OK, I have to study this further. Are you saying the interest rate risk of LTT is offset by gold? Because from what I understood, that doesn't work like that, right?blue_ruin17 wrote: Your rational, logical, legitimate fear of long-term European sovereign debt instruments isn't actually a fear about BONDS
the fear that you are expressing in your posts does not strike me as the fear of someone who is merely afraid that LTT will be a losing asset (you seem to accept that this is how the PP "works"). Rather, it seems like you are afraid of the evaporation of the LTT market altogether.
...But that is what GOLD is for.
Starting EU PP, doubts about the bonds part
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- europeanwizard
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Re: Starting EU PP, doubts about the bonds part
- blue_ruin17
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Re: Starting EU PP, doubts about the bonds part
LTT interest rate risk is hedged most directly by the T-BILLS portion of the PP.
If rates go up, your LTT take a hit, but because the duration on your T-Bills is so short (ideally <1 year) your cash benefits from the rising rates. It won't be enough to offset the capital losses experienced by the declining value of the treasuries, but the increased income from the T-Bills helps to soften the blow.
However, LTT interest rate risk could also be said to be indirectly hedged by STOCKS and GOLD
In a relatively stable political/economic environment (low systemic risk), if rates begin to climb, people dump their treasuries and move their capital into STOCKS. In this prosperous and politically stable climate, LTT holders were probably in long-term bonds because they were chasing yield. As rates rise and the market for treasuries declines, or even crashes, their pursuit of yield naturally leads them into stocks.
In a relatively unstable political/economic environment (high systemic risk), if rates begin to climb, people dump their treasuries and move into GOLD. In this type of environment they were probably in LTT because of the perceived safety. With rates climbing though, not only are they taking losses, but their level of trust begins to hemorrhage as well. In a standard recession (where the political situation is still stable) they would probably just go into CASH, but it is systemic uncertainty (especially when accompanied by rising rates) that drives people into GOLD instead.
*****************************************************
MediumTex (I think it was him) once mentioned that the thing about the Permanent Portfolio is that it is like running a General Store in which you agnosticly buy and sell every core asset.
... A customer walks in to your General Asset Class Store and explains in distress that his stocks declined by 20% over the last few days. He wants to sell them immediately and buy treasuries, which have been very successful as of late. "No problem!" you assure the investor, and you buy his stocks at a discount and sell him some treasuries at a premium, since they have been in such high demand as of late.
Next week the same customer comes in, and in disgust he slams the treasuries on the table and says he's done with them. Rates rose significantly, and the value of his treasuries declined by 20% over the last few days. He wants to sell them immediately and buy gold, which has been rising in value as of late. "Yes sir!", you chirp, and you buy his treasuries at a discount and sell him some gold at a premium, since customers have been buying up your inventory all week.
A while later the customer storms into your store in a panic. "Gold is crashing as we speak, I need to get out of it and into T-Bills, I'm done with these volatile assets!" You buy his gold at a discount and send him on his way with some T-Bills, which had been collecting dust on a top shelf for a while but were generating a steady flow of income for you the entire time.
Sure as rain, the next week the man returns to the store and decries that the T-Bills just don't generate enough income now that rates have been falling steadily. He wants into treasuries, which have of course been rising in value due to the falling rates. He sells you his perfectly good T-Bills and buys the same treasuries that he bought from you the first week, at a premium, because they've been in such demand this week...
If rates go up, your LTT take a hit, but because the duration on your T-Bills is so short (ideally <1 year) your cash benefits from the rising rates. It won't be enough to offset the capital losses experienced by the declining value of the treasuries, but the increased income from the T-Bills helps to soften the blow.
However, LTT interest rate risk could also be said to be indirectly hedged by STOCKS and GOLD
In a relatively stable political/economic environment (low systemic risk), if rates begin to climb, people dump their treasuries and move their capital into STOCKS. In this prosperous and politically stable climate, LTT holders were probably in long-term bonds because they were chasing yield. As rates rise and the market for treasuries declines, or even crashes, their pursuit of yield naturally leads them into stocks.
In a relatively unstable political/economic environment (high systemic risk), if rates begin to climb, people dump their treasuries and move into GOLD. In this type of environment they were probably in LTT because of the perceived safety. With rates climbing though, not only are they taking losses, but their level of trust begins to hemorrhage as well. In a standard recession (where the political situation is still stable) they would probably just go into CASH, but it is systemic uncertainty (especially when accompanied by rising rates) that drives people into GOLD instead.
