Slowly bleeding

[dutchtraffic]

"the german 20year etf is yielding 0.35%"

Is the US rate higher because of expected inflation? ie the real rates for safe 1st world countries should be the same? (equilibrate)

None of the bond rates make any sense right now, as they are effectively set by the government (yeah yeah..), and a government which sets the rates that they can borrow for, is not a market.

[craigr]

I need to invest a rather substantial (for me) amount of money, I am partially invested in a euro PP, but just cannot get myself to fully invest in it, not when the german 20year etf is yielding 0.35%, that's just insanity, almost zero upside left, not to speak about stocks which are also at valuations reaching total insanity.

I am totally not convinced the PP can work whatsoever in an environment where "the market" has effectively been killed by central banks, there is no market. Nor has HB ever taken this into account. No european bonds are priced properly, none at all.

The Euro has always been in jeopardy of going away. Generally I would focus on the country's bonds where I lived. But as you said, once they get so low in yield I wouldn't buy them either. You need to hold cash or divest from the Eurozone to some degree.

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile. And of course I say that as one of the authors on the updated Permanent Portfolio book so take that for what it's worth. Sometimes dogma needs to yield to reality and the reality of long bonds under 1% is not good. Better to be in cash in that case.

I'm looking for alternative portfolios that are less risky than the PP (yes i consider the PP to be a serious risk in this situation).
Any ideas? Short term bonds are not even an option as it will cause me to bleed 1.2% in taxes and an additional -0.63% (https://www.ishares.com/nl/particuliere ... tf-de-fund).

Since Browne's death and the publication of our updated book, the political landscape has shifted radically due to phenomenally bad government policies. I believe that the situation in Europe and the U.S. will correct itself, but it's likely to be pretty bumpy. My advice today would be to look into a diversified global portfolio that lowers your exposure to the Eurozone to have it represent the worldwide percentage in the global economy.

Basically, think of a Permanent Portfolio, but using globally diversified assets for the cash, bonds, and stocks. Gold should remain and should have geographic diversification outside the continent where you live for emergencies.

I can't provide specific advice other than the above as each person's situation is different. In fact, the advice above is just a market commentary as I'm not a financial advisor and you should do your own due diligence before making any kind of decision with your savings.

[ochotona]

dutchtraffic, maybe you could adopt a global market portfolio in the process of trying to eliminate home zone risk. Here is Meb Faber's version of the global market portfolio (GMP). You could implement with eight ETFs

Actually, you only have to buy one US ETF... "GAA".

US stocks 20%
Foreign developed economy stocks 15%
Foreign emerging economy stocks 5%
Corporate bonds 22%
US long bonds 15% {governments}
Ex-US 10-year bonds 16% {governments}
US TIPS bonds 2% {US government inflation adjusted bond, or maybe gold is better}
REITs 5% {the book doesn't say, but I presume global REITs}

1973-2013 performance US Dollars
CAGR 9.90%
Volatility 8.45%
Sharpe ratio 0.55
Maximum drawdown -26.87%

Compare to the Permanent Portfolio 1973-2013 performance US Dollars
CAGR 8.53%
Volatility 7.29%
Sharpe ratio 0.45
Maximum drawdown -12.74%

Faber, Mebane (2015), Global Asset Allocation: A Survey of the World's Top Investment Strategies, The Idea Farm LP

[MachineGhost]

You must avoid stocks and invest in other Prosperity assets or the PP is effectively broken.

I'm not sure what you mean?
I'm not avoiding stocks, i have a fully normal (EU) PP.

Means if you're going to invest in assets that aren't priced to deliver long-term returns during Prosperity conditions because they're overvalued, you must find other assets to invest in (in the same currency).

[MachineGhost]

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile. And of course I say that as one of the authors on the updated Permanent Portfolio book so take that for what it's worth. Sometimes dogma needs to yield to reality and the reality of long bonds under 1% is not good. Better to be in cash in that case.

You're indirectly worryng about "Tight Money" and that's market timing. There's nothing magical about 1% being a barrier and we don't hold bonds in the PP for yield, but for the capital gains.

That being said, 1% is a heuristic for bond valuation. But again, valuation only really matters if you're buying bonds for the cash flow and not Deflation protection.

What you can do if you don't like the duration risk that 1% or less represents is reduce your Deflation weighting to a maximum of 12 years duration as it was in 1945 before the bear market commenced.

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

[craigr]

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.

[boglerdude]

There's a real barrier, folks will pull cash if rates get low enough and banks need to charge fees.

Unless the fed pays banks more IOER...

[ILoveMoney]

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

Got a lot out of this. Thanks!

[ILoveMoney]

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile.

Craig, could you please talk a bit more about the risk profile of long bonds when they go under 1%?

Also, it's not entirely clear to me, why the long bonds would provide little insurance when they go below that threshold.

Thanks in advance.

[dutchtraffic]

Again I am starting to think more and more about a global portfolio to try and get through this total madness.

The percentage figures are pretty much pulled out of my *** so they would probably change.

10% Short term govt. bonds/cash in local currency - iShares Euro Government Bond 0-1yr UCITS ETF / IEGE (or better yet, german short term bonds)
20% Gold - ETFS Physical gold / PHAU
20% Global AAA-AA Govt bonds - iShares Global AAA-AA Government Bond / IS0Z
10% Global inv. grade Corporate bonds - iShares Global Corporate Bond / IS0X
25% Global high dividend stocks - Vanguard FTSE All-World High Dividend Yield / VHYL
10% Global real estate - Think Global Real Estate / TRET
5% Global Private equity - iShares Listed Private Equity / IPRV

This translates to:
10% local cash
20% gold
20% global AAA govt. bonds
10% global corp. bonds
30% global stocks
10% global real estate

Backtesting drawdowns against the euro PP is pointless because I cannot backtest one of many euro breakup scenarios, I cannot backtest Germany deciding to give the middle finger to foreign creditors and not converting their euro nominated bonds into marks, and 50 other scenarios that are increasinly realistic, etc etc etc.

