Gyroscopic Investing

Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.

sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.

Not to mention that the conventional 60/40 stock/bond split lost money in real terms for the 12-year period from 1970 to 1981. When financial assets like stocks and treasuries are doing poorly (because they are not keeping up with inflation), people have a tendency to buy hard assets like gold and housing. Housing prices in real terms kind of gyrated around in the 1970s but went consistently up during the years Sophie is citing above.

I totally get that the early 1970s gold data is questionable, but I believe that of the mid to late 1970s makes sense.

Barrett, that's a really good point: housing prices were subject to the same conditions in 1978-79 minus the history of price fixing. If they responded similarly to gold, that would be some evidence that the gold gains were not artificial.

Although, I personally can't believe that gold's fluctuations for the entire decade were all due to the effect of the previous price fixing. How do you explain the 25% drop in gold price in 1975? If 1973-4 were a gold bubble, I'd say a 25% drop is pretty effectively the end of it. That's about the same as the gold drop in 2013. I doubt anyone in 2014 was saying that gold was in a bubble.

What I'm more worried about with gold is the rise of ETFs, i.e. paper gold. It might be making gold more of a speculative than a safe haven asset. What exactly does a share in an ETF mean, if the managers can loan out a large proportion of their gold stores?

housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .

mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .

Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.

barrett wrote:

mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .

Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.

http://www.econ.yale.edu/~shiller/data/Fig3-1.xls

It gives both real and nominal values for a US residential housing price index; AFAIK this is a price only index and does not include what you would've made in rental income if you had rented the housing out.

For the period that stocks lost to inflation (1966-81 or 1969-81 depending on whether you go by the Dow or S&P 500) it shows nominal non-inflation adjusted residential housing prices from 1966-1981 increased just under 200% for 66-81 (i.e. if it was worth $10K on Jan 1st 1966 it was worth a little over $29.9K in December 1981) or approximately 177.94% for 69-81 (i.e. if it was worth $10K on Jan 1st 1969 it was worth around $27.8K in December 1981).

As per the Minneapolis Fed's inflation adjusted price calculator you would have had to have $24,790 in 1981 to buy what $10,000 would have bought in 1969; you would have had to have $28,000 in 1981 to buy what $10,000 would have bought in 1966. So it looks like for the whole late 60s to early 80s inflationary period residential housing beat inflation, albeit only slightly.

Now, for the 1978 to 1981 Volcker rate shock period, housing (as per Shiller's document referenced above), actually did slightly worse than inflation overall; the real inflation-adjusted value of residential housing went from approximately 113.4 at the beginning of 1978 to around 111.04 by December 1981.

Desert wrote:I do like the 40 percent equity though, and am slowly building up from 30% to 40%.

You feel comfortable increasing your equity exposure at a time when US stocks are "richly" valued ?
I'm well below 30% and would like to increase towards 40% but am reluctant to do so now and wish to wait for a "mean reversion". Of course I could be waiting a long time as US stocks could be on a permanently high plateau.

D1984 wrote:

barrett wrote:

mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .

Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.

http://www.econ.yale.edu/~shiller/data/Fig3-1.xls

It gives both real and nominal values for a US residential housing price index; AFAIK this is a price only index and does not include what you would've made in rental income if you had rented the housing out.

For the period that stocks lost to inflation (1966-81 or 1969-81 depending on whether you go by the Dow or S&P 500) it shows nominal non-inflation adjusted residential housing prices from 1966-1981 increased just under 200% for 66-81 (i.e. if it was worth $10K on Jan 1st 1966 it was worth a little over $29.9K in December 1981) or approximately 177.94% for 69-81 (i.e. if it was worth $10K on Jan 1st 1969 it was worth around $27.8K in December 1981).

As per the Minneapolis Fed's inflation adjusted price calculator you would have had to have $24,790 in 1981 to buy what $10,000 would have bought in 1969; you would have had to have $28,000 in 1981 to buy what $10,000 would have bought in 1966. So it looks like for the whole late 60s to early 80s inflationary period residential housing beat inflation, albeit only slightly.

Now, for the 1978 to 1981 Volcker rate shock period, housing (as per Shiller's document referenced above), actually did slightly worse than inflation overall; the real inflation-adjusted value of residential housing went from approximately 113.4 at the beginning of 1978 to around 111.04 by December 1981.

Here is one of the charts that I was looking at (this is inflation adjusted data as well):

https://inflationdata.com/articles/wp-c ... ousing.gif

I'll keep looking for better links but note that housing started to come down in real dollar terms in 1980 and continued to drop in 1981. 1981, as we all know, was a bad time to own just about anything. I believe T-Bills or money market funds were the relative "winners" that year.

sophie wrote:Barrett, that's a really good point: housing prices were subject to the same conditions in 1978-79 minus the history of price fixing. If they responded similarly to gold, that would be some evidence that the gold gains were not artificial.

