Gyroscopic Investing

I just finished reading this article: https://money.usnews.com/investing/news ... ic-reality

In particular what concerns me are the following excerpts:

One question, for example, is whether to make crisis-fighting policies a part of the routine toolkit. Another is whether to try to prepare the public to accept higher inflation from time to time.

In doing so, the central bank went beyond fine-tuning its language or adjusting to changing conditions. Interviews with officials as well as analysis of Fed minutes and policymakers' public statements suggest the emergence of a long-elusive consensus that interest rates would likely never return to pre-crisis levels, and that once established relationships, such as inflation rising when unemployment fell, no longer worked.

But to veteran Fed watchers, the bar is now higher. The January statement, JP Morgan analyst Michael Feroli wrote recently, showed the Fed "subtly but profoundly evolving" to a new view of the world where a variety of forces have changed the way inflation and interest rates work, and have now changed how the central bank responds.

With half the portfolio's yield beholden to one bank that looks more and more to have its rates politically informed, with a posture of low-interest rates far into the future, how viable is the barbell allocation of STT/LTT? Aren't we running a greater risk of negative real-returns in the coming years? Are markets now structured in such a way that investors are compelled to bear more risk to chase break-even yield?

I read Mises articles saying this will lead to a monetary crisis. Maybe, but I don't know how that works with a fiat currency, assuming what follows is a deflationary spiral. What I also don't know is the history of the Fed's actual reactions to market conditions - did they always look this compromised at one time or another?

Does the HBPP now exist in a world where the fundamental mechanical assumptions which underpin its performance no longer apply? ZIRP/QE was ongoing for 10 years, but I can't find detailed analysis of its effect in regards to HBPP.

There is a reason why this place uses real vs. nominal returns. Examine the returns yourself and make your own assessment as to the impact of low rates.

Even if the worst happens in that regard and we do stay in a super low interest rate environment permanently, take on massive QE, and go on a debt binge to try to force stimulate the economy... well there's already an example of that in Japan. Japan has had low to negative interest rates for 20 years and has binged on both QE and debt on a scale that has never been seen before. In the massive PP thread on the Bogleheads forum at some part in the thread someone did the calcs on a Japan PP and it did well even in that environment. You could try to dig up the data on Japan from the early 90's to today and calculate that out and see how it would have done. That might help you assess the merits of PP even in that worse case scenario environment.

And if you want to hear an opinion that is the exact opposite (and arguably more scary) than that article, give this podcast 5 part series a listen. I dare you to listen to this series and not be all in on PP, lol: https://www.macrovoices.com/aia

The truth is nobody knows what's going to happen. The beauty of the PP is that we are covered either way.

pmward wrote: ↑Fri Feb 22, 2019 8:44 pm And if you want to hear an opinion that is the exact opposite (and arguably more scary) than that article, give this podcast 5 part series a listen. I dare you to listen to this series and not be all in on PP, lol: https://www.macrovoices.com/aia

Luke Gromen just did another 'cast on Macrovoices.com this week, it was great. Scary as all get out. Make you glad you have gold.

These low (or for EU zero) interest rates have been likened to drugs by Peter Schiff.

ochotona wrote: ↑Fri Feb 22, 2019 9:22 pm

pmward wrote: ↑Fri Feb 22, 2019 8:44 pm And if you want to hear an opinion that is the exact opposite (and arguably more scary) than that article, give this podcast 5 part series a listen. I dare you to listen to this series and not be all in on PP, lol: https://www.macrovoices.com/aia

Luke Gromen just did another 'cast on Macrovoices.com this week, it was great. Scary as all get out. Make you glad you have gold.

Yeah I saw that. I took a quick glance at the slide deck the other day and I plan on listening to it this weekend. It does scare the crap out of me. But yeah, after listening to that series there's nobody in the world that could convince me not to include gold in my portfolio just in case, haha. Like HB said, people have been predicting this stuff for decades, so who knows if it actually happens or on what timeframe. But I'll gladly pay my gold insurance premium just in case.

europeanwizard wrote: ↑Sat Feb 23, 2019 12:31 am These low (or for EU zero) interest rates have been likened to drugs by Peter Schiff.

