Negative interest rates

Discussion of the Bond portion of the Permanent Portfolio

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jhogue
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Re: Negative interest rates

Post by jhogue » Sat Mar 07, 2020 2:42 am

Right now, I am making money as interest rates fall and the price of my 30 year T-bonds skyrocket. If and when my 30 year T-bonds hit their 35% rebalance band, I will sell enough to restore a 4 x 25 balance. Seems like HBPP orthodoxy to me. So why would I need to go to a 3x33 minus LTTs?

As for Cash, if our central bankers should ever be so foolish as to try to impose negative interest rates on retail banking clients, they will likely trigger a good old-fashioned bank run. The American consumer could operate the economy with greenbacks -- and, if necessary, gold as well. Personally, I doubt it will come to that.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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dualstow
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Re: Negative interest rates

Post by dualstow » Sat Mar 07, 2020 8:11 am

It wasn’t that long ago that not a few people were suggesting 3 x 33% portfolio, but it was cash that they wanted to get rid of.
It was mostly because they felt cash wasn’t yielding enough.
Bonds have largely been the most disliked asset in the past ten years, but they’ve also been my saving grace.
Despised even as they save us- Bonds are like Batman.
The new Freakonomics: Why Are Cities (Still) So Expensive? (Ep. 435)
pmward
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 8:20 am

doodle wrote:
Fri Mar 06, 2020 10:13 pm
So I do think a reaxamination of the classic 4x25 portfolio is necessary should our rates decline to the point that Europe's have. At that point I would almost think a 3x33 comprising of cash, gold and stocks would make more sense....off the cuff
It doesn't have to be an all or nothing binary switch. I mentioned in another thread earlier this week that if the 30 year goes into negative territory I'm debating on setting up a rule to start moving from 30 year to 10 year like IEF. This reduces average duration. I am also currently tightening up my cash from 1 year bills to 90 day bills now that we are in a negative real yield environment. This skews down the average duration, which changes the risk/reward equation greatly. It dampens bonds returns if yields go more negative (but I still can participate if this does happen), but it also helps to hedge rates going back up. I'm not sure that a 33/33/33 portfolio would be any more protected in a rising rate environment than a 25/25/25/25 with 90 day bills and IEF (or similar) as the bond barbell piece as stocks and gold will both reprice as well when this does happen. This not to mention the fact that part of the way the PP fundamentally works is to hold the losers and buy/rebalance into them when they are out of favor. If you completely forego the downturn altogether, you lose out on that ability to buy the dip. Bonds will eventually have a bear market... they also will inevitably rise again. In my scenario I would theoretically be in 10 year with negative nominal 30 year bonds, but I would be selling 10 year and going back to 30 year if we went positive again. I'm not sure I will actually do this, but it is something I'm kicking around in my head at the moment.
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Hal
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 1:57 pm

jhogue wrote:
Sat Mar 07, 2020 2:42 am
As for Cash, if our central bankers should ever be so foolish as to try to impose negative interest rates on retail banking clients, they will likely trigger a good old-fashioned bank run. The American consumer could operate the economy with greenbacks -- and, if necessary, gold as well. Personally, I doubt it will come to that.
You may wish to consider what is currently happening in Australia....

https://www.news.com.au/national/orwell ... 7d95d4fb3f
Pet Hog
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Re: Negative interest rates

Post by Pet Hog » Sat Mar 07, 2020 4:23 pm

From a quick google search I found that, according to this chart, there are $1.46 trillion US dollars in circulation (paper money, greenbacks). According to this PBS article, the population of the US is 331 million. That means each person could hold, on average, about $4400 in cash.

What that tells me is that it will be impossible for all investors to say, "I'm not going to invest in negatively yielding bonds. What do you think I am? Stupid? I'm just going to hold cash until the yields turn positive again!" There's just not enough paper money in circulation.

Hoard now and avoid the rush!

In other words, someone's going to have to hold the bonds. For comparison, US Treasury debt is about $14.4 trillion, so about 10 time bigger than the amount of circulating cash.

$1.46 trillion sounds like a lot of dollar bills, but Jeff Bezos is worth $116 billion -- that's $0.116 trillion. He alone could stockpile one-fourteenth of all the US dollars in existence!
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Hal
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 5:13 pm

Pet Hog wrote:
Sat Mar 07, 2020 4:23 pm

What that tells me is that it will be impossible for all investors to say, "I'm not going to invest in negatively yielding bonds. What do you think I am? Stupid? I'm just going to hold cash until the yields turn positive again!" There's just not enough paper money in circulation.

Hoard now and avoid the rush!
Hi Pet Hog,

If that's the case do you believe this theory is correct?

