Ray Dalio on Bonds

[AdamA]

Well at least historically both bonds and stocks become correlated and go down as interest rates are rising...so 50% of your PP is not going to be doing well. Gold, who knows. It may help, it may not help. So that leaves cash.

All of this is also somewhat influenced by how interest rates go up...so hard to say/predict.

Studying 73-82 is instructive, take out gold's truly meteoric rise from the equation and it's all around ugly for the PP (and pretty much anything else).

I would not be surprised if 20 years from now we are looking back at this period of time and saying, "take out LTT's truly meteoric rise from the equation and it was all around ugly for the PP (and pretty much anything else).


There is still upside here.

If rising rates were a foregone conclusion the way everyone thinks they are, wouldn't it already be baked in to bond prices/rates?

[ahhrunforthehills]

Well at least historically both bonds and stocks become correlated and go down as interest rates are rising...so 50% of your PP is not going to be doing well. Gold, who knows. It may help, it may not help. So that leaves cash.

All of this is also somewhat influenced by how interest rates go up...so hard to say/predict.

Studying 73-82 is instructive, take out gold's truly meteoric rise from the equation and it's all around ugly for the PP (and pretty much anything else).

I would not be surprised if 20 years from now we are looking back at this period of time and saying, "take out LTT's truly meteoric rise from the equation and it was all around ugly for the PP (and pretty much anything else).


There is still upside here.

If rising rates were a foregone conclusion the way everyone thinks they are, wouldn't it already be baked in to bond prices/rates?

The markets are driven by short-term profits, not long-term safety. QE is very likely (which will drive LT yields lower yet). Many firms have said that they are waiting for another drop in yields before they sell (which would drive LT yields up).

Regardless, nobody here said that there was no possibility of upside. In fact, I said exactly the opposite.

What we have been saying is that it is a long-term lopsided bet, therefore needs to be risk-adjusted.

From a PP perspective, removing LTT seems like an emotional gut decision. However, based on likely possible scenarios, i view anyone staying in a traditional PP as the one who is actually gambling with their emotions (basically putting their head in the sand hoping everything will be all right).

Granted, it might be alright... but not because they put their head in the sand. It feels good (and “safe”) to believe in the HB dogma. But he was a bit of a flip-flopper during his own investing lifespan. I have very little doubt he would do the same today.

The difference between Dalio and HB is that Dalio is still around to change his mind. Period.

The whole “well, anything can happen... and the PP is “safe”, so...” sounds like a kid wanting his teddy-bear because he had a nightmare.

Playing poker is based on multiple factors... just like markets. However, you can still adjust risk of the cards you can’t see based on the cards you can see. The odds of being dealt an ace is much lower if you are already holding 3 of them (since there are only 4 in a deck). Adjust risk accordingly.

I encourage everyone to make a list of realistic possible outcomes over the next 3-5 years. In every situation where LTT would have done well, ask yourself what likely happened to the other asset classes (and if the underlying correlations have changed based on the environment, why you should not just own a higher percentage of them instead). If you still think LTT deserves 25%, kindly explain why.

Maybe LTT does deserve 25% over the next 3-5 years. I am hoping someone can provide a real reason other than just a teddy bear.

I apologize if any of this sounded a little harsh. I felt like it needed to be pointed to get the point across.

[Hal]

Maybe LTT does deserve 25% over the next 3-5 years. I am hoping someone can provide a real reason other than just a teddy bear.

+1

In HB's time QE hadn't been conceived of in the US, so I believe it's worth considering if the premise the PP is built on is still valid.
(hopefully the answer will be yes)

https://www.managementstudyguide.com/qu ... tances.htm

[modeljc]

Well at least historically both bonds and stocks become correlated and go down as interest rates are rising...so 50% of your PP is not going to be doing well. Gold, who knows. It may help, it may not help. So that leaves cash.

All of this is also somewhat influenced by how interest rates go up...so hard to say/predict.

Studying 73-82 is instructive, take out gold's truly meteoric rise from the equation and it's all around ugly for the PP (and pretty much anything else).

