Ray Dalio on Bonds

Discussion of the Bond portion of the Permanent Portfolio

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ahhrunforthehills
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Re: Ray Dalio on Bonds

Post by ahhrunforthehills » Wed Sep 30, 2020 10:42 am

Not to rock the boat even further…

But many of us pretty much know that the Permanent Portfolio isn’t perfect... and isn’t REALLY “Permanent”. There have been many posts about what it would take to break it. If it turns out that mixing peanut butter and windex makes gold… everyone around here would have to rethink some things.

I think the reality is that the Permanent Portfolio is pretty much like modern car’s “lane assist” feature. If you are distracted with other things and start to swerve out of your lane, the cameras in the side mirrors detect it and simply steer you back in your lane. Fantastic. However, the more extreme the environments conditions are, the more that safety feature will break down.

This is the problem with the Permanent Portfolio. It needs firewalls for extreme environments. It needs to be a "Proactive Permanent Portfolio" to address low-occurrence events (zero yields, world reserve currency changes, hyperinflation, etc.). Additional rules that allow it to temporarily change its asset allocation to adjust for the change in risk (caused by a change in the underlying asset correlations due to the extreme event).

Some things that would probably have an impact on the risk-balance within a traditional Permanent Portfolio...

- Scenario A: LTT reaching zero yields
- Scenario B: Hyperinflation
- Scenario C: Explosion in gold production
- Scenario D: World reserve currency shift

I am sure there might be several others. But it is easy to see that...

In a Scenario B, you would be rebalancing your gold for worthless paper.
In a Scenario C, you could be rebalancing your stocks and cash for worthless gold.

It is hard to think of the best specific safeguards for these events (especially since the world will be different when they occur). However, I think it would be great for us to come up with SET DEFINITIONS in advance.

For example, (let's just say for argument's sake) that Scenario A becomes an issue at below 2.5% yield (or whatever number). When that threshold is crossed, a Proactive Permanent Portfolio would say:

WARNING!! BEST-LAID INVESTING PLAN HAS GONE WRONG!! WARNING!!

At 2.5% yield = halt rebalancing into LTT
At 2.0% yield = reduce LTT allocation to 15%
At 1.5% yield = reduce LTT allocation to 12.5%
At 1.25% yield = reduce LTT allocation to 10%
At 1.0% yield = reduce LTT allocation to 7.5%
At 0.75% yield = reduce LTT allocation to 5%
At 0.5% yield = reduce LTT allocation to 2.5%
At 0.25% yield = reduce LTT allocation to 0%
At 0.5% yield = increase LTT allocation to 2.5%
At 0.75% yield = increase LTT allocation to 5%
At 1.0% yield = increase LTT allocation to 7.5%
At 1.25% yield = increase LTT allocation to 10%
At 1.5% yield = increase LTT allocation to 12.5%
At 2.0% yield = increase LTT allocation to 15%
At 3.0% yield = resume rebalancing into LTT

I am not implying that the approach above is ideal. However, I am trying to point out that it is systematic and nothing crazy. You are just trying to balance out the change in risk as the correlation of the underlying assets distort.

A Scenario D (World Reserve Currency shift) would probably be similar. The world will likely slowly and steadily drift from the dollar. At a certain point you begin allocating away from it with whatever the world is using.

IMHO, that is what the traditional Permanent Portfolio is lacking and desperately needs to meet its intended goal. It can probably hold up on its own, but its safety is not linear.
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Re: Ray Dalio on Bonds

Post by Kevin K. » Wed Sep 30, 2020 11:38 am

Great stuff as usual ahhrunforthehills!

And yeah, we're well on our way with scenario #1 and arguably (according to Dalio anyway) with scenario #4 as well. I really do like the idea of having a rules-based approach and as has been said already in this thread that also applies just as much if not more with the issue of when when to revert to the original allocation (so for example a phased-in return to the LTT/STT barbell when/if yields and the yield curve return to some semblance of normalcy).

At the end of the day what seems to be "permanent" rather than the PP as such are Harry Browne's brilliant insights into constructing portfolios based not just on backtesting but on robust response to specific economic conditions along with many other pearls of wisdom as expressed in the 16 Rules for Financial Safety.

Thanks to you and everyone else here for making this thread into something worth saving and reflecting on.
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Re: Ray Dalio on Bonds

Post by Vil » Wed Sep 30, 2020 1:48 pm

ahhrunforthehills wrote:
Wed Sep 30, 2020 10:42 am
- Scenario D: World reserve currency shift
Can recall listening to Dalio about that. Actually, what sort of implication have this shift on PP - it might be over simplified view of things, but is that about (in the very essence of it) the negative correlation of the world reserve currency (USD as of now) with Gold ? Actually, if Scenario D happens anytime in the future, that would be the ultimate killer of (US!) PP as we/you know it (and as I've previously shared - I do not believe in non-US PP implementations, for example Gold doesn't give a **** about how my local currency is doing or how high is the inflation in my country ) ...
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Re: Ray Dalio on Bonds

Post by Vil » Wed Sep 30, 2020 2:37 pm

mathjak107 wrote:
Wed Sep 30, 2020 3:12 am
which is why i would only use short term tips ...
Yup, got your point. It might be this one is nothing new for you, but worth reading for anyone else - "The long and short of TIPS"
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Re: Ray Dalio on Bonds

Post by modeljc » Wed Sep 30, 2020 2:52 pm

Kevin K. wrote:
Wed Sep 30, 2020 11:38 am
Great stuff as usual ahhrunforthehills!

