Why should PP continue going up?

[Sam Brazil]

LTTs cannot be timed, just like gold and stocks. But unlike gold and stocks, they do have an interest rate floor. We don't know exactly what that floor is, but we do know if rates stay persistently negative, it will endanger the entire financial system as banks and insurance companies have their business models turned upside down. It's also pretty disconcerting that PRPFX was launched shortly after a 30 year bear market for LTTs.

Why should the PP continue going up overall, despite 1/3 risk assets no longer drifting up, as it has since 1982?

Edit: How could someone see this chart, and know the PP has only been around since around 1983, and not be seriously concerned about the PP's viability?
https://fred.stlouisfed.org/series/GS20

[Kriegsspiel]

People will still be productive and have to put their money somewhere?

[Sam Brazil]

People will still be productive and have to put their money somewhere?

Right, just as people worked and were productive from 1950 to 1982, when they put their money in all sorts of things, one of which was not LTTs, which went pretty much straight down in price for over 3 decades. Since the PP wasn't around then, it raises the question of whether the PP would still have managed to generate positive return in that kind of environment.

[dualstow]

And gold is worthless because it's going to be synthesized. And cash is no good due to runaway printing.
And the stock market is rigged.

So, what else are you going to buy?

[MachineGhost]

LTTs cannot be timed, just like gold and stocks. But unlike gold and stocks, they do have an interest rate floor. We don't know exactly what that floor is, but we do know if rates stay persistently negative, it will endanger the entire financial system as banks and insurance companies have their business models turned upside down. It's also pretty disconcerting that PRPFX was launched shortly after a 30 year bear market for LTTs.

Which is like saying I would have made a BIG MISTAKE buying a chunk of bonds and gold now after Brexit when they're clearly overextended, smart money is shorting them, duration exposure is extreme relative to economic/inflation factors and their cycles are turning down until bottoming later this year. Essentially, whenever something "feels right", you are on the wrong side of a crowded trade. When it "feels wrong", you are on the right side of a reviled trade. Which do you choose?

Anyway, the PP did quite well when bonds were at the tail end of their bear market from 1970-1982. Gold and stocks saved it. I fully expect that to happen next time along with cash. When it comes to a sovereign debt crisis, everything but government debt goes up in value as people flee like rats off a sinking ship.

BTW, 20-year bonds from 1940-1982 returned essentially breakeven in nominal terms. It's the inflation that killed them. That's what real assets is for.

[Sam Brazil]

And gold is worthless because it's going to be synthesized. And cash is no good due to runaway printing.
And the stock market is rigged.

So, what else are you going to buy?

I don't see what what I said has to do with what you said.

I'm saying LTTs have an inherent ceiling because their price is a function of interest rates which have a floor. Gold, stocks and cash have no ceiling.

[Sam Brazil]

LTTs cannot be timed, just like gold and stocks. But unlike gold and stocks, they do have an interest rate floor. We don't know exactly what that floor is, but we do know if rates stay persistently negative, it will endanger the entire financial system as banks and insurance companies have their business models turned upside down. It's also pretty disconcerting that PRPFX was launched shortly after a 30 year bear market for LTTs.

Which is like saying I would have made a BIG MISTAKE buying a chunk of bonds and gold now after Brexit when they're clearly overextended, smart money is shorting them, duration exposure is extreme relative to economic/inflation factors and their cycles are turning down until bottoming later this year. Essentially, whenever something "feels right", you are on the wrong side of a crowded trade.

What I'm saying has nothing to do with feelings or trading. I'm looking at the fundamental workings of the financial system and asking how it's possible that it could function with persistently negative interest rates. It's self evident that given where rates are now, in order for LTTs to continue going up as they have been, we would have to have not only persistently negative interest rates, but they would have to persistently get more negative long term. That's not a feeling, that's just an observation about where interest rates are now, combined with an axiomatic statement about how bonds work.

That persistently negative interest rates would endanger the financial system is not some kind of feeling. It would logically turn the business models of banks and insurance companies upside down. If banks and insurance companies cannot stay solvent, that endangers the entire financial system.