I would not be surprised if 20 years from now we are looking back at this period of time and saying, "take out LTT's truly meteoric rise from the equation and it was all around ugly for the PP (and pretty much anything else).


There is still upside here.

If rising rates were a foregone conclusion the way everyone thinks they are, wouldn't it already be baked in to bond prices/rates?

The markets are driven by short-term profits, not long-term safety. QE is very likely (which will drive LT yields lower yet). Many firms have said that they are waiting for another drop in yields before they sell (which would drive LT yields up).

Regardless, nobody here said that there was no possibility of upside. In fact, I said exactly the opposite.

What we have been saying is that it is a long-term lopsided bet, therefore needs to be risk-adjusted.

From a PP perspective, removing LTT seems like an emotional gut decision. However, based on likely possible scenarios, i view anyone staying in a traditional PP as the one who is actually gambling with their emotions (basically putting their head in the sand hoping everything will be all right).

Granted, it might be alright... but not because they put their head in the sand. It feels good (and “safe”) to believe in the HB dogma. But he was a bit of a flip-flopper during his own investing lifespan. I have very little doubt he would do the same today.

The difference between Dalio and HB is that Dalio is still around to change his mind. Period.

The whole “well, anything can happen... and the PP is “safe”, so...” sounds like a kid wanting his teddy-bear because he had a nightmare.

Playing poker is based on multiple factors... just like markets. However, you can still adjust risk of the cards you can’t see based on the cards you can see. The odds of being dealt an ace is much lower if you are already holding 3 of them (since there are only 4 in a deck). Adjust risk accordingly.

I encourage everyone to make a list of realistic possible outcomes over the next 3-5 years. In every situation where LTT would have done well, ask yourself what likely happened to the other asset classes (and if the underlying correlations have changed based on the environment, why you should not just own a higher percentage of them instead). If you still think LTT deserves 25%, kindly explain why.

Maybe LTT does deserve 25% over the next 3-5 years. I am hoping someone can provide a real reason other than just a teddy bear.

I apologize if any of this sounded a little harsh. I felt like it needed to be pointed to get the point across.

I like the phrase "bit of a flip-flopper" when you look at the advise HB gave to PRPFX in the early 80's. I would bet that if HB were alive he would stay a mile away from a 25% bet on LTT's. And in the past PRPFX has not held big positions in LTT's. Not a fan of PRPFX but its done OK even with its large fees. And also consider we only have about a 1000 believers in HB.

I have lowered my LTT's to 10% and will exit them on the possible run to zero rates. Please don't follow me as I have been known to chase performance only to lose money.

[ahhrunforthehills]

Exactly.

It's like people put Browne on a pedestal because he died. As a result, his investment advice FROM A SINGLE MOMENT IN TIME is given more weight than it deserves...

Here's a link to a thread from this site from 10 years ago.

Has anything really changed?

viewtopic.php?f=3&t=1096&p=11740&hilit= ... all#p11740

Why stop at 10 years? Let's go back 40 years ago to 1981... Harry Browne was advising people to hold ZERO Long-Term Treasuries if they thought we were going to have "level inflation". He also advised having a negative position in Long-Term Treasuries if you thought rising inflation was coming.

So, what was the difference between 40 years ago and today? Look back at 40 years before the 40 years...

http://www.ritholtz.com/blog/wp-content ... g-Term.png

1941: All-time low Long-Term Interest Rates at 2.09%
1981: All-time high Long-Term Interest Rates at 14.14% (when Brown was bearish on LTT)
2021: All-time low Long-Term Interest Rates currently at 1.40%

Anyone see a pattern?!?! Browne's view of LTTs changed along with the LTT yield when he wrote the Permanent Portfolio. Shocker.

But I digress... in reality, I would never take a teddy bear away from a scared child. So why should I do differently here. The reality is that some people might need the illusion of "safety" that the PP brings to keep them from doing something REALLY stupid with their saving.

