Trump's Effect on the PP

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MachineGhost
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Re: Trump's Effect on the PP

Post by MachineGhost » Fri Nov 18, 2016 3:50 pm

dutchtraffic wrote:The drawdown can never be higher than buy and hold :)
Why does your chart (first one) show it higher then?
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Re: Trump's Effect on the PP

Post by dutchtraffic » Fri Nov 18, 2016 3:51 pm

And if you are worried about missed gains during a sharp increase of the underlying, then sell 20 delta or even further 5-10 delta, it's pretty much free money if you are that many strikes away.
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Re: Trump's Effect on the PP

Post by dutchtraffic » Fri Nov 18, 2016 3:51 pm

MachineGhost wrote:
dutchtraffic wrote:The drawdown can never be higher than buy and hold :)
Why does your chart (first one) show it higher then?
I think there's something wrong with it, the second chart is also from a much more credible source.
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Re: Trump's Effect on the PP

Post by Kevin K. » Fri Nov 25, 2016 3:26 pm

rickb wrote: I'm very sanguine about the PP's ability to withstand interest rate increases, stock market crashes, etc.

On the other hand, I'm skeptical of the PP's ability to withstand an idiot congress led by an ignoramus who together seem like the perfect storm that may end up with the US defaulting on Treasuries and/or the US dollar losing its worldwide reserve currency status.

The PP is constructed assuming a 0% chance the US defaults (well, not quite - the gold you can hold in your hand is meant to preserve at least a portion of your assets in any conceivable or inconceivable SHTF scenario). My problem is that the chance of the US defaulting given our recently elected congress and president seems to have gone from an ignorable SHTF sort of probability to something greater than 1% and possibly as high as 10-20%. This seems to me to be a Nassim Taleb sort of "Black Swan" event. Extremely difficult to estimate, albeit relatively low, probability, but very high impact (sort of like Trump winning the election in the first place).

The IMF already has SDRs as a new global currency, see http://www.imf.org/en/News/Articles/201 ... e-Renminbi . What happens if the US dollar loses its reserve currency status is that demand for US Treasuries tanks. This would be a problem at our current deficit spending rate, let alone a significantly increased deficit spending rate caused by drastically cutting taxes on the uber wealthy and increasing spending to "defend" our border from those pesky Mexicans trying to steal our jobs and rape our women.

I guess I feel like we've taken a huge dump and blithely assuming it's going to miss the fan is perhaps excessively wishful thinking.
We've had the obstructionist idiots in Congress running the show and flirting with Treasury bond default for 8 years now, but adding the Ignoramumus-in-Chief does add an additional dose of volatility. I do think the points you are others have raised about the PP counting on flight to safety are well worth heading. But if what we are saying is not just that "full faith and credit" has one or more asterixes by it but that the dollar's reserve currency status and indeed the primacy of the U.S. in the world economy could be threatened then it seems to me being defensive would mean moving in the direction of a much more diversified approach along the lines of what DFA, Paul Merriman and other modern portfolio theory folks recommend. Hugely diversified equity allocation, perhaps 10% (but no more) in gold as SHTF insurance, total U.S. bond market instead of pure treasuries and a decent-sized slice of international bonds as well. "Defensive" going forward may look very different than in did in Mr. Browne's era. He certainly had no great regard for politicians, but I don't think he'd have imagined we'd have folks running all three branches of government whose main interest is in making sure it doesn't work in order to prove it doesn't work.
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Re: Trump's Effect on the PP

Post by Mountaineer » Fri Nov 25, 2016 4:50 pm

Kevin K. wrote:
rickb wrote: I'm very sanguine about the PP's ability to withstand interest rate increases, stock market crashes, etc.

On the other hand, I'm skeptical of the PP's ability to withstand an idiot congress led by an ignoramus who together seem like the perfect storm that may end up with the US defaulting on Treasuries and/or the US dollar losing its worldwide reserve currency status.