How has Euro PP performed in that environment?

It's good to have the japan numbers as backup, but I think there's a good theoretical reason for the PP to do well in a prolonged low interest environment: low interest rates will push more investors to buy stocks, particularly dividend yielding stocks returning more than bank/CD interest rates.

The PP does well because Harry Browne managed to identify 4 fundamental assets that capture the entire investing landscape. All other assets behave as some combination of these fundamental assets. You can think of investors as a bunch of pigs in a pen with 4 feeding troughs. They're always going to pick at least one trough to feed from, and if one of the troughs falls out of favor the pigs will necessarily run to one of others.

The problem with a European PP is that I'm not sure the assets work quite like this there. There's heavy European investment in US Treasuries, which I think might be a big reason for our flat yield curve. Perhaps splitting the bonds between European and US might make sense.

sophie wrote: ↑Sat Feb 23, 2019 10:23 am There's heavy European investment in US Treasuries, which I think might be a big reason for our flat yield curve.

Pretty much the planet is buying US treasuries right now...a classic carry trade (buy high interest rate stuff, finance with low interest stuff, pocket the difference if all goes well). Someone would need to look it up, but pretty sure we still have the highest interest rates of any advanced economy...which is very weird BTW.

pmward wrote: ↑Sat Feb 23, 2019 8:01 am How has Euro PP performed in that environment?

Gold: 1,7%
Bonds: 0,9%
Stocks: -0,5%
Cash: 0,7%

So an average of 0.7% in 2018, thanks to gold. I'm switching out of a Euro PP, and taking steps toward a global PP. I've already moved out of EU stocks, and taken a global stocks fund. I'll probably do the same for bonds.

> we still have the highest interest rates of any advanced economy

Population growth is the easy money. When people stop wanting to move to the US, the party's over

edit: OTOH Japan's deflationary but high quality of life. Easy investment returns and quality of life get conflated

boglerdude wrote: ↑Sun Feb 24, 2019 11:39 pm > we still have the highest interest rates of any advanced economy

Population growth is the easy money. When people stop wanting to move to the US, the party's over

That's why I refer to our economy as a Ponzi scheme. It all depends on the rate of growth not slowing down, which needs more consumers.

stuper1 wrote: ↑Sun Feb 24, 2019 11:45 pm

boglerdude wrote: ↑Sun Feb 24, 2019 11:39 pm > we still have the highest interest rates of any advanced economy

Population growth is the easy money. When people stop wanting to move to the US, the party's over

That's why I refer to our economy as a Ponzi scheme. It all depends on the rate of growth not slowing down, which needs more consumers.

That's not a ponzi scheme. That's capitalism. But I agree with your overall assessment. The system isn't designed to just produce what it did last year. It has to continuously expand lest it will collapse.

moda0306 wrote: ↑Fri Mar 01, 2019 8:31 am

stuper1 wrote: ↑Sun Feb 24, 2019 11:45 pm

boglerdude wrote: ↑Sun Feb 24, 2019 11:39 pm > we still have the highest interest rates of any advanced economy

Population growth is the easy money. When people stop wanting to move to the US, the party's over

That's why I refer to our economy as a Ponzi scheme. It all depends on the rate of growth not slowing down, which needs more consumers.

That's not a ponzi scheme. That's capitalism. But I agree with your overall assessment. The system isn't designed to just produce what it did last year. It has to continuously expand lest it will collapse.