The emotional decision that keeps them in the PP is probably better than the emotional decisions they would make without it.

That is the crux of the PP. Some of us, based on data, were already using something similar to a PP (which Browne's book and this forum were useful since it added additional insights). Others probably found the PP and kicked the tires quite a bit to see if the data held up. However, it seems that many people here simply subscribe 100% to the feeling of "safety" based on Browne's (overly-simplified and controversial) asset allocation to market conditions.

It reminds me of Marty McFly's vest in Back to the Future. It was great in 1985. The further he got away from 1985 the worse it would get. By 1955 people were making fun of his life preserver. Vests had changed. Life preservers had changed. This is why combining "philosophy" and "asset allocations" in a one-stop-shop wrapper is dangerous. Philosophy can be pretty timeless. Asset allocations are not.

Blindly taking asset allocation guidance from someone in a different point in history is basically insane... the more time that has gone by, the more insane it becomes.

But whatever, who am I to tell another man how to gamble his paycheck (especially when we are playing against each other).

[Kevin K.]

An outstanding post on top of a bunch of other great ones of late ahrunforthehills. Thanks!

Taken as a whole your comments and those of mathjak107 here reflect approaches that are deeply informed by Browne’s work while responding to realities he’d never encountered.

I know some view any departure from the 4 x 25 PP as heretical but I see reducing or eliminating the LTTs as being no more radical than tilting towards prosperity in the Golden Butterfly.

[ahhrunforthehills]

An outstanding post on top of a bunch of other great ones of late ahrunforthehills. Thanks!

Taken as a whole your comments and those of mathjak107 here reflect approaches that are deeply informed by Browne’s work while responding to realities he’d never encountered.

I know some view any departure from the 4 x 25 PP as heretical but I see reducing or eliminating the LTTs as being no more radical than tilting towards prosperity in the Golden Butterfly.

Thanks Kevin. I appreciate that.

What's funny is I always viewed the GB as performance chasing. After a ton of research I just never got comfortable enough to convince me that it wasn't. LTT was a much easier decision.

[pp4me]

An outstanding post on top of a bunch of other great ones of late ahrunforthehills. Thanks!

Taken as a whole your comments and those of mathjak107 here reflect approaches that are deeply informed by Browne’s work while responding to realities he’d never encountered.

I know some view any departure from the 4 x 25 PP as heretical but I see reducing or eliminating the LTTs as being no more radical than tilting towards prosperity in the Golden Butterfly.

Thanks Kevin. I appreciate that.

What's funny is I always viewed the GB as performance chasing. After a ton of research I just never got comfortable enough to convince me that it wasn't. LTT was a much easier decision.

The GB reduces your LTT exposure by 5 percent.

[l82start]

An outstanding post on top of a bunch of other great ones of late ahrunforthehills. Thanks!

Taken as a whole your comments and those of mathjak107 here reflect approaches that are deeply informed by Browne’s work while responding to realities he’d never encountered.

I know some view any departure from the 4 x 25 PP as heretical but I see reducing or eliminating the LTTs as being no more radical than tilting towards prosperity in the Golden Butterfly.

i don't know that departures are considered heretical ? but it does seem wise to view them as reserved for extraordinary situations, the transition between - doing better by leaving alone - and the need to adjust for way out of the ordinary times.. should not be tackled lightly.

[modeljc]

An outstanding post on top of a bunch of other great ones of late ahrunforthehills. Thanks!

Taken as a whole your comments and those of mathjak107 here reflect approaches that are deeply informed by Browne’s work while responding to realities he’d never encountered.

I know some view any departure from the 4 x 25 PP as heretical but I see reducing or eliminating the LTTs as being no more radical than tilting towards prosperity in the Golden Butterfly.

Thanks Kevin. I appreciate that.

What's funny is I always viewed the GB as performance chasing. After a ton of research I just never got comfortable enough to convince me that it wasn't. LTT was a much easier decision.