Although, I personally can't believe that gold's fluctuations for the entire decade were all due to the effect of the previous price fixing. How do you explain the 25% drop in gold price in 1975? If 1973-4 were a gold bubble, I'd say a 25% drop is pretty effectively the end of it. That's about the same as the gold drop in 2013. I doubt anyone in 2014 was saying that gold was in a bubble.

Sophie, also notice that the gold drop you are referring to corresponded with stocks shooting up. This gets back to Tyler's main point about gold... that it is largely uncorrelated with stocks.

sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.

Seriously...you don't think 1978-Jan 1980 wasn't a speculative bubble? I may give you 1978, but no way after that. Pretty much the definition of a bubble is up 400% in a year (79) and down by half the following year (80). Going near vertical in 2 months on a price chart is a pretty good tell as well.

Kbg wrote:

sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.

Seriously...you don't think 1978-Jan 1980 wasn't a speculative bubble? I may give you 1978, but no way after that. Pretty much the definition of a bubble is up 400% in a year (79) and down by half the following year (80). Going near vertical in 2 months on a price chart is a pretty good tell as well.

Nope. Why would a bubble be defined purely from price movements, ignoring the conditions that may have triggered it? And still less, why do you attribute the gold gains in this period to something that happened almost a decade earlier? There was a lot going on in 1980 that I don't have time to research at the moment - maybe you should?

Gold and treasuries rose after the 2008 financial shock as well. Treasuries rose ~30% in a very short time in 2008. Was that a "speculative bubble", or a logical result of what was going on in the markets at the time? Regardless of the term you use, those events are precisely why you hold gold and treasuries. People holding PP's in 2008 were calmly rebalancing and reaping the gains from these drastic price movements, while everyone else was in shock at watching their retirement account balances almost cut in half. I'm HAPPY to know that gold can move that fast in the right conditions. That's the whole point of owning it as part of a balanced portfolio.

Here's a good chart in nominal dollars (sorry about that!) so we know what we are debating:

http://goldprice.org/gold-price-chart.html

One of the things I remember about that time in late 1979/early 1980 is that the Hunt Brothers were attempting to corner the silver market. When they got over-leveraged, it caused a panic sell-off in silver that had a spillover effect into other commodities.

This link is not bad:

https://en.wikipedia.org/wiki/Silver_Thursday

I look at that spillover as pretty much the same thing that happens when the stock market gets slammed. Good companies are dragged down with the bad.

It's interesting to note that gold settled into a less crazy trading range through, say, the middle of the 1990s, and it did so at a price that was way above the value at the time of de-pegging. Maybe its price was in fact bubbly in 1979 but Sophie is right that that time was crazy. Among other things, cash yields were sky high.

Because of where gold "settled" after Volcker got the markets calmed down, I'm going to speculate that gold was really only in a bubble in very late 1979 to early 1980. Ditto for, say 2011 to early 2013.

Obviously we all have the benefit of hindsight now but another thing I remember about late 1979/early 1980 is that everyone was talking about the price of gold. Kind of like stocks in the late 1990s and housing in the middle of the aughts.

Crazy is also associated with a bubble...curious as to what this group considers a bubble?

i always thought a bubble was self descriptive, a rise with nothing substantial underneath it..

Kbg wrote:Crazy is also associated with a bubble...curious as to what this group considers a bubble?

That's a fair question. To me a bubble is more easily quantified after the fact. Have a look at this NASDAQ price history:

http://www.macrotrends.net/1320/nasdaq-historical-chart

That is in inflation-adjusted numbers so we can see that the index broke through the 2,500 level in about March of 1998 and peaked at over 6,700 (again, in today's dollars) in February of 2000. I use the number 2,500 because that was a sort of trading range that the index settled into again when the stock market as a whole recovered in 2003.

Using this sort of thinking would put gold in a bubble from November of 1979 to September of 1980.

I'm really just thinking out loud here. Hope what I'm saying makes sense. There seems to be a price that everyone more or less agrees on after the craziness ends. Anything above that "floor" was probably bubbly.

For me gold did a great job protecting against an eroding US Dollar in the late 1970s (before its price briefly got bubbly).

I'm going to amend what I wrote two posts ago (the validity of my posts has a very short half life!) and say that gold was in a bubble from roughly September of 1978 to September of 1980. The bubble finished popping around June of 1982 when gold's price was back to its pre-bubble level. From that point on gold shows a weakly positive real return through the present.

I don't 100% agree with Desert's assertion that its behavior is "uncorrelated and utterly unpredictable." Uncorrelated, yes. But it has done well when stocks have struggled because of economic uncertainty/weak USD, etc. Under those conditions investors don't trust that stocks will keep up with inflation.

In other words, there is an actual reason that it's a good diversifier.

Grain of salt and all that.

Desert wrote: That curve looks mighty familiar ... the "take off" was in 1972.

Or stocks starting in 1982.

A bubble is just another word for "unsustainable in hindsight". It's not isolated to gold by any means, which is why diversification matters.

As long as the asset in question is the financial equivalent of Euclid's basic postulates, a pattern like this is made-to-order for a multi-asset allocation with set rebalancing bands - whether you call this a bubble or not. If people are buying this much gold, then they aren't buying other things like stocks or bonds. You get to reap the benefits when you rebalance, as long as you keep emotions out of it and go with your pre-set rebalancing bands. This kind of volatility in uncorrelated assets is exactly what you want.