I'm not telling you I can feel when exactly rates will reach the floor. I have no idea exactly where that is or when we will reach it. What I am saying is that stocks could feasibly repeat their gains of the last 30 years. So could gold. What is the feasible explanation for how LTTs could? There isn't one.

So if you think LTTs are not a problem for the PP, then you either believe interest rates will go negative and keep getting more negative long term OR you believe the PP can function as it has been with only 2 assets out of 4 drifting up.

Is there another choice I'm missing?

[dualstow]

And gold is worthless because it's going to be synthesized. And cash is no good due to runaway printing.
And the stock market is rigged.

So, what else are you going to buy?

I don't see what what I said has to do with what you said.

I'm saying LTTs have an inherent ceiling because their price is a function of interest rates which have a floor. Gold, stocks and cash have no ceiling.

The relation between what I said and what you said is less specific than that. You're saying long bonds have a ceiling, but more broadly speaking, you're saying you think you found a problem with bonds. And broadly speaking, I'm saying that periodically someone announces that they found some fundamental flaw with one of the assets, to the extent that it just won't work anymore.

There are at least a few threads about the ceiling, or should we call it a yield basement? Interest rates can go negative, so I suppose we can dig a new basement. Remember the one in which Craig said he might sell at 1% yield, but was reluctant to say it out loud because he didn't want anyone blindly copying that move without due diligence?

You also mentioned the long bear market in bonds that preceded the launch of PRPFX. Others mention coming off the gold standard when talking about the creation of the pp. In both cases, one might argue that time is running out for the pp, and that it is not so permanent after all.

This is not to say that your statement should not be explored. I'm merely saying that this was meant to be an all-weather portfolio (as you know), not just a well-timed one. Harry Browne was alive during the inception of PRPFX (although I guess it was Terry Coxon at the helm). Browne was alive until, what, 2005?

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

[clacy]

It's entirely possible that 3 or even 4 of the PP asset classes will continue to go up, because the US looks relatively wonderful compared to the turd that is the rest of the world.

At least for those of us in the US.

[MachineGhost]

So if you think LTTs are not a problem for the PP, then you either believe interest rates will go negative and keep getting more negative long term OR you believe the PP can function as it has been with only 2 assets out of 4 drifting up.

Is there another choice I'm missing?

Well, we're only at 2.30%, so we got a ways to go before worrying about it. But once yields reach 0%, the PP is technically broken and so is the world's reserve currency.

In the meantime, all that we can do is try to manage our duration exposure which I'm currently working on to find out what is optimal for the PP. What's optimal for the PP isn't necessarily optimal for holdings bonds per se.

A lot will depend on how sentiment shifts. The PP is rock solid from a macroeconomic perspective; the investment choices may have to change as investors change. PS has already positioned himself in high quality, investment grade corporate bonds in his VP although I don't know how he went about deciding on the allocation size.

[Sam Brazil]

It's entirely possible that 3 or even 4 of the PP asset classes will continue to go up, because the US looks relatively wonderful compared to the turd that is the rest of the world.

At least for those of us in the US.

Someone else mentioned that we're in uncharted territory with rates this low for this long. That's absolutely true. Part of being in uncharted territory means that the rules of the game aren't necessarily the same. So regarding your statement, the implicit argument is that so long as the USA is doing relatively doing well vs the rest of the world, LTTs can continue to go up in price.

That seems impossible at a certain point of negative yield.

Whereas the other PP assets operate in a relative world with no absolute bounds, the unique thing about bonds is that they are tied to an quasi-absolute yield floor of 0% yield. I say quasi-absolute because although yields can technically dip below zero, if that happens persistently, let alone with ever increasing intensity, the entire financial system is in serious systemic danger. That means negative rates are either at most short term state, i.e., LTTs could not sustain upward drift long term after reaching zero, as they have for the past 30 years, or it means economics and finance don't work the way we all think they work, which means the premise behind the PP is shot.

[Sam Brazil]

So if you think LTTs are not a problem for the PP, then you either believe interest rates will go negative and keep getting more negative long term OR you believe the PP can function as it has been with only 2 assets out of 4 drifting up.