I think of the PP as a way to save myself from myself without help from brokers and other fees. I love this thread and hope we can talk about asset allocation. I thinking more about 40% TSM, 30% gold and 30% cash. I'm needing a tilt at age 83. Great posts ahhrunforthe hills! I live in West Fork AR and did run when I was age 32. The hills are great and family has joined me.

[Vil]

I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS.

While I can see your point on short-term Treasuries, I can vividly recall couple of paragraphs from Craig's book that are related to TIPS, in essence (+cite):

- "Among the risks involved with TIPS is the integrity of the reporting process for inflation, also known as the Consumer Price Index (CPI). Even if
one believes that the CPI provides an accurate picture of inflation in the broader economy right now, the question is whether the government would
be tempted to manipulate the CPI during some future period of severe inflation. In fact, the U.S. CPI has been changed a number of times through
the years for various reasons. There is nothing to say it can't be changed again in the future."

-"TIPS have only been available in the United States since 1997 and have not been through a period of high inflation. Therefore, anyone stating how
TIPS would do during a period of high U.S. inflation is just guessing regardless of what credentials they hold. If the United States were to encounter
a period of high inflation, TIPS owners could easily begin to feel more like crash test dummies than investors"

- "the increases in the value of TIPS during periods of high inflation will never be great enough to offset the losses in the rest of the portfolio. TIPS are simply not as volatile as gold. As already discussed, in a crisis gold can have explosive price movements in excess of 100 percent annually. The chances of TIPS ever doing this are basically zero due to how they are priced by the markets"

Just some extra food for thought on TIPS, not necessarily do want to bring them under the lights for any further discussion :-)

Disclaimer: I am non-US, but following a variety of the US PP (local-currency hedged). Cannot spot a teddy bear anywhere around me :-)

[modeljc]

I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS.

While I can see your point on short-term Treasuries, I can vividly recall couple of paragraphs from Craig's book that are related to TIPS, in essence (+cite):

- "Among the risks involved with TIPS is the integrity of the reporting process for inflation, also known as the Consumer Price Index (CPI). Even if
one believes that the CPI provides an accurate picture of inflation in the broader economy right now, the question is whether the government would
be tempted to manipulate the CPI during some future period of severe inflation. In fact, the U.S. CPI has been changed a number of times through
the years for various reasons. There is nothing to say it can't be changed again in the future."

-"TIPS have only been available in the United States since 1997 and have not been through a period of high inflation. Therefore, anyone stating how
TIPS would do during a period of high U.S. inflation is just guessing regardless of what credentials they hold. If the United States were to encounter
a period of high inflation, TIPS owners could easily begin to feel more like crash test dummies than investors"

- "the increases in the value of TIPS during periods of high inflation will never be great enough to offset the losses in the rest of the portfolio. TIPS are simply not as volatile as gold. As already discussed, in a crisis gold can have explosive price movements in excess of 100 percent annually. The chances of TIPS ever doing this are basically zero due to how they are priced by the markets"

Just some extra food for thought on TIPS, not necessarily do want to bring them under the lights for any further discussion :-)

Disclaimer: I am non-US, but following a variety of the US PP (local-currency hedged). Cannot spot a teddy bear anywhere around me :-)

I am looking for the same teddy bear. I don't trust TIPS either.

[mathjak107]

I am not a tip lover and I would never count on them to keep pace with my personal cost of living .

But having said that I find tips , commodity funds , floating rate loans and gold make for a very capable portfolio for dealing with inflation....the only question is how much to commit to my more conventional model vs the inflation centered portfolio when all is said and done

[Kevin K.]

I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS.

While I can see your point on short-term Treasuries, I can vividly recall couple of paragraphs from Craig's book that are related to TIPS, in essence (+cite):

- "Among the risks involved with TIPS is the integrity of the reporting process for inflation, also known as the Consumer Price Index (CPI). Even if
one believes that the CPI provides an accurate picture of inflation in the broader economy right now, the question is whether the government would
be tempted to manipulate the CPI during some future period of severe inflation. In fact, the U.S. CPI has been changed a number of times through
the years for various reasons. There is nothing to say it can't be changed again in the future."