And yeah, we're well on our way with scenario #1 and arguably (according to Dalio anyway) with scenario #4 as well. I really do like the idea of having a rules-based approach and as has been said already in this thread that also applies just as much if not more with the issue of when when to revert to the original allocation (so for example a phased-in return to the LTT/STT barbell when/if yields and the yield curve return to some semblance of normalcy).

At the end of the day what seems to be "permanent" rather than the PP as such are Harry Browne's brilliant insights into constructing portfolios based not just on backtesting but on robust response to specific economic conditions along with many other pearls of wisdom as expressed in the 16 Rules for Financial Safety.

Thanks to you and everyone else here for making this thread into something worth saving and reflecting on.
Even PRPFX believes in some evolution and have changed over the last 40 years. No LTT's and only 9.4% in Treasuries that are mostly short and they don't extend out but 6 or 7 years. In total only 28% in bonds and 19% of them are also short term. They have maintained their position in Swiss Francs at 7.4% thinking about scenario #4. We may need to change also as the world will be far different in the future.
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Re: Ray Dalio on Bonds

Post by ahhrunforthehills » Wed Sep 30, 2020 3:09 pm

Vil wrote:
Wed Sep 30, 2020 1:48 pm
ahhrunforthehills wrote:
Wed Sep 30, 2020 10:42 am
- Scenario D: World reserve currency shift
Can recall listening to Dalio about that. Actually, what sort of implication have this shift on PP - it might be over simplified view of things, but is that about (in the very essence of it) the negative correlation of the world reserve currency (USD as of now) with Gold ? Actually, if Scenario D happens anytime in the future, that would be the ultimate killer of (US!) PP as we/you know it (and as I've previously shared - I do not believe in non-US PP implementations, for example Gold doesn't give a **** about how my local currency is doing or how high is the inflation in my country ) ...
What happens is a bit of a rabbit-hole.

The relationship with gold could be one issue. I think one question is... how does the following map change (if at all [assuming it is correct to begin with]) as the United States drifts from being the major world reserve currency force: https://investresolve.com/inc/uploads/2 ... eatmap.png

Also keep in mind that world reserve currency status is a blessing in the beginning, but becomes a bit of a curse later. The United States losing its status would not necessarily be a bad thing.

A normal country can simply devalue its currency to make its exports more attractive. If there currency strengthens, they can buy foreign assets (denominated in foreign currencies) to offset that. A country with world reserve currency cannot manipulate its currency nearly as easy AFAIK. As a result it drifts further and further away from manufacturing.

I imagine you could end up with a hybrid model for reserve currency like the SDR (that uses a mixture of US Dollar, Euro, Yuan, Yen, and Pound). You might find that you now need to split up your equities accordingly as well. Of course this could have pretty large tax repercussions that might make such a tax strategy prohibitive. Also, the dollar losing its status would likely grow US manufacturing again (since the US could be more of a currency manipulator). So, there appears to be a relationship between the world reserve status and equities as well to consider.

Keep in mind that the world (under its current model) requires a stable reserve currency (countries need one in order to optimize trade... that is why they are literally called "reserves"). So something needs to either meet that requirement or the model would need to change to where they have less of that need (i.e. maybe some type of world reserve cryptocurrency?).

How your allocation needs to changed based on the difference between a world reserve currency SDR model vs a cryptocurreny model could be huge.

As I mentioned, it is hard to think of the best specific safeguards for these events (especially since the world will be different when they occur). I'd just be happy having an alarm go off at a certain point that tells me I REALLY need to turn off auto-pilot, grab the wheel, and make a decision based on the environment sitting in front of me.
Last edited by ahhrunforthehills on Wed Sep 30, 2020 3:42 pm, edited 1 time in total.
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Re: Ray Dalio on Bonds

Post by l82start » Wed Sep 30, 2020 3:13 pm

i have skimmed through some of the free-gold articles posted around here in the past, and (unless i am mistaken which i probably am) that with a loss of reserve status by America there may be no world reserve money, just competing fiat currency's..
“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”

Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence
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Re: Ray Dalio on Bonds

Post by mathjak107 » Wed Sep 30, 2020 3:40 pm

Vil wrote:
Wed Sep 30, 2020 2:37 pm
mathjak107 wrote:
Wed Sep 30, 2020 3:12 am
which is why i would only use short term tips ...
Yup, got your point. It might be this one is nothing new for you, but worth reading for anyone else - "The long and short of TIPS"
Thanks ...it confirms what I planned on ...the short term tips should at least track the CPI if inflation kicks up...the heavy lifting is done with dbc and its commodities and Gld gold if the dollar weakens
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Re: Ray Dalio on Bonds

Post by mathjak107 » Wed Sep 30, 2020 3:43 pm

Kevin K. wrote:
Tue Sep 29, 2020 5:44 pm
While I can see where a real return strategy could make sense for some people the Fido fund has anemic (as in 1-3 year plain vanilla corporates) returns and a hefty .75% ER.

As far as I know all the risk parity approaches use long duration TIPS. I just don’t see the sense in long-duration Treasuries of any sort in this environment. What am I missing?
We have had low inflation so a real return fund would not have been the place to be all these past years
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Re: Ray Dalio on Bonds

Post by mathjak107 » Fri Oct 02, 2020 8:47 am

tlt has been no help in these stock market sell offs ... meh ....
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Re: Ray Dalio on Bonds

Post by Kbg » Fri Oct 02, 2020 11:24 am

May have been posted already, anyway, relevant to this thread.

https://www.morningstar.com/articles/991117/article
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Re: Ray Dalio on Bonds

Post by mathjak107 » Fri Oct 02, 2020 12:38 pm

at this point reading and back testing mean nothing ..whatever will be will be regardless ... i don't even try to sooth myself anymore by the past ....

all we can do is watch as things unfold
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