I don't think the capitalist system was actually "designed". It's the product of evolution.

moda0306 wrote: ↑Fri Mar 01, 2019 8:31 am

stuper1 wrote: ↑Sun Feb 24, 2019 11:45 pm

boglerdude wrote: ↑Sun Feb 24, 2019 11:39 pm > we still have the highest interest rates of any advanced economy

Population growth is the easy money. When people stop wanting to move to the US, the party's over

That's why I refer to our economy as a Ponzi scheme. It all depends on the rate of growth not slowing down, which needs more consumers.

That's not a ponzi scheme. That's capitalism. But I agree with your overall assessment. The system isn't designed to just produce what it did last year. It has to continuously expand lest it will collapse.

Well then I have some questions and maybe need to learn more. It sounds to me like maybe capitalism is a ponzi scheme. How about a place like Japan, which admittedly I know next to nothing about. Does Japan have a capitalist economy? I looked up some statistics for them. Their immigration rate is about 17% of ours. Over the last 30 years, their GNP has increased by about 50% and the US's has increased by about 130%. So, compared to Japan, we have six times the number of immigrants per year, and we are getting 2.5 times the amount of GNP growth. Is this a good tradeoff for us? I personally doubt it. I think our immigration rate is too high to allow good assimilation of the newcomers. Who is profiting mainly from our extra GNP growth? Is it middle class people or people who are already very rich? Maybe we would be better off if our ponzi version was a bit less aggressive.

stuper1 wrote: ↑Fri Mar 01, 2019 2:34 pm I think our immigration rate is too high to allow good assimilation of the newcomers.

Actually, the opposite. If you look at the research, immigrants are much more likely to become millionaires than native born Americans. We natural born Americans take our country and what it offers for granted.

stuper1 and moda, it seems that you're both hinting at Ricardo's law of diminishing marginal returns? IE, adding more workers while other inputs remain static results in diminishing increases in output.

pmward wrote: ↑Fri Mar 01, 2019 3:01 pm

stuper1 wrote: ↑Fri Mar 01, 2019 2:34 pm I think our immigration rate is too high to allow good assimilation of the newcomers.

Actually, the opposite. If you look at the research, immigrants are much more likely to become millionaires than native born Americans. We natural born Americans take our country and what it offers for granted.

Doesn't seem relevant to stuper1's point though. (Cultural) assimilation is independent of financial status. You could argue something like "so what? Let (foreign immigrant from X) keep their culture as long as they contribute to America's GDP." But I think that's what stuper1 (correct me if I'm wrong) is arguing is a undesirable goal insofar as maintaining a cohesive country.

It seems to me that the PP is still as relevant as ever, even in a low interest rate environment.

Those low interest rates are putting the hurt on other, more traditional portfolios, as well.

I am less concerned with the viability of HBPP in the context of perpetually low interest rates than I am interested in HBPP's ability to survive the consequences of "perpetually" low interest rates.

In this regard, I am unconcerned.

Concerns about perpetually low interest rates are perfectly valid, they can go lower, and may even go negative as you've stated. The problem is- what if you align yourself for this expectation and are wrong? I'd rather have a portfolio that takes my emotions out of it and forces me to mechanically transfer profits from a running bull to a bear in preparation for a reversal whenever it happens.

When I've lost money with investing, it was when I thought I'd have to prepare for catastrophe (watching news and checking prices daily) and aligned myself too far on one side of the bet (ahem/cough silver 2011) ..

europeanwizard wrote: ↑Sat Feb 23, 2019 1:08 pm

pmward wrote: ↑Sat Feb 23, 2019 8:01 am How has Euro PP performed in that environment?

Gold: 1,7%
Bonds: 0,9%
Stocks: -0,5%
Cash: 0,7%

So an average of 0.7% in 2018, thanks to gold. I'm switching out of a Euro PP, and taking steps toward a global PP. I've already moved out of EU stocks, and taken a global stocks fund. I'll probably do the same for bonds.

Funny how currency matters ... I have a "global" golden butterfly, with cash in SEK and evaluating in SEK.

SEK having lost 25% to all currencies, the global PP is doing great. Everything is doing great. Except cash.