-"TIPS have only been available in the United States since 1997 and have not been through a period of high inflation. Therefore, anyone stating how
TIPS would do during a period of high U.S. inflation is just guessing regardless of what credentials they hold. If the United States were to encounter
a period of high inflation, TIPS owners could easily begin to feel more like crash test dummies than investors"

- "the increases in the value of TIPS during periods of high inflation will never be great enough to offset the losses in the rest of the portfolio. TIPS are simply not as volatile as gold. As already discussed, in a crisis gold can have explosive price movements in excess of 100 percent annually. The chances of TIPS ever doing this are basically zero due to how they are priced by the markets"

Just some extra food for thought on TIPS, not necessarily do want to bring them under the lights for any further discussion :-)

Disclaimer: I am non-US, but following a variety of the US PP (local-currency hedged). Cannot spot a teddy bear anywhere around me :-)

Much as I admire Craig and J.M. Lawson and that book I think their views on TIPS are largely mistaken and are based on the fact that TIPS performed terribly during the 2008 market crash - which turns out to have more to do with Lehman Brothers than it does with TIPS per se (see link below).

William Bernstein has this to say about the "they can manipulate the CPI" trope:

"Some worry that the government may manipulate the CPI in a way that understates inflation and erodes the real purchasing power of TIPS. This is unlikely for the simple reason that the bond market would consider this to be a form of default, which would have two consequences: first, it would produce bond market turbulence of a sort that the Treasury could ill afford, and second, it would destroy the Treasury's future ability to offer them, possibly permanently. The United Kingdom first offered inflation-linked gilts in the early 1980s and scrupulously maintained the integrity of its inflation reporting."

Getting back to Jonathan Clements, what's he's doing is buying short-term tips (think VTIP) and short-term Treasuries as a low-duration barbell that's agnostic about inflation. That's entirely different than buying long-term TIPs as a substitute for LTT's which Rowland and Lawson rightly object to because they don't provide deflation insurance. However as Bernstein points out deflation is the least likely of the 4 economic scenarios the PP was designed to deal with and the most expensive to insure against. And remember Clements has his ~67% equities in fully internationally-diversified, small cap and value tilted funds, which according to Bernstein and others are the best long-term inflation hedge of all.

Here's the link to the article I mentioned about what happened to TIPS in 2008:

https://movement.capital/the-largest-ar ... s-in-2008/

All that said, I personally don't see TIPS of any duration priced with negative nominal interest rates as being appealing. For the 50% of my portfolio I have in fixed and cash I'm buying our annual 10K limit in iBonds, putting a decent chunk into NCUA insured 6-12 month CD's paying .60-.80% (better than 10 year Treasuries and just as safe IMHO) and including about 20% in Vanguard's BSV ETF, which is 70% government, 30% high-quality corporate, very short duration. Equities and gold are 25% TSM, 10% Total International and 15% Gold. That's the PP-inspired portfolio (which I admit is no longer very PP like in terms of percentages). Much less sophisticated than Mathjak 107's portfolio for sure, but easy to maintain.

But while Mathjak107 has his conventional and his inflation-fighting portfolio, I've decided after years of thinking about it to diversify across active and passive strategies, so the other half of my assets are in 80% Vanguard Wellesley, 20% Gold (see my thread on Wellesley in the Variable Portfolio forum here if interested). To be clear I'm not recommending anything I'm doing to anyone else. It's just a good-enough allocation that takes into account the knowns and the known unknowns of these crazy times as best I can. Needless to say I will happily revert to a more PP-like bond allocation if we ever get back to Treasuries with positive real returns.

[AdamA]

.

The emotional decision that keeps them in the PP is probably better than the emotional decisions they would make without it.

Exactly.

[mathjak107]

I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS.

