A bond yield-based asset rotation strategy for the PP

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tarentola
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A bond yield-based asset rotation strategy for the PP

Post by tarentola » Thu Sep 05, 2019 11:57 am

Can anyone help me to understand this article : https://seekingalpha.com/article/428373 ... n-strategy. Without mentioning the Permanent Portfolio, the article describes a timing system to decide which of the three PP components SPY, TLT and GLD to buy. The back-tested results look good. The central idea seems interesting but I have trouble following the terminology.

Quoting the article:
« There are three components that match each of the three assets: the yield curve, the inflation breakeven rate minus the yield curve, and the 20-year TIP bond rate. »
« The strategy is simple - you buy whatever signal is highest.
  • If the yield curve is highest, you buy stocks.
  • If the inflation expectation rate minus the yield curve is highest, you buy gold.
  • And if the 20-year TIP rate is highest, you buy long-term bonds. »
The idea is attractive, as it seems to be consistent with Harry Browne’s reasoning. The parameters used are a reflection of the state of the economy, and so there is some logic in their signalling which of the three PP components to buy. My interpretation of the above is :
  • If the difference between the 10-year Treasury rate and the two-year Treasury rate (« the yield curve ») is highest, buy stocks. A rising yield curve is bad for long bonds, good for stocks.
  • If the 10-year breakeven inflation rate minus the above difference is highest, buy gold. 10-year breakeven inflation rate = (10-year nominal Treasury yield) - (10-year TIPS yield).
  • If the 20-year TIP rate is highest, buy long bonds.
However I am not sure if I have understood the article. Could anyone correct and expand on my interpretation ?
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