*****************************************************
MediumTex (I think it was him) once mentioned that the thing about the Permanent Portfolio is that it is like running a General Store in which you agnosticly buy and sell every core asset.
... A customer walks in to your General Asset Class Store and explains in distress that his stocks declined by 20% over the last few days. He wants to sell them immediately and buy treasuries, which have been very successful as of late. "No problem!" you assure the investor, and you buy his stocks at a discount and sell him some treasuries at a premium, since they have been in such high demand as of late.
Next week the same customer comes in, and in disgust he slams the treasuries on the table and says he's done with them. Rates rose significantly, and the value of his treasuries declined by 20% over the last few days. He wants to sell them immediately and buy gold, which has been rising in value as of late. "Yes sir!", you chirp, and you buy his treasuries at a discount and sell him some gold at a premium, since customers have been buying up your inventory all week.
A while later the customer storms into your store in a panic. "Gold is crashing as we speak, I need to get out of it and into T-Bills, I'm done with these volatile assets!" You buy his gold at a discount and send him on his way with some T-Bills, which had been collecting dust on a top shelf for a while but were generating a steady flow of income for you the entire time.
Sure as rain, the next week the man returns to the store and decries that the T-Bills just don't generate enough income now that rates have been falling steadily. He wants into treasuries, which have of course been rising in value due to the falling rates. He sells you his perfectly good T-Bills and buys the same treasuries that he bought from you the first week, at a premium, because they've been in such demand this week...
STAT PERPETUS PORTFOLIO DUM VOLVITUR ORBIS
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
- europeanwizard
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Re: Starting EU PP, doubts about the bonds part
Thanks for this tip, and the rest of the comment. For some reason, my broker (DeGiro) doesn't offer the 30YR one. But everything else until the 20 year maturity can be bought.gaston wrote: Similarly for cash I would use Dutch short term bills/bonds. Rates are negative -0.6% but that is an insurance against bank failures. Apparently the market thinks this risk is high. Physical gold storage costs more than that.
Others, thanks for commenting! Still re-reading all those who reacted.
Last edited by europeanwizard on Sun Jun 25, 2017 10:02 am, edited 1 time in total.
- europeanwizard
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Re: Starting EU PP, doubts about the bonds part
OK, I have to let this sink in for a bit. For some reason, to me the bonds part turns out to be the most difficult to comprehend. Did not expect this!blue_ruin17 wrote:LTT interest rate risk is hedged most directly by the T-BILLS portion of the PP.
I've decided that I just need to start playing with this. So I placed some orders and am going to see how it turns out.
2500 euros: TEET = Think European Equity UCITS ETF (Euro fund based in NL)
2500 euros: PHAU = ETFS Physical Gold
2500 euros: NL0000102234 = Dutch long term bond
2250 euros: NL0006227316 = Dutch short term bills
- blue_ruin17
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Re: Starting EU PP, doubts about the bonds part
This is why you hold "Cash" (T-Bills or STT) in your portfolio: sometimes gold or stocks will save you when your LTT's tank, but in a rising interest rate environment, everything might be declining except for CASH, which remains stable in value and also starts spitting out a lot of income the higher that rates go.
Cash doesn't have the volatility to directly off-set the large capital losses from LTT, so you have to hope that gold or stocks will pop, which they often do. But if they remain flat, or even decline in lock-step with your LTT's, it will be the T-Bills that act as a life preserver for your portfolio.
STAT PERPETUS PORTFOLIO DUM VOLVITUR ORBIS
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
Re: Starting EU PP, doubts about the bonds part
Just jumping in to say that I've been getting a lot out of your posts in this thread, blue-ruin17. The only thing I wanted to add is that a person holding 25% in cash might end up being relatively wealthier than other investors who avoid cash like the plague. I think relative wealth is important.blue_ruin17 wrote:Cash doesn't have the volatility to directly off-set the large capital losses from LTT, so you have to hope that gold or stocks will pop, which they often do. But if they remain flat, or even decline in lock-step with your LTT's, it will be the T-Bills that act as a life preserver for your portfolio.
Ah, I see you addressed relative wealth in the "Hambone" thread.
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Re: Starting EU PP, doubts about the bonds part
Not sure how I'd explain it without comparing it to anything. Let me try. It looks like the value of Icelandic currency fell for each 1 unit to 0.4. Icelandic PP returned ~50% thanks to gold giving that for each 1 unit invested you ended up with 0.6. Thus still at a significant loss.blue_ruin17 wrote:It is easy to beat any portfolio by using hindsight to point out how an investor could have done better than any given static, passive portfolio.