Is there another choice I'm missing?

Well, we're only at 2.30%, so we got a ways to go before worrying about it. But once yields reach 0%, the PP is technically broken and so is the world's reserve currency.

Well if the world's reserve currency is broken then maybe the PP isn't broken, because isn't that the hyperinflation scenario where everyone loses confidence in the dollar and therefore in fiat currency, which means gold would also hyper-appreciate? Hyper-appreciation of gold is at least a logical way for the PP to continue overall upward drift despite losing 1/3 of its upward drifting assets.

Aside from that scenario, I don't see how the PP could continue overall upward drift. LTTs were crucial to the PP's gains over its lifetime, so it's not as though LTTs are some kind of "nice to have, but not needed" part of the recipe. It also makes no sense, at least to my feeble mind, how rates could continue their long term trajectory downward, past the zero bound, as though zero were any other number, and the financial system just keeps on like nothing happened as rates go to -5%, -10%, etc.

What's optimal for the PP isn't necessarily optimal for holdings bonds per se.

Right, good point. I'm completely aware that saying 1 of 4 PP assets going down in X scenario does not mean that the overall PP goes down in X scenario. So what I'm asking is how it's possible, within the enclosure of the PP system, it can "lose" LTTs as a long term upward drift engine, yet still manage to sustain overall upward drift? Hyperinflation is the only answer I can think of, where gold would carry the rest.

A lot will depend on how sentiment shifts. The PP is rock solid from a macroeconomic perspective; the investment choices may have to change as investors change.

I'm confused. How can you say the PP is rock solid macro-economically and then say it may need to change? Are you broadening the definition of the PP to mean something broad like "any collection of mutually counter veiling assets?" Because my understanding was that HB thought corporate bonds were not suitable for the LTT role, because they didn't respond to macroeconomic circumstances as LTTs did.

PS has already positioned himself in high quality, investment grade corporate bonds in his VP although I don't know how he went about deciding on the allocation size.

Who's PS?

[Sam Brazil]

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

I get the "I can't think of a better way to invest sentiment." I wouldn't be here or waste my time thinking about this if I didn't find something deeply lacking in traditional approaches and something very appealing about the PP.

But isn't it pretty disingenuous to say you can't think of a better way to invest? The PP is a pretty novel experiment, at least when viewed through the lens of long-term history. Long-term history going back to early 1900's or farther is on the side of sticking with a combination of stocks, bonds and maybe real estate. Anything else is unproven, especially something that has only experienced a bond bull market since inception, and which heavily relies on bonds for returns. That's got to at least make an open-minded person seriously think, if not ultimately agree, that there's a better way to invest.

I would really like to believe there's a decidedly better alternative to 60/40 strategy, which saves you from enduring diarrhea-inducing stock draw downs every 8 years, and which isn't an enormous gamble on which start/end years you happen to draw, yet still allows you to enjoy good returns. But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function well long-term as LTT rates are now approaching zero. The only explanation I can think of is hyperinflation causing gold to hyper appreciate. However, relying on hyperinflation to save my portfolio is not exactly what I had in mind when looking for a solid, realistic investment strategy.

[Dieter]

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

I get the "I can't think of a better way to invest sentiment." I wouldn't be here or waste my time thinking about this if I didn't find something deeply lacking in traditional approaches and something very appealing about the PP.

But isn't it pretty disingenuous to say you can't think of a better way to invest? The PP is a pretty novel experiment, at least when viewed through the lens of long-term history. Long-term history going back to early 1900's or farther is on the side of sticking with a combination of stocks, bonds and maybe real estate. Anything else is unproven, especially something that has only experienced a bond bull market since inception, and which heavily relies on bonds for returns. That's got to at least make an open-minded person seriously think, if not ultimately agree, that there's a better way to invest.

I would really like to believe there's a decidedly better alternative to 60/40 strategy, which saves you from enduring diarrhea-inducing stock draw downs every 8 years, and which isn't an enormous gamble on which start/end years you happen to draw, yet still allows you to enjoy good returns. But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function well long-term as LTT rates are now approaching zero. The only explanation I can think of is hyperinflation causing gold to hyper appreciate. However, relying on hyperinflation to save my portfolio is not exactly what I had in mind when looking for a solid, realistic investment strategy.

