negative interest rates in Germany

Post by Xan » Mon Feb 01, 2016 10:59 am

Long bonds are for deflation.  If you hold a promise for $x in the future, and those dollars are worth more and more, then that promise is worth more.
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buddtholomew
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Re: ultra low / negative interest rates in Germany

Post by buddtholomew » Mon Feb 01, 2016 11:03 am

A 25% allocation to cash is an understated PP benefit.
The key is not to look at the investments in isolation.
Some see gold/cash and stocks/bonds but I see bonds/cash as IT bonds but held in a barbell.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: ultra low / negative interest rates in Germany

Post by dragoncar » Mon Feb 01, 2016 3:58 pm

buddtholomew wrote: A 25% allocation to cash is an understated PP benefit.
The key is not to look at the investments in isolation.
Some see gold/cash and stocks/bonds but I see bonds/cash as IT bonds but held in a barbell.
You get used to it. I don’t even see the individual assets anymore.. All I see is blonde, brunette, red-head.
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Re: ultra low / negative interest rates in Germany

Post by Fred » Mon Feb 01, 2016 4:57 pm

jafs wrote: My understanding is that cash is held in case of deflation, while long bonds are supposed to do well in recessions.
You have it backwards according to the PP strategy.

And I don't agree at all with the statement somebody made about not ever seeing a deflationary period again. I say this as someone who saw the value of his home cut in half between 2006-2008. I believe that one year during that same period or shortly thereafter the value of long bonds went up 33%.
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jafs
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Re: ultra low / negative interest rates in Germany

Post by jafs » Mon Feb 01, 2016 5:10 pm

It looks like that.

But it makes more sense to me that cash would be good in case of deflation, since it would be worth more and have more purchasing power.

I've looked for the basic statement and reasoning for the PP strategy, but haven't found it.
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Re: ultra low / negative interest rates in Germany

Post by MediumTex » Mon Feb 01, 2016 5:33 pm

jafs wrote: It looks like that.

But it makes more sense to me that cash would be good in case of deflation, since it would be worth more and have more purchasing power.

I've looked for the basic statement and reasoning for the PP strategy, but haven't found it.
A couple of guys wrote a book back in 2013 (I think) that provided a pretty good overview of the PP strategy.  You might want to check it out.  The Amazon reviews are pretty good and I think a lot of the people here have read it and found it to be a good resource. 

Harry Browne's Fail Safe Investing and Why the Best Laid Investment Plans Usually Go Wrong are the two original reference texts for the PP strategy.  The former is an overview of the strategy, and the latter is a deeper dive.
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Re: ultra low / negative interest rates in Germany

Post by Pfanni » Tue Feb 02, 2016 12:15 am

I don't want to defect from PP.
But the question is, do Harry Browne's thoughts on bonds have validity in an age where negative rates on the safest bonds are normal?

1) Why take on 30 year duration risks for 1% return? When I can get no duration risk for 0% return, that seems to be a much better deal (cash).
2) Aren't Europeans like me already meddling with the original PP strategy when we replace short term gov bonds for the cash portion (negative rates) with things like saving accounts?

Going out on a limb here, but I am convinced Harry Browne would not have bought a 1 year German government bonds yielding MINUS 0.4x%.
USA saw very low nominal rates during the Great Depression - but there was deflation, so real rates very quite high. In Germany we have low, but steady inflation, so negative rates make no sense.. it is ECB policy, not a natural market-driven event.
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