PP in non QE world

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

feicfeic123
Junior Member
Junior Member
Posts: 6
Joined: Sat Dec 17, 2016 11:01 am

PP in non QE world

Post by feicfeic123 » Sat Dec 17, 2016 11:10 am

Two points on the PP:

1-Central banks world wide have purchased $7 trillion in bonds the last 7-8 years. This has had a huge artificial positive effect on the bond portion of the portfolio while not really affecting the stock and gold portions. What happens as central banks move to sell those bonds?
Gold has corrected 40% in dollars but not really corrected in foreign currencies. The immediate future will be negative.

2-PP has done wonderfully in a world where interest rates go down:1981 to 2016. If we were to say reverse say even 75% of that drop in rates I doubt the PP does as well.

Thoughts all?
User avatar
Kbg
Executive Member
Executive Member
Posts: 1542
Joined: Fri May 23, 2014 4:18 pm

Re: PP in non QE world

Post by Kbg » Sat Dec 17, 2016 11:34 am

Well it is not difficult to figure out what bonds are likely to do how about the other three? And as a portfolio what about that? Are you going to toss the PP or tilt it? If toss what then, if tilt how?

These are far more relevant questions.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2057
Joined: Fri May 21, 2010 4:16 pm

Re: PP in non QE world

Post by buddtholomew » Sat Dec 17, 2016 12:25 pm

You participate in the asset that rises the most or falls the least in the PP.
You also participate in the other 2 volatile assets.
Sometimes 1 of these assets rises as well.
Sometimes 2 of these assets fall at the same time.
Sometime they all rise together.
Sometimes they all fall together.

If you believe in the PP, the asset or assets that rise grow more than the asset or assets that fall.

Get this straight in your head and you hold all 4 assets understanding the pros and the cons of the portfolio as a whole.
feicfeic123
Junior Member
Junior Member
Posts: 6
Joined: Sat Dec 17, 2016 11:01 am

Re: PP in non QE world

Post by feicfeic123 » Sat Dec 17, 2016 5:32 pm

The point about QE is: PP will do surely do well in an uber money supply rise situation. Now what if money supply doesn't rise as it has? How about dumping the 25% in bonds? Did it really make sense to hold bonds with the US 10yr at 1.6%?

33% gold
33% cash
33% stocks
User avatar
JohnnyFactor
Full Member
Full Member
Posts: 50
Joined: Fri Jul 08, 2016 9:16 pm
Location: Canada

Re: PP in non QE world

Post by JohnnyFactor » Sun Dec 18, 2016 2:22 am

feicfeic123 wrote:what if
This is the reason why we invest in the PP to begin with. What should happen is not the same as what does happen. These forums are littered with dead and gone predictions that went nowhere. I can agree with your logic but it doesn't help me make a better decision.

Continue questioning the PP though. You need to believe in what you invest in.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1542
Joined: Fri May 23, 2014 4:18 pm

Re: PP in non QE world

Post by Kbg » Sun Dec 18, 2016 8:04 am

feicfeic123 wrote:The point about QE is: PP will do surely do well in an uber money supply rise situation. Now what if money supply doesn't rise as it has? How about dumping the 25% in bonds? Did it really make sense to hold bonds with the US 10yr at 1.6%?

33% gold
33% cash
33% stocks
If we assume that the next 30 years is the same as 1951-1981 (bond bear market). Using the 10 year bond nominal returns were 4.72% for cash and 3.03% for the 10 year. If we throw in down year stock markets of 53,57,62 the long bonds did better than cash to buffer the loss but the reverse was the case for the down years of 69, 73, 74, 81. If we split the period from 1951-65 then cash does slightly better than bonds and it completely crushes bonds from 65-81. (6.82% to 3.79%). Inflation didn't really start to fire up until late 1965.

It's hard to say if the above is a superior mix. Useful data doesn't exist for gold/U.S. and the general thought is over long periods of time you get a 2% real on bonds and a loss at the rate of inflation on cash. 0% for gold IIRC. Not that I have ANY predictive ability but if I had to pick between the first and second 15 year periods today I'd bet on the earlier period being a better pattern until we start seeing evidence of something else. What we do know about the above is that 2/3rds of the assets are in things that have no risk premium cooked into them.

So bottom line if your goals are a small opportunity for growth and and a rate of loss at 50% of the inflation rate (gold holds its value and cash loses its value so .5 of inflation) then I guess the above is a good portfolio. My gut feeling is that you are expecting inflation but assuming today's environment. It isn't going to happen that way. We either stay in no/low/neg inflation or move to avg/high inflation. if that's your expectation then as a minimum cash should probably go to something like ST TIPS.