>> The PP is a pretty novel experiment, at least when viewed through the lens of long-term history.

Same with being off the Gold standard, no? Or having a high percentage of society owning stocks/bonds.

The Talmud investment advice is to diversify across Land, Business, and Reserves (Gold was cash), which seems PPish for a gold-standard environment and not exactly newfangled.

But yes, rates being so low is, um, "interesting times".

>> But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function
>> well long-term as LTT rates are now approaching zero.

I don't have a PhD in finance, so no idea what happens to the PP if LTTs yields keep going down below 0....
(not just a problem for the PP I'd imagine -- if LTTs are <0%, Mid & Short term bonds in other portfolios will yield even less.)

Maybe Land, Business, Reserves (Gold/Cash.)

Old is new again.

[MachineGhost]

Right, good point. I'm completely aware that saying 1 of 4 PP assets going down in X scenario does not mean that the overall PP goes down in X scenario. So what I'm asking is how it's possible, within the enclosure of the PP system, it can "lose" LTTs as a long term upward drift engine, yet still manage to sustain overall upward drift? Hyperinflation is the only answer I can think of, where gold would carry the rest.

I'm confused. How can you say the PP is rock solid macro-economically and then say it may need to change? Are you broadening the definition of the PP to mean something broad like "any collection of mutually counter veiling assets?" Because my understanding was that HB thought corporate bonds were not suitable for the LTT role, because they didn't respond to macroeconomic circumstances as LTTs did.

Who's PS?

PS is PointedStick.

I'm saying if investors decide that Treasury bonds are no longer disinflation/deflation protection and something else is, then the PP will have to adapt to the new assets de jour. That doesn't mean the PP itself is broken. Don't be so picky about the specific assets HB recommended and be more concerned about the metaphysical concept. I'm not a HB fanboy, haven't read more than two of his books, never listened to his podcasts so I don't view him as some guru I must kowtow to or face an eternity in hell. He gave us a gift not a religion.

And hyperinflation doesn't happen unless productivity is also destroyed such as via war or Communist takeover. Unless you think the USA is going in such a Mad Max direction, it's not necessary for the PP to continue to profit with negative yields. Heck, just having negative yields or a loss of confidence in the USD is enough to invoke a monetary crisis of which we'll wind up with a new form of currency and associated debt, etc.. The USD is in the pole position.

I think you're a little too obsessed with "upward drift" coming from Treasury bonds. The PP will do fine with the other three assets just as it did during the 70's when everyone and their mother was convinced the USD was absolutely and utterly doomed. If we get to a point like that again and exceed it as we must, fondle your gold! And buy CD's at 20%.

[Sam Brazil]

I think you're a little too obsessed with "upward drift" coming from Treasury bonds. The PP will do fine with the other three assets just as it did during the 70's when everyone and their mother was convinced the USD was absolutely and utterly doomed. If we get to a point like that again and exceed it as we must, fondle your gold! And buy CD's at 20%.

https://fred.stlouisfed.org/series/GS20

What about the 70's shows how the PP performed outside of a LTT long-term bull market? I'm not talking about 3 year draw downs in LTT prices.

If the only issue were possible 3-5 year slumps in performance I wouldn't care. Nothing is without those. I'm talking about the FRED chart, where it shows that 1950-1983ish was a huge, multi-decade bond bear market, the mirror image of 1983-now.

Has anyone simulated the PP back to 1950 or so using 10 year treasuries to proxy 30 year? That would really put the question to rest.

[Sam Brazil]

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

I get the "I can't think of a better way to invest sentiment." I wouldn't be here or waste my time thinking about this if I didn't find something deeply lacking in traditional approaches and something very appealing about the PP.

But isn't it pretty disingenuous to say you can't think of a better way to invest? The PP is a pretty novel experiment, at least when viewed through the lens of long-term history. Long-term history going back to early 1900's or farther is on the side of sticking with a combination of stocks, bonds and maybe real estate. Anything else is unproven, especially something that has only experienced a bond bull market since inception, and which heavily relies on bonds for returns. That's got to at least make an open-minded person seriously think, if not ultimately agree, that there's a better way to invest.

