Gyroscopic Investing

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.

Oh and everything is a bet on something. Every position is based on some assumption. Buy and hold is not somehow ideologically purer than any other way to allocate

craigr wrote: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?

But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).

We only have a historical record of rates rising from "low" yields on 20-year bonds so if you want a quantifiable yield level to stop buying under, here it is (it is 30yr 1977+):



20yr was last under that rate on Oct. 3rd so I guess we're there already. Allow a 1% margin to account for a different macro-environment and I guess 1% doesn't sound that unreasonble as a battle stations point if we actually get there. But you guys better figure out what exactly you're going to do to hedge your stocks and gold if you go to all cash.

MachineGhost wrote:But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).

I totally get it.

But each investor has to make their own judgment call on this. At 1% or lower I'm simply not a buyer of long-bonds and I will not likely hold onto them. For people in Europe with yields under 0.50%, they should definitely not be buying them. There is just no juice left vs. the risk.

I couldn't in good conscience tell someone to buy and hold onto long-bonds under 1% in yield. I wouldn't do it myself so I wouldn't recommend someone else to do it.

Again, each person needs to make up their own mind based on the risks they see.

How horrible would a return to 5-10% interest rate be? What would happen to pension funds, real estate prices?

I suppose pensions would have to be fully funded by tax money.

AnotherSwede wrote:How horrible would a return to 5-10% interest rate be? What would happen to pension funds, real estate prices?

I suppose pensions would have to be fully funded by tax money.

5-10% ?
As of right now, the world's financial system would pretty much implode entirely.

Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.

craigr wrote:

dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.

With 50% of the portfolio at -100% (bonds and bills), and stocks at -90% or worse, I'm not sure if the portfolio would be doing "ok"
Only thing you have left at that point is gold, and you better have phydical bars at that point, because it would be a massive questionmark if your fancy ETF would be working at that point.

dutchtraffic wrote:

craigr wrote:

dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.

With 50% of the portfolio at -100% (bonds and bills), and stocks at -90% or worse, I'm not sure if the portfolio would be doing "ok"
Only thing you have left at that point is gold, and you better have phydical bars at that point, because it would be a massive questionmark if your fancy ETF would be working at that point.

Yeah I understand. But you know no other portfolio is going to be doing any better, and most a lot worse. Iceland was a recent example where most people got pummeled, but if you were widely diversified across four assets you did a heck of a lot better than your countrymen.

And yes again, not many portfolios advocated holding gold assets outside the country where you live as a back up plan. I don't recommend using ETFs for gold unless you have no other choice or for a small allocation for rebalancing purposes. Physical gold held in a far off first-world stable country is a better idea.

A global PP (using https://www.ishares.com/uk/individual/e ... -ucits-etf for the bonds), and using a total world ETF for stocks would have never broken down completely.

It does break the PP concept entirely though.

stuper1 wrote:There was a controversial guy who used to post on here whose portfolio was basically 50% stocks and 50% gold. He claimed it was less volatile than one might imagine. If you have a fairly long time horizon to ride out some volatility, you might consider that portfolio, since you seem to want to avoid long bonds and short bonds.

Another idea is a foreign currency ETF as a separate asset class. Would that have the same tax problems for you?

Vaguely remember that..... Here is an analysis on that theory.

http://www.merkinvestments.com/download ... cation.pdf

and if all else fails go back to the fundamentals

https://en.wikiquote.org/wiki/Benjamin_Graham

and my favourite

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
― Benjamin Graham

5-10% ?
As of right now, the world's financial system would pretty much implode entirely.

Someone suggested return to normalcy. Even you implied it. If yields stay around zero, or get more and more negative, until meltdown, I don't see why PP couldn't "work", and ultimately give you 25% gold and whatever could be saved of the rest.

AnotherSwede wrote:25% gold and whatever could be saved of the rest.

It doesn't make any sense to hold a portfolio where you have a chance of retaining a part of your capital.

If the alternative is worthless currency and equity it is.

If the alternative is slowly, but not smoothly, losing nominal value, then smooth-ish 0% return is really good.

I am just questioning a quick and orderly return to positive yields and honest economics.

AnotherSwede wrote:If the alternative is worthless currency and equity it is.

If the alternative is slowly, but not smoothly, losing nominal value, then smooth-ish 0% return is really good.

Not if you can prevent that to begin with. Which you can.

I am just questioning a quick and orderly return to positive yields and honest economics.

That is literally impossible right now.
There is no way back, and the longer we stay at NIRP, the worse that gets

If the market would be allowed to set the rates, as it's supposed to be, the game ends, or do you think Italy will last long with double digit rates? Because that's what the real rates are supposed to be. Or Spain, or Portugal or.....etc etc.

And what do you think happens with ALL the bubbles when rates go up? Real estate, stocks, everything is bubbly due to nirp.

Not if you can prevent that to begin with. Which you can.

How?

AnotherSwede wrote:

Not if you can prevent that to begin with. Which you can.

How?

By not being 100% invested in euros.

Ok, my currency (krona) follows the euro, pounds are worse.

I am afraid euros (and bunds) are not worse off than other currencies, even if the euro breaks it must be replaced, 1 to something, by something.

AnotherSwede wrote:Ok, my currency (krona) follows the euro, pounds are worse.

I am afraid euros (and bunds) are not worse off than other currencies, even if the euro breaks it must be replaced, 1 to something, by something.

It remains to be seen if Germany or whatever country's bonds you hold, will convert foreign creditors bonds 1 on 1 to german marks..

Let me put it like this for all the people who still say it's all ok and will work out.

Lets just say:

- you have 25 - 30 yearsalaries in euros.
- you live in Europe
- most of it is in cash, part of it is in a euro PP
- you obviously cannot hold this in cash (especially euros!)

Who here will claim with a straight face that as of today, they'd drop 25-30 yearsalaries in a euro PP....?
Because I don't...

I have a mortgage and have not been able to rationalize paying much more interest than I get.

So I have 75% global equity, 25% gold and try paying off the mortgage.

AnotherSwede wrote:I have a mortgage and have not been able to rationalize paying much more interest than I get.

So I have 75% global equity, 25% gold and try paying off the mortgage.

75% stocks? Holy shit, to each his own but to be 75% in stocks right now?

[quote][Because I don't../quote]
Me neither

what an awful problem, having that much money in these times.

AnotherSwede wrote:

[Because I don't../quote]
Me neither

what an awful problem, having that much money in these times.

I realise it's a luxury problem, but it's still a problem.