Of course all the above is based on very LT averages...1-5 year moves could be very different.
Last edited by Kbg on Sun Dec 18, 2016 3:55 pm, edited 1 time in total.
feicfeic123
Junior Member
Junior Member
Posts: 6
Joined: Sat Dec 17, 2016 11:01 am

Re: PP in non QE world

Post by feicfeic123 » Sun Dec 18, 2016 8:52 am

There really has been no point in holding bonds since mid 2013. I thought the bond correction would have started then it didn't. Brexit will turn out to have been the high point in he bond market and that was mid 2016. 3 yrs of bonds yielding 1.5-3%.

Look QE was an "experiment" that was without precedent. It was similar to pressing the reset button. The job is to figure out what will reset. It sounds silly to hold bonds at least for the next few (1-4) years.
User avatar
sophie
Executive Member
Executive Member
Posts: 3486
Joined: Mon Apr 23, 2012 7:15 pm

Re: PP in non QE world

Post by sophie » Mon Dec 19, 2016 7:33 am

The PP is designed to operate in a world where the markets are influenced by central bank actions, or at least actions external to the market itself. I think it would become irrelevant if all outside forces magically disappeared, which is highly unlikely.

Bond interest rates have overall come down since the PP's inauguration, but it wasn't a steady downward trend. There were times when interest rates went up. Think of it instead as unequal prevalence of the different economic conditions over the past 40 years - which btw is the problem with backtesting PP tweaks like the Golden Butterfly; the prevalence of specific economic conditions may be different going forward.

It may well be that the Fed's plan for carefully controlled, slow interest rate increases will be the PP's nightmare scenario, because gold won't react to that and stocks won't be enough to pick up the slack. I still have no plans to change portfolios though, because the main reason I went with the PP initially hasn't changed: I don't want to see yet another huge dip in portfolio value. I've gone through two of those already. One was unrecoverable and the second took years to regain the losses. At this stage of the game, a third drop will be devastating. A point or two of CAGR just isn't enough to tempt me to take that risk again.
feicfeic123
Junior Member
Junior Member
Posts: 6
Joined: Sat Dec 17, 2016 11:01 am

Re: PP in non QE world

Post by feicfeic123 » Mon Dec 19, 2016 9:15 am

The PP is designed to operate in a world where the markets are influenced by central bank actions, or at least actions external to the market itself. I think it would become irrelevant if all outside forces magically disappeared, which is highly unlikely


Trillions of dollars in QE worldwide is uber extraordinary. Such events cannot be predicted in size and scope anyway. That benefited PP enormously. Are you saying now that an unwind of that wont affect PP negatively? There is something about this that bothers me.
DragonJoey3
Full Member
Full Member
Posts: 56
Joined: Wed Dec 05, 2012 3:00 pm

Re: PP in non QE world

Post by DragonJoey3 » Mon Dec 19, 2016 11:50 am

Rising rates on bonds is nothing new (1970's) and the PP can manage. Remember that as bond rates go up so to does the returns on CASH. "What's that?" you say "cash can actually make a return!?" Yes my friends, it is possible to hold cash and actually see a return, and we may perhaps be returning to the days of 3-5% returns on your savings accounts.

If bond rates start rising due to a dramatic pick up in inflation then we will see gold rise as well, and capture some of the price raises there.

Honestly can you think of a scenario that leads to bonds rising and doesn't benefit at least one of the other assets? I just saw an article posted today about "the great rotation: the movement of money from bonds to stocks."

Stick with the program people, it works. Slow and steady wins the race, and trying to time things and tilt things is all well and good for a variable portfolio, but need I remind you that you are horrible at picking which stock/asset will be the winner. You may think you are not but statistically you are. Go back and look at the new years polls on this very site for "Which asset will be the winner in 2015/2016" and you'll see how horrible people are at picking the winning asset. I recall that no one voted bonds either of the last two stellar years for bonds.

Here is just one example of a reason you hold bonds:

US Elects someone who cares not for political correctness.
This person then decides to heck with the "one china" policy, and for that matter the whole south china sea debacle.
US and China go to war.

Now imagine for a moment that the US and China are at war? Which asset do you imagine is doing well? Probably none of them, but most US financial institutions will probably end up reliant on Bonds. At the very least between that and Gold will be the best considering the beatdown stocks would take.

The markets can remain irrational longer than you can remain solvent. Stick with the 4/25 portfolio, and you shall do well.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1542
Joined: Fri May 23, 2014 4:18 pm

Re: PP in non QE world

Post by Kbg » Mon Dec 19, 2016 12:33 pm

ff,

Good heavens do what you think best if you hate bonds.
feicfeic123
Junior Member
Junior Member
Posts: 6
Joined: Sat Dec 17, 2016 11:01 am

Re: PP in non QE world

Post by feicfeic123 » Mon Dec 19, 2016 12:38 pm

I would rather own bonds when they pay 5% than when they pay 2%. I don't need to ride US treasuries from 2 to 5% to make that decision.

I happen to think QE has distorted the price of all assets. If such mispricing has AIDED the PP I cannot imagine that ITS UNWINDING will also help it. That is what you seem to be saying right?
Post Reply