I would really like to believe there's a decidedly better alternative to 60/40 strategy, which saves you from enduring diarrhea-inducing stock draw downs every 8 years, and which isn't an enormous gamble on which start/end years you happen to draw, yet still allows you to enjoy good returns. But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function well long-term as LTT rates are now approaching zero. The only explanation I can think of is hyperinflation causing gold to hyper appreciate. However, relying on hyperinflation to save my portfolio is not exactly what I had in mind when looking for a solid, realistic investment strategy.

>> The PP is a pretty novel experiment, at least when viewed through the lens of long-term history.

Same with being off the Gold standard, no? Or having a high percentage of society owning stocks/bonds.

The Talmud investment advice is to diversify across Land, Business, and Reserves (Gold was cash), which seems PPish for a gold-standard environment and not exactly newfangled.

But yes, rates being so low is, um, "interesting times".

>> But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function
>> well long-term as LTT rates are now approaching zero.

I don't have a PhD in finance, so no idea what happens to the PP if LTTs yields keep going down below 0....
(not just a problem for the PP I'd imagine -- if LTTs are <0%, Mid & Short term bonds in other portfolios will yield even less.)

Maybe Land, Business, Reserves (Gold/Cash.)

Old is new again.

Sure, we are in novel times. That's always going to be the case. What bothers me is that the PP is supposed to be engineered to handle any economic "season" that could possibly happen in the future. Yet no one seems to have a plausible explanation for how that will work with interest rates sitting around 0%. Does that mean the PP will fail? No. It could mean the PP will somehow work and I don't get it, or it could mean I don't understand the impact of zero rates on PP assets. If that's the case I'm hoping someone can explain what I'm missing.

It just sticks out like an elephant in the living room because the whole spirit of the PP is that it's supposed to be very simple, and in particular, it's supposed to be quite simple to understand how it will respond and still work in any economic environment. The plausible, simple explanation for how it will still work as rates approach zero is conspicuously missing. This is the only scenario in PPology that elicits non-straightforward answers.

[MachineGhost]

If the only issue were possible 3-5 year slumps in performance I wouldn't care. Nothing is without those. I'm talking about the FRED chart, where it shows that 1950-1983ish was a huge, multi-decade bond bear market, the mirror image of 1983-now.

That isn't a total return chart. Yields go up when bond prices drop.

Has anyone simulated the PP back to 1950 or so using 10 year treasuries to proxy 30 year? That would really put the question to rest.

Gold didn't float before 1968 so its not possible.

And read this: https://www.hedgewise.com/blog/marketco ... 8-1982.php

[MachineGhost]

It just sticks out like an elephant in the living room because the whole spirit of the PP is that it's supposed to be very simple, and in particular, it's supposed to be quite simple to understand how it will respond and still work in any economic environment. The plausible, simple explanation for how it will still work as rates approach zero is conspicuously missing. This is the only scenario in PPology that elicits non-straightforward answers.

Are you trolling? Yields declining == disinflation. When they go below 0%, then you have nominal deflation. What happens after that point depends all on investor sentiment. If they have high trust in their government, then things will continue as before. If not, then gold and alternatives will go up to compensate. What about this is hard to understand? Its out of our control what central banks and governments want to do to try to put a chicken in every pot.

[dualstow]

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

I get the "I can't think of a better way to invest sentiment." I wouldn't be here or waste my time thinking about this if I didn't find something deeply lacking in traditional approaches and something very appealing about the PP.

But isn't it pretty disingenuous to say you can't think of a better way to invest?

No, I am never dishonest.

Without the benefit of precognition, all investments are a crap shoot. The pp is the best way I can think of to hedge my bets.

[dualstow]

ADDED:

I would really like to believe there's a decidedly better alternative to 60/40 strategy, which saves you from enduring diarrhea-inducing stock draw downs every 8 years, and which isn't an enormous gamble on which start/end years you happen to draw, yet still allows you to enjoy good returns.