However those who argue that Icelandic PP did well are presenting it like if one has ended up at 1.5 for each invested unit. This is misleading the readers IMO.
- blue_ruin17
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Re: Starting EU PP, doubts about the bonds part
Yes you are right, I should have mentioned that the Krona devalued significantly, which makes the seemingly fantastic nominal returns of the Icelandic PP in 2008 misleading.
The PP didn't make anyone rich in 2008, let's be clear about that: but it would have saved your ass, even with the devaluation, because the Krona crashed for traditional 60/40 portfolio holders too. Their tremendous nominal losses are even worse than they appear on paper because of this.
Assessing portfolio performance is relative. You cannot evaluate an asset allocation in isolation. A gain of 100% seems fantastic, but its awful if other portfolios with similar risk profiles gained 300%. A loss of 50% seems terrible, but not if similar portfolios lost 90%.
The PP didn't make anyone rich in 2008, let's be clear about that: but it would have saved your ass, even with the devaluation, because the Krona crashed for traditional 60/40 portfolio holders too. Their tremendous nominal losses are even worse than they appear on paper because of this.
Assessing portfolio performance is relative. You cannot evaluate an asset allocation in isolation. A gain of 100% seems fantastic, but its awful if other portfolios with similar risk profiles gained 300%. A loss of 50% seems terrible, but not if similar portfolios lost 90%.
STAT PERPETUS PORTFOLIO DUM VOLVITUR ORBIS
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
- blue_ruin17
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Re: Starting EU PP, doubts about the bonds part
And as if on que, Bjorgen found the statistics (and an article) for the PP performance in Iceland 2008.
Permanent Portfolio Rescues Iceland From Total Collapse
Highlights:
Does this historical example prove that the PP "doesn't work"? To the contrary:
I highly recommend that everyone reads that article in its entirety.
Even in a small economy of a country that is the size of some American suburbs, the PP mechanism did not break. It was subjected what could be described as extreme stress during a crisis which, for Icelanders, will be remembered for generations. Most importantly, it preserved purchasing power relative to local goods and services, and I think that is a feature that most investors discount.
Also note how the Icelandic PP investor not only preserved purchasing power for local goods and services, but they were provided with a significant investment opportunity on the otherside of the crisis This is a 'feature' of the PP that I often reference: it protects capital during events which wipe everyone else out, leaving YOU as one of the only players with chips on the table to play with at the precise moment when significant opportunities present themselves. "The time to buy is when there is blood in the streets", but you can only do so if you have capital to deploy.
Everyone is souping up and tweaking their portfolios to squeeze out ever greater "performance", but the danger of chasing yield today is that it might lead to you chasing bread crumbs tomorrow.
Permanent Portfolio Rescues Iceland From Total Collapse
Highlights:
The PP is safer even than 100% cash, in other words.Icelanders with a traditional ‘defensive’ portfolio, consisting of only stocks and bonds, destroyed their capital in 2008. Icelanders that had everything on a savings account can buy 3 times less. The Icelander with a permanent portfolio however was relatively well protected and can now buy 40% more real estate.
Gold worked exactly as advertised, even in the context of a tiny domestic economy. It preserved purchasing power and benefited from a crisis premium.Starting in 2008 you paid 90 krona for 1 euro. At the end of 2008 you paid 290 krona for 1 euro. A staggering 69% drop in value. Starting 2008 gold was priced 530 euro per ounce. At the end of 2008 gold was priced 592 euro per ounce. In Icelandic krona gold therefore was valued at the start of 2008 47,700 krona per ounce (530 euro/ounce x 90 krona/euro). At the end of 2008 gold was valued at 171,680 krona per ounce (592 euro/ounce x 290 krona/euro).
A lesson for PP investors: a drop of 50%+ in FX purchasing power is still possible, even with a portfolio that is designed to withstand systemic shocks and fat-tail risk. Internalize this fact of life, so that you do not panic if it should happen to your PP.So the 100 krona at the start of 2008 became 146 krona, a yield of 46% for the permanent portfolio. ... But those 145 krona you had at the end of 2008 could only get you 0.5 euro. In other terms, even with 46% yield, you still lost 55% purchasing power in the Eurozone even though you had a permanent portfolio.
Does this historical example prove that the PP "doesn't work"? To the contrary:
Interesting. Maybe this is one of the reasons Harry Browne believed in investing in the economy where you live, work and spend money. The PP took a big hit when it came to being able to buy German cars and Asian electronics, but it actually GAINED from the crisis when it comes to buying what matters most: food and shelter. In a crisis, isn't that what we want, what we need from our portfolio, anyways? We aren't using the PP to "get rich", and in a serious crisis perhaps we won't even care about a loss of purchasing power relative to FX, if it means we can still put food on the table and have a roof over our heads....an Icelander, that invested his money according to the permanent portfolio principles, can now buy 40% more real estate.