<snip>
Initially, this process creates demand for paper money and paper gold, as whatever value is present in the upper levels of the inverse debt pyramid must pass through these on the way down into gold and the security of the asset pyramid
<snip>
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pmward
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 5:15 pm

Yes, small time retail investors could hold physical cash, but it would be almost impossible for large institutions and businesses, which is really where most of the wealth is held.

Aside from the possibility, there is also the feasibility aspect. Where to stash this cash? Obviously, the members of this forum are very well versed in how difficult and expensive it is to hold hard physical assets. If you wanted to go ultra cheap and bury it in the back yard... well Pablo Escobar used to write 10% of his buried cash off because he averaged 10% either destroyed by the elements or found and taken by someone else. Interestingly, this is also why the "effective lower bound" is rumored to be around -10% yield, because at that point burying cash becomes an arbitrage opportunity, lol.

Also, there has been talk in some of the negative yielding countries of creating paper dollars with a decay rate. So it would have printed on its something like "declines in value 1% per year after 2020". The idea being to try to keep dollars in circulation for less than a year, and anyone that tries to hold would be penalized. So in this system even paper money would have a decay built in.

Negative yields in the U.S. would definitely force a lot of people out into riskier assets with money that they otherwise would have kept safe...
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Re: Negative interest rates

Post by Pet Hog » Sat Mar 07, 2020 6:11 pm

Hal wrote:
Sat Mar 07, 2020 5:13 pm
If that's the case do you believe this theory is correct?
Hal, that's a beautiful and informative chart. Yes, I would have to say I do believe in the theory, whatever it might be! (I suspect it says that as money pours into an economy it goes to higher levels of the double-pyramid -- with riskier assets, but larger markets, upon climbing the inverted pyramid -- but always passing through the small gold market.)
pmward wrote:
Sat Mar 07, 2020 5:15 pm
Yes, small time retail investors could hold physical cash, but it would be almost impossible for large institutions and businesses, which is really where most of the wealth is held.
I feel that the small-time investors are eventually going to spend that physical cash and it will end up with the large institutions. I don't see how there's going to be any good way to avoid all forms of cash (bank accounts, credit cards, short-term treasuries) losing value -- even notes printed with decay rates, as you say, pmward.

Another thing I was considering adding to my earlier post is that governments are still going to issue bonds no matter where yields are. The government needs the money and will get it somehow. Again, someone's going to have to buy those negatively yielding bonds, and the cost will be passed on to the consumer. I have no idea how that will affect the economy, but I can't believe it will be sustainable. For now, I'm happily in the PP, at an all-time high.
pmward wrote:
Sat Mar 07, 2020 5:15 pm
well Pablo Escobar used to write 10% of his buried cash off because he averaged 10% either destroyed by the elements or found and taken by someone else.
Funnily enough, I'm traveling through Medellin as we speak. I shall keep my eye out for buried treasure!
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Tortoise
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Re: Negative interest rates

Post by Tortoise » Sat Mar 07, 2020 6:46 pm

Negative interest rates aren’t so weird in a deflationary environment, in which the rate of inflation is negative.

So my guess is that if we see negative interest rates in the U.S. for a long period of time, it will be during a long, drawn-out deflation.
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Re: Negative interest rates

Post by Kriegsspiel » Sat Mar 07, 2020 6:59 pm

Tortoise wrote:
Sat Mar 07, 2020 6:46 pm
Negative interest rates aren’t so weird in a deflationary environment, in which the rate of inflation is negative.
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. Who knows whether that person will be wise or foolish? Yet they will have control over all the fruit of my toil into which I have poured my effort and skill under the sun. . . Nothing is better for a man than to eat and drink and enjoy his work.
- Ecclesiastes
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Re: Negative interest rates

Post by doodle » Sat Mar 07, 2020 7:37 pm

pmward wrote:
Sat Mar 07, 2020 5:15 pm
Negative yields in the U.S. would definitely force a lot of people out into riskier assets with money that they otherwise would have kept safe...
It seems to me as interest rates approach zero on the longer end of the spectrum it would drive money into stocks, gold and cash. Again, I don't see the logic of taking a great amount of interest rate risk for a negative return. I really think its possible that we see the ten year touch negative yields if this coronavirus continues to spread and so at some point need to formulate a plan should us bonds go negative...
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Hal
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 7:53 pm

Pet Hog wrote:
Sat Mar 07, 2020 6:11 pm
Hal wrote:
Sat Mar 07, 2020 5:13 pm
If that's the case do you believe this theory is correct?
Hal, that's a beautiful and informative chart. Yes, I would have to say I do believe in the theory, whatever it might be! (I suspect it says that as money pours into an economy it goes to higher levels of the double-pyramid -- with riskier assets, but larger markets, upon climbing the inverted pyramid -- but always passing through the small gold market.)
;D https://web.archive.org/web/20120104214 ... gspot.com/
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