PP in non QE world

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feicfeic123
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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?
Kbg
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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.
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buddtholomew
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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
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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
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JohnnyFactor
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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.
Kbg
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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
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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.
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sophie
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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
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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.
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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.
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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
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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?
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Re: PP in non QE world

Post by DragonJoey3 » Mon Dec 19, 2016 12:53 pm

feicfeic123 wrote: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?

What I'm saying is if you sell now when do you buy? How do you determine the timing? What magic ball do you have to tell you the bottom of bonds? As long as you understand that you are timing the market which is something that as a passive investor I am opposed to, then go ahead, but you should have the understanding that timing the market is not what the PP is for.

Will I ride bonds down from a 2% yield to a 5% yield? Maybe! No one knows the future for bonds, and anyone who says they do is making assumptions and predicting the future.

QE was an attempt to distort bond prices, but there is no guarantee that the future lines up with the Fed's predictions moving forward. I prefer to leave the timing the markets to the "experts" who are out there charging people for their mutual funds, I'll stick with a passively invested PP and be happy with the results.
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I Shrugged
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Re: PP in non QE world

Post by I Shrugged » Mon Dec 19, 2016 1:54 pm

I don't like looking at backtested PP performance from the 70s because when gold ownership was legalized, there was a huge pent up demand for it. A one time thing. I fear that rising rates could be painful for the PP for a long period of time.
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sophie
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Re: PP in non QE world

Post by sophie » Mon Dec 19, 2016 7:18 pm

People keep saying that about the PP in the 1970s, but the gold legalization thing could not have influenced prices for an entire decade. The PP did what it was designed to do, and gold did what it was designed to do.

Let's just examine this assumption for a moment. The only part of gold's rise in the 1970s that is fair to discount is the difference between the fixed rate of $35/oz and the ~$100/oz it would have been in a free market at the time of legalization in 1972. So fine, subtract that $65/oz from gold's price increases in the 1970s. By 1980 it had reached $600/oz. That $65/oz knocks a bit off the 1970s CAGR, but this is not a reason to dismiss the remaining $500/oz of the increase. So can we please stop doing that?

In a rising rate environment, the worst portfolio I can think of to own is the standard stock/bond mix. They'll both get hammered, with no rescue in sight. I'll take the PP any day in that scenario.
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I Shrugged
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Re: PP in non QE world

Post by I Shrugged » Tue Dec 20, 2016 7:50 am

Sophie, you might be right. But there was quite a gold mania at the time.
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Re: PP in non QE world

Post by Kbg » Tue Dec 20, 2016 7:32 pm

PP is an all weather category portfolio with a premise/assumption that humans don't predict well. You are predicting an increase in interest rates. If you are correct then you will beat the PP. If interest rates stay the same or decline again you will not.

Make your decision, place your investment bet and live with it. People who hang here are comfortable with the PP or come to ask questions. What you are comfortable with only you can decide. I personally don't intend on arguing with anyone about where interest rates are going.
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jason
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Re: PP in non QE world

Post by jason » Wed Dec 21, 2016 12:27 am

I Shrugged wrote:Sophie, you might be right. But there was quite a gold mania at the time.
Yes, there was a gold mania in the 70s that lasted many years, but not because of pent up demand. The pent up demand may have had some impact early on, but if you look the historical inflation chart, you see that inflation was extreme at that time. Did the pent up demand for gold cause inflation to occur? I think it's much more likely that high inflation caused the extremely strong demand for gold. Am I wrong?
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sophie
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Re: PP in non QE world

Post by sophie » Wed Dec 21, 2016 7:14 am

jason wrote:
I Shrugged wrote:Sophie, you might be right. But there was quite a gold mania at the time.
Yes, there was a gold mania in the 70s that lasted many years, but not because of pent up demand. The pent up demand may have had some impact early on, but if you look the historical inflation chart, you see that inflation was extreme at that time. Did the pent up demand for gold cause inflation to occur? I think it's much more likely that high inflation caused the extremely strong demand for gold. Am I wrong?
Makes sense. It was not a secret that stocks and bonds were getting hammered in real dollars. Also remember that at that time, there was no Fidelity or Vanguard, and no stock index funds. Ordinary people were limited to passbook savings accounts that paid around 5% interest. Buying stocks was complicated and expensive, and then you got stock certificates that you put into a safe deposit box. Buying gold was not any more difficult and in fact may have been easier and cheaper. I imagine plenty of people noticed that gold was doing much better than stocks and bought accordingly. Not unlike now, where people are buying stock fund shares and talking about how you would have to be nuts to buy gold.
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I Shrugged
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Re: PP in non QE world

Post by I Shrugged » Wed Dec 21, 2016 8:57 am

jason wrote:
I Shrugged wrote:Sophie, you might be right. But there was quite a gold mania at the time.
Yes, there was a gold mania in the 70s that lasted many years, but not because of pent up demand. The pent up demand may have had some impact early on, but if you look the historical inflation chart, you see that inflation was extreme at that time. Did the pent up demand for gold cause inflation to occur? I think it's much more likely that high inflation caused the extremely strong demand for gold. Am I wrong?
Admittedly, no one ever can know the "right" price for gold. My observation in the 70s was that the gold bugs expected hyperinflation, and the gold price was truly a bubble. ie Whatever the "right" price was, it was over-shot and then some. Gold bugs today still expect hyperinflation, but the trading volume is bigger, and allegedly there are large actors who intervene to suppress the price.

It's all animal spirits. Looking back at the 70s, it seems like a bubble now, to me.
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Re: PP in non QE world

Post by ochotona » Wed Dec 21, 2016 9:02 am

The animal spirits cut both ways. SOMEDAY, it could be years or decades in the future, gold will overshoot to the downside it's "long term average" (whatever that means) price which is 2x the Consumer Price Index, or about $500, it will go to $250-$400 in today's Dollars like it did in 2001, and that will be the time to buy, but no one will want to!
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Re: PP in non QE world

Post by ochotona » Wed Dec 21, 2016 3:27 pm

When the next equity bear market hits, everyone will want in on this allocation, and they won't care about the prices of long bonds or gold.
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