I still think the alternative hypothesis that these fluctuations reflect market conditions at the time is a better explanation, but I suppose the only way to test this is to go through another 1970s style event. On the other hand, you could consider crisis periods in other countries, examining gold price in their currency - keeping mind that no two financial events will be alike, and that direct comparison is probably not possible. I recall past threads looking at Iceland and Argentina.

Just thought I'd give a quick update on my own personal Golden Butterfly portfolio for anyone keeping track.

If you read back a ways you'll note that I have 100% of my money in the GB but (after an extended bout of analysis paralysis) chose to go with small cap blend over small cap value when first setting things up. While that has worked out very well, after updating my source data, studying it every way I can think of, and educating myself on the theory behind the value premium I finally decided to go all-in and convert my SCB allocation to SCV. I don't anticipate a huge change in performance or anything and still believe that other options are just fine, but I figured it was time to trust my data-driven instincts.

So for anyone reading along wondering if people really invest in the Golden Butterfly or if it's just some crazy idea on the internet, know that there's at least one guy happy to share his experience.

Tyler wrote: ↑Mon May 21, 2018 6:17 pm Just thought I'd give a quick update on my own personal Golden Butterfly portfolio for anyone keeping track.

If you read back a ways you'll note that I have 100% of my money in the GB but (after an extended bout of analysis paralysis) chose to go with small cap blend over small cap value when first setting things up. While that has worked out very well, after updating my source data, studying it every way I can think of, and educating myself on the theory behind the value premium I finally decided to go all-in and convert my SCB allocation to SCV. I don't anticipate a huge change in performance or anything and still believe that other options are just fine, but I figured it was time to trust my data-driven instincts.

So for anyone reading along wondering if people really invest in the Golden Butterfly or if just some crazy idea on the internet, know that there's at least one guy happy to share his experience.

Very interesting Tyler. I also adopted the GB a few years back after reading about it on your website but stuck with SCV.

Nice to know I was right. Or maybe not. Data doesn't lie but human interpretations of financial data are notoriously unreliable due to the unavoidable fact that there is no way to predict the future.

But here's to hoping that the future will feel constrained to behave in the same way it has done in the fairly recent past. At least as long as I need it to.

Looking just at Vanguard funds, Small Cap Growth vs Value pretty much a wash over the last five years. Last 12 months through 4/30 has Growth way ahead: 16.1% vs 7.3.

S&P 500 12.9% last 5 years, so the tilt has hurt in short term. Ach well. SC, especially SCG, has done better than LCB YTD though

In my GBish IRA, I have stocks 1/3 TSM, 1/3 SCV, 1/3 ISB (VG International Explorer -- good in last 12 months - 20%; a wash last 5 years vs Small Cap.

Tyler, you're not alone! I have 2 GB-ish (or should I say GB-esque ) portfolios, both in retirement accounts. I've become comfortable with using GB in lieu of classic HBPP and I do understand the differences. For me GB seems to be a decent compromise between classic PP and Bogleheads-type allocation which is easier to stick with for a long term.

I have all of my 401k in a GB style portfolio, except I use the Paul Merriman index fund allocation, which is worldwide instead of just US.

i much prefer the gb to the pp . it makes more sense . i used it for a short while when the elections came up . but once it looked like rates were going to climb i ditched it for my regular models . i did not want gold and long term treasuries at that stage .

Tyler wrote: ↑Mon May 21, 2018 6:17 pm Just thought I'd give a quick update on my own personal Golden Butterfly portfolio for anyone keeping track.

If you read back a ways you'll note that I have 100% of my money in the GB but (after an extended bout of analysis paralysis) chose to go with small cap blend over small cap value when first setting things up. While that has worked out very well, after updating my source data, studying it every way I can think of, and educating myself on the theory behind the value premium I finally decided to go all-in and convert my SCB allocation to SCV. I don't anticipate a huge change in performance or anything and still believe that other options are just fine, but I figured it was time to trust my data-driven instincts.

So for anyone reading along wondering if people really invest in the Golden Butterfly or if it's just some crazy idea on the internet, know that there's at least one guy happy to share his experience.

Tyler, would you mind sharing which fund or ETF you are now using for SCV? If you are investing in a taxable account, have you considered using Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX)? I recall reading at bogleheads that at least some people found it has a small cap value orientation. Of course some ETFs may be sufficiently tax-efficient there as well... thanks!

williswine wrote: ↑Wed Jun 20, 2018 7:10 pm Tyler, would you mind sharing which fund or ETF you are now using for SCV? If you are investing in a taxable account, have you considered using Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX)? I recall reading at bogleheads that at least some people found it has a small cap value orientation. Of course some ETFs may be sufficiently tax-efficient there as well... thanks!

I personally use VBR, but there are several good SCV ETFs out there. I'm not familiar with VTMSX so don't have much to offer on that front.