The PP is constructed assuming a 0% chance the US defaults (well, not quite - the gold you can hold in your hand is meant to preserve at least a portion of your assets in any conceivable or inconceivable SHTF scenario). My problem is that the chance of the US defaulting given our recently elected congress and president seems to have gone from an ignorable SHTF sort of probability to something greater than 1% and possibly as high as 10-20%. This seems to me to be a Nassim Taleb sort of "Black Swan" event. Extremely difficult to estimate, albeit relatively low, probability, but very high impact (sort of like Trump winning the election in the first place).

The IMF already has SDRs as a new global currency, see http://www.imf.org/en/News/Articles/201 ... e-Renminbi . What happens if the US dollar loses its reserve currency status is that demand for US Treasuries tanks. This would be a problem at our current deficit spending rate, let alone a significantly increased deficit spending rate caused by drastically cutting taxes on the uber wealthy and increasing spending to "defend" our border from those pesky Mexicans trying to steal our jobs and rape our women.

I guess I feel like we've taken a huge dump and blithely assuming it's going to miss the fan is perhaps excessively wishful thinking.
We've had the obstructionist idiots in Congress running the show and flirting with Treasury bond default for 8 years now, but adding the Ignoramumus-in-Chief does add an additional dose of volatility. I do think the points you are others have raised about the PP counting on flight to safety are well worth heading. But if what we are saying is not just that "full faith and credit" has one or more asterixes by it but that the dollar's reserve currency status and indeed the primacy of the U.S. in the world economy could be threatened then it seems to me being defensive would mean moving in the direction of a much more diversified approach along the lines of what DFA, Paul Merriman and other modern portfolio theory folks recommend. Hugely diversified equity allocation, perhaps 10% (but no more) in gold as SHTF insurance, total U.S. bond market instead of pure treasuries and a decent-sized slice of international bonds as well. "Defensive" going forward may look very different than in did in Mr. Browne's era. He certainly had no great regard for politicians, but I don't think he'd have imagined we'd have folks running all three branches of government whose main interest is in making sure it doesn't work in order to prove it doesn't work.
I'm not sure I'm understanding you correctly, but it seems you may be advocating more of a Boglehead type portfolio vs. a Browne type portfolio. Might a Boglehead portfolio, perhaps like one of the target retirement funds, deal with Black Swans a bit better, especially if one is in the distribution stage?
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Re: Trump's Effect on the PP

Post by Kevin K. » Fri Nov 25, 2016 5:10 pm

Mountaineer wrote: I'm not sure I'm understanding you correctly, but it seems you may be advocating more of a Boglehead type portfolio vs. a Browne type portfolio. Might a Boglehead portfolio, perhaps like one of the target retirement funds, deal with Black Swans a bit better, especially if one is in the distribution stage?
Yes, that's the question I'm raising. If you look at, for example, Vanguard Lifestrategy Conservative Growth Fund, it's 60:40 bonds to stocks but the bond holdings are 60% Total Bond Market (which is more than half Treasuries but also includes the entire corporate and agency markets) and 40% hedged International, while the 40% of the portfolio that's in equities is also 60:40 Total U.S. and Total International. Now there are no tilts to small cap, value or emerging markets as you'd find in a more sophisticated but much harder to manage portfolio, but the Vanguard fund-of-funds is infinitely more broadly diversified than the PP and much better positioned to withstand threats of default on Treasury obligations.

Personally, as I'm in the distribution phase myself, I find Desert's latest proposed portfolio (60% Intermediate Treasuries, 10% each Total U.S. Stock Market, Small Cap, Emerging Markets and Gold) much more appealing but am seriously thinking about diversifying the huge bond allocation beyond Treasuries. Desert's approach is a pretty cool hybrid of insights gleaned from the PP with Larry Swedroe's "Larry" portfolios.
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Re: Trump's Effect on the PP

Post by technovelist » Fri Nov 25, 2016 8:30 pm

I'm going to suggest the following plan to President-Elect Trump:
1. Revalue the Treasury's gold to a high enough price to pay off the debt not held by the Fed.
2. Cancel the debt held by the Fed.
3. End the Fed.
4. End the following departments: HUD, Commerce, Education.
5. Submit a balanced budget, and propose a constitutional amendment requiring this. This will end the trade deficit automatically because there won't be hundreds of billions of $ flowing overseas.
6. Propose a constitutional amendment requiring a balanced budget.
7. End the IRS, funding the government via tariffs.