So with the permanent portfolio you did lose a lot of purchasing power versus imports, but you gained purchasing power versus local goods, services and real estate.
A stunning example of the PP working exactly as advertised...The permanent portfolio also got a serious beating. Expressed in euros, 50% of your purchasing power is lost. Also painful, but you still have 146 krona instead of 110 krona like the saver, meaning you have 30% more purchasing power than a savings account. You have 146 krona instead of 72,5 krona for a traditional ‘defensive’ portfolio investor, meaning you now have more than double his purchasing power. You quadrupled your purchasing power versus a neutral investor with 50% stocks and 50% bonds and fifteen folded your purchasing power versus a traditional aggressive investor with 100% stocks.
I highly recommend that everyone reads that article in its entirety.
Even in a small economy of a country that is the size of some American suburbs, the PP mechanism did not break. It was subjected what could be described as extreme stress during a crisis which, for Icelanders, will be remembered for generations. Most importantly, it preserved purchasing power relative to local goods and services, and I think that is a feature that most investors discount.
Also note how the Icelandic PP investor not only preserved purchasing power for local goods and services, but they were provided with a significant investment opportunity on the otherside of the crisis This is a 'feature' of the PP that I often reference: it protects capital during events which wipe everyone else out, leaving YOU as one of the only players with chips on the table to play with at the precise moment when significant opportunities present themselves. "The time to buy is when there is blood in the streets", but you can only do so if you have capital to deploy.
Everyone is souping up and tweaking their portfolios to squeeze out ever greater "performance", but the danger of chasing yield today is that it might lead to you chasing bread crumbs tomorrow.
STAT PERPETUS PORTFOLIO DUM VOLVITUR ORBIS
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
Amazon: Investing Equanimity: The Logic & Wisdom of the Permanent Portfolio
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Re: Starting EU PP, doubts about the bonds part
OK sounds reasonable!blue_ruin17 wrote:Yes you are right, I should have mentioned that the Krona devalued significantly, which makes the seemingly fantastic nominal returns of the Icelandic PP in 2008 misleading.
The PP didn't make anyone rich in 2008, let's be clear about that: but it would have saved your ass, even with the devaluation, because the Krona crashed for traditional 60/40 portfolio holders too. Their tremendous nominal losses are even worse than they appear on paper because of this.
Assessing portfolio performance is relative. You cannot evaluate an asset allocation in isolation. A gain of 100% seems fantastic, but its awful if other portfolios with similar risk profiles gained 300%. A loss of 50% seems terrible, but not if similar portfolios lost 90%.
Side note, by no means I'd recommend holding 60/40 in such a small economy. When I talk about 60/40 I assume total world equity market and a large economy for bonds (or a mix of reasonable sovereign bonds; I don't think I'd dare buying bonds only of my own country if I live anywhere economically smaller/weaker than for example Australia or Canada, so if I'm in Europe I guess it'd be only German bonds or a mix of whatever stronger economies there are).
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Re: Starting EU PP, doubts about the bonds part
I have just started myself a European PP.
After a whole month reading opinions, taking notes, doing backtesting... I sticked to the basics: Bundesrepublik Bond 2046 (DE0001102341). However, I decided to introduce another Bond Asset using Vanguard's 20+ YEAR EU fund (IE00B246KL88). I just made 60%-40% distribution. At least I can sleep calm thinking that I kind of did something with the bonds.
After a whole month reading opinions, taking notes, doing backtesting... I sticked to the basics: Bundesrepublik Bond 2046 (DE0001102341). However, I decided to introduce another Bond Asset using Vanguard's 20+ YEAR EU fund (IE00B246KL88). I just made 60%-40% distribution. At least I can sleep calm thinking that I kind of did something with the bonds.
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Re: Starting EU PP, doubts about the bonds part
Btw, I don't know what happened to the German Bond 2046. My google sheet stoped showing info from it and it seems that Frankufrt Boerse link does not work anymore:
http://en.boerse-frankfurt.de/bonds/Bun ... 0001102341
Seems to work in Boerse Berlin. The trend is not very promising btw...
http://en.boerse-frankfurt.de/bonds/Bun ... 0001102341
Seems to work in Boerse Berlin. The trend is not very promising btw...