This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.

[AnotherSwede]

What if they continue lowering yield by .2-.3% each year? More and more negative.

Stock valuations will continue becoming more and more insane.

Cash banned, if deemed necessary, but probably not.

[dutchtraffic]

What if they continue lowering yield by .2-.3% each year? More and more negative.

Stock valuations will continue becoming more and more insane.

Cash banned, if deemed necessary, but probably not.

Then you would be totally crazy to stay invested in euro paper.

[AnotherSwede]

We are a couple of years into relying on bigger fools with a printing press.

No, I don't have any bonds myself

[ochotona]

Dutch, Faber's most important conclusion from the GAA book was that costs matter more than the exact allocation which is knowable only in hindsight anyway. The many allocations he studied were not so different in the end except the best one if burdened with excess cost suddenly performed worse than the worst one.

[MachineGhost]

I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.

How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).

[dutchtraffic]

I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.

How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).

It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.

[MachineGhost]

This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.

I think you need to seriously consider the currency effect interplay before considering a global PP. If you're Dutch, then you want something stronger, not weaker than the Euro and that would be the USD. USD will always be king of the hill in a monetary crisis so you're unnecessarily exposing yourself to sovereign risk that would not be in a PP that is USD only (there's enough foreign currency exposure in the large caps) if you're going for global assets.

Also, the private listed equity ETF is not real private equity. It's financial management companies. If you want real private equity, you have to look to the new online crowdfunding portals in the US and UK.

[MachineGhost]

It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.

Well then we need quantitative evidence and not gut feelings. I thought I posted that already and yields are fine in terms of providing capital gains down to about .10% or something? We're nowhere near that yet. 1% leaves too much on the table. So since we have no data on a bond bear market except the last one in terms of 20-years, we do have to be more diligent in capping the duration. I don't think the PP can survive a hit with 25% of T-Bonds at 0% with a 30-year year duration. That throws the risk parity way out of whack.
.

[dutchtraffic]

This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.

I think you need to seriously consider the currency effect interplay before considering a global PP. If you're Dutch, then you want something stronger, not weaker than the Euro and that would be the USD. USD will always be king of the hill in a monetary crisis so you're unnecessarily exposing yourself to sovereign risk that would not be in a PP that is USD only (there's enough foreign currency exposure in the large caps) if you're going for global assets.

Also, the private listed equity ETF is not real private equity. It's financial management companies. If you want real private equity, you have to look to the new online crowdfunding portals in the US and UK.

Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.

[dutchtraffic]

It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.

Well then we need quantitative evidence and not gut feelings. I thought I posted that already and yields are fine in terms of providing capital gains down to about .10% or something? We're nowhere near that yet. 1% leaves too much on the table.

The german 20yr etf is doing 0.35%.
And it's not gut feelings, it's just a bad deal no matter how you look at it.

[MachineGhost]

Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.

That may or may not be a bad trade if the Euro goes kaput which is what all those negative bond yields current imply. Speculators are betting on a return to the Mark.

USD also gets to benefit from huge capital inflows when something does go kaput. That't can be modeled in things like the Big Mac Index since its about safety and psychology, not PPP.

[dutchtraffic]

Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.

That may or may not be a bad trade if the Euro goes kaput which is what all those negative bond yields current imply. Speculators are betting on a return to the Mark.

USD also gets to benefit from huge capital inflows when something does go kaput. That't can be modeled in things like the Big Mac Index since its about safety and psychology, not PPP.

That's true but it's a gamble I cannot take.

[MachineGhost]

The german 20yr etf is doing 0.35%.
And it's not gut feelings, it's just a bad deal no matter how you look at it.

It is gut feelings until you provide statistical evidence that a .35% yield doesn't have enough "juice" anymore. Calculating it, .35% is 19.33 years duration and 25% of that is 4.8325 years. Still within the PP ball park. .35% is "locked in" in both yield and duration so it doesn't matter what the yields are after you buy. Even at 0% it will still do the job but you may have to adjust the 25% weight a bit.

I don't see anyone complaining about buying Zero Coupon bonds which are 0% yields, so why make a mountain out of a molehill?

I think your real risk is not low yields but repudiation. So buy T-Bonds.

[craigr]

I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.

How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).

At 1% there is some capital gain from going to 0.5%, but the damage going to 2.0% is much worse.

I just pulled up a convexity calculator to get a feel for this. The assumption is a 20 year bond with current yield of 1.0%

Rates drop by -0.5%: +9.50% gain
Rates increase by +0.5%: -8.61% loss

Rates drop by -1.0%: +20% gain
Rates increase by +1.0%: -16.42%

So yes there is a potential for gain, but it's not the out of the ballpark figure as it would be if yields started higher. If LT bonds go negative (which I am not assuming, but maybe that's wrong), then there is potential for larger gain. But how negative will LT go before people just don't want them outside of financial institutions shuffling money around?

At 1% I don't think bonds are a good deal in terms of the risk and below 1% they are toxic waste and I wouldn't own them. Again, it's dogma vs. reality here.

[ochotona]

Europe and Japan realizing NIRP is not working as hoped. I think the rubber band is near to fully stretched and it will come back in a nasty way on a new buyer of long bonds... someday.