Then watch the economy take off!
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Re: Trump's Effect on the PP

Post by Kevin K. » Fri Nov 25, 2016 9:51 pm

Might as well require turning in all weapons that aren't musket-loaders and require the slaves to get back to their plantations while you're at it.
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Re: Trump's Effect on the PP

Post by technovelist » Fri Nov 25, 2016 11:01 pm

Kevin K. wrote:Might as well require turning in all weapons that aren't musket-loaders and require the slaves to get back to their plantations while you're at it.
No, that would be the Democrat platform.
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Re: Trump's Effect on the PP

Post by ochotona » Sun Nov 27, 2016 2:59 pm

Back in 2001 and 2002, the US Dollar index hit a high of 120. Not the highest ever, but the highest in the last 20 years.

Right now it's at 101.55. Could the US-Foreign interest rates spreads being established now run it up by 18% back up to 120?

You'd see gold back to sub-$1000. LT Treasuries would be way high, they're 3% for the 30 year now, could they run up to 5%? 6%? Bonds would get creamed even more. Would the tight money on the long end of the yield curve then tank the stock market?

I think these are the risks for 2017-2018.
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Re: Trump's Effect on the PP

Post by barrett » Mon Nov 28, 2016 7:44 am

ochotona wrote: You'd see gold back to sub-$1000. LT Treasuries would be way high, they're 3% for the 30 year now, could they run up to 5%? 6%? Bonds would get creamed even more. Would the tight money on the long end of the yield curve then tank the stock market?

I think these are the risks for 2017-2018.
I think stocks will take a hit if the ten-year treasury gets up to, say 3.0% - 3.5%. There is a point at which investors will take the "risk-free" asset over the one with the very high P/E ratio. In other words, stocks and bonds will find a point of equilibrium.

I don't buy the notion that Trump is somehow going to cause a default on US treasuries. The USG will need to keep borrowing big if he is to fund what he wants to do with infrastructure. That can't be done if people don't have faith that they'll get their money back.

I'm not saying that there won't be more short-term pain for the PP. Obviously some damage has already been done but we all knew that bonds and stocks were overpriced and that something would bring them down a couple notches. We just didn't know what.

The other thing is that if the USD continues to gain strength, there should be tons of overseas buyers for US Treasuries as they would stand to gain on two fronts, i.e. from the yield spread above their own country's bonds AND and from a currency that is strengthening relative to their own.

As usual, I have no clue about gold except that it will do well if the USD's rock solid standing is ever called into doubt. That was all Harry Browne ever really said about gold... that the USD was the world's number one reserve currency and that folks would flock to the number two currency (gold) when option number one was no longer attractive.
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Re: Trump's Effect on the PP

Post by sophie » Mon Nov 28, 2016 7:53 am

Exactly, Barrett. The Fed agrees with you about stocks, which is why they've been so hesitant about raising rates.

I do think the market has a far greater impact on Treasury interest rates than the Fed does though. And the market is a large, infinitely complex entity with many moving parts, some of which you listed. Thus we're back to the idea that you can't predict the market. Yes, interest rates could rise battering stocks and gold, although if they start rising too fast gold will rebound. Or, this could be the same transient bump in rates that we saw the last time the Fed raised interest rates, combined with some excitement about Trump's election. Or, interest rates could go back in the dumpster where they've been for a while, stocks will take off again, and gold will continue to wallow in the 1200-1300 range.

Or maybe something completely different from all of the above will happen. Right?
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