You would like to believe. Ok. Maybe the reason you think I'm being disingenuous is that we may have different definitions of "best way to invest." Mine includes what you wrote above about relative safety form stock drawdowns. If I thought the pp was an "enormous gamble" in any way, shape or form I'd probably have an all-treasury portfolio at this point.

But I have yet to hear a plausible explanation for how the PP could (not "will," just "could") continue to function well long-term as LTT rates are now approaching zero.

Your point is well taken. I might panic and sell my long bonds at some point, probably replacing them with low-yielding 5-year notes. But that's on me. I'm not expecting the pp to magically do well every year. I just don't see a strategy out there with which I am willing to replace the pp, something that I think is a better idea. That's why it's the best way I know to invest.

Long-term history going back to early 1900's or farther is on the side of sticking with a combination of stocks, bonds and maybe real estate. Anything else is unproven,

If we're in uncharted territory, how can one demand a proven strategy? That's something of a paradox.

[barrett]

Just jumping in to remind folks of the Swiss PP YTD results that Lang posted somewhere in the last couple of days. He had the long Swiss bond (50-year issue maturing in 2064) returning about 30% YTD.

And thanks Sam for pushing the issue. I think we're all interested in what happens to long bonds if/when rates go negative. But it seems to me that paying close attention to Japan and Europe can provide a lot of insight as both "economic zones" seem to be a few years ahead of us in terms of disinflation/deflation.

Not sure how this ends or morphs into something else but I do agree that gold is the logical choice to carry the PP under current conditions. Outright deflation should be terrible for stocks. Ditto for cash. Whether or not there is a bond floor (or basement... kudos Dualstow!), I guess we'll find out. But gold may not have to perform sensationally well in order to carry the PP. Something along the lines of what stocks did here in the US from 1982 to 2000 might do the trick. If, for example, we had an economy that was shrinking by 1% each year, the PP would need to return 3% to 4% to yearly to keep up with its historical performance.

And are banks necessarily broken with sustained negative rates? Can't they charge you to hold your money while also charging 2% to lend it to you? I mean, there is still a spread which is how they have always made money. The obvious retort is that a deflationary environment is unlikely to produce a lot of lending activity. But less lending is different than no lending.

[sophie]

I don't think Sam is trolling. He's expressing the same discomfort with long bonds that everyone else here has, at one time or another.

The PP always has an asset that's in the doghouse, but the other three assets always manage to smooth the ride. I guess the closest analogy is the simulations of the Japanese PP. As long as the PP's fundamentals hold (which they are, so far), you won't lose too much if you stick to the bond buying plan. If the rates kind of bounce up and down over the next few years, you'll be in a position to capture some of the gains. There may come a point where most of us will quit buying bonds, but we haven't reached it yet.

For what it's worth - even with the PP holding 75% in assets that no one wants to own, it's beating the pants off a 50/50 Boglehead portfolio, especially over time. Take a look at your 10 year Vanguard personal performance if you don't believe me...I just did, and it's pretty abysmal. And the other problem is...where would you put your money?? The waters are uncharted for any portfolio, including all stock/bond mixes and 100% cash. The popular choice is stock/bond, but my guess is that those portfolios are going to be worse off than the PP. Popular does not equal safe, and a portfolio designed based on fundamentals rather than convenience strikes me as the smarter option.

edit: Just saw Barrett's post. Same thoughts exactly!!

[Pointedstick]

In general, I agree with the worry: past a certain point, U.S. bonds don't work anymore for what we need them to do. My personal limit is 1% yields; at that point, I plan to ditch the bonds and go to 33x3. In addition, I've replaced the treasuries in one of my PP accounts with a mix of treasuries and corporates, which makes me feel better. It performs mostly the same as pure treasuries but yields about 1% more.

I also agree that the idea of negative nominal rates for the bonds backing the world's reserve currency seems like an ill omen. I would expect gold to shoot through the roof in such a situation.

[MachineGhost]

I have posted an update on the duration exposure issue: http://www.gyroscopicinvesting.com/foru ... 22#p150782

What's the next fish to fry? Is there any left?