While I can see your point on short-term Treasuries, I can vividly recall couple of paragraphs from Craig's book that are related to TIPS, in essence (+cite):

- "Among the risks involved with TIPS is the integrity of the reporting process for inflation, also known as the Consumer Price Index (CPI). Even if
one believes that the CPI provides an accurate picture of inflation in the broader economy right now, the question is whether the government would
be tempted to manipulate the CPI during some future period of severe inflation. In fact, the U.S. CPI has been changed a number of times through
the years for various reasons. There is nothing to say it can't be changed again in the future."

-"TIPS have only been available in the United States since 1997 and have not been through a period of high inflation. Therefore, anyone stating how
TIPS would do during a period of high U.S. inflation is just guessing regardless of what credentials they hold. If the United States were to encounter
a period of high inflation, TIPS owners could easily begin to feel more like crash test dummies than investors"

- "the increases in the value of TIPS during periods of high inflation will never be great enough to offset the losses in the rest of the portfolio. TIPS are simply not as volatile as gold. As already discussed, in a crisis gold can have explosive price movements in excess of 100 percent annually. The chances of TIPS ever doing this are basically zero due to how they are priced by the markets"

Just some extra food for thought on TIPS, not necessarily do want to bring them under the lights for any further discussion :-)

Disclaimer: I am non-US, but following a variety of the US PP (local-currency hedged). Cannot spot a teddy bear anywhere around me :-)

Much as I admire Craig and J.M. Lawson and that book I think their views on TIPS are largely mistaken and are based on the fact that TIPS performed terribly during the 2008 market crash - which turns out to have more to do with Lehman Brothers than it does with TIPS per se (see link below).

William Bernstein has this to say about the "they can manipulate the CPI" trope:

"Some worry that the government may manipulate the CPI in a way that understates inflation and erodes the real purchasing power of TIPS. This is unlikely for the simple reason that the bond market would consider this to be a form of default, which would have two consequences: first, it would produce bond market turbulence of a sort that the Treasury could ill afford, and second, it would destroy the Treasury's future ability to offer them, possibly permanently. The United Kingdom first offered inflation-linked gilts in the early 1980s and scrupulously maintained the integrity of its inflation reporting."

Getting back to Jonathan Clements, what's he's doing is buying short-term tips (think VTIP) and short-term Treasuries as a low-duration barbell that's agnostic about inflation. That's entirely different than buying long-term TIPs as a substitute for LTT's which Rowland and Lawson rightly object to because they don't provide deflation insurance. However as Bernstein points out deflation is the least likely of the 4 economic scenarios the PP was designed to deal with and the most expensive to insure against. And remember Clements has his ~67% equities in fully internationally-diversified, small cap and value tilted funds, which according to Bernstein and others are the best long-term inflation hedge of all.

Here's the link to the article I mentioned about what happened to TIPS in 2008:

https://movement.capital/the-largest-ar ... s-in-2008/

All that said, I personally don't see TIPS of any duration priced with negative nominal interest rates as being appealing. For the 50% of my portfolio I have in fixed and cash I'm buying our annual 10K limit in iBonds, putting a decent chunk into NCUA insured 6-12 month CD's paying .60-.80% (better than 10 year Treasuries and just as safe IMHO) and including about 20% in Vanguard's BSV ETF, which is 70% government, 30% high-quality corporate, very short duration. Equities and gold are 25% TSM, 10% Total International and 15% Gold. That's the PP-inspired portfolio (which I admit is no longer very PP like in terms of percentages). Much less sophisticated than Mathjak 107's portfolio for sure, but easy to maintain.

But while Mathjak107 has his conventional and his inflation-fighting portfolio, I've decided after years of thinking about it to diversify across active and passive strategies, so the other half of my assets are in 80% Vanguard Wellesley, 20% Gold (see my thread on Wellesley in the Variable Portfolio forum here if interested). To be clear I'm not recommending anything I'm doing to anyone else. It's just a good-enough allocation that takes into account the knowns and the known unknowns of these crazy times as best I can. Needless to say I will happily revert to a more PP-like bond allocation if we ever get back to Treasuries with positive real returns.

my tips i own are already up in appreciation more than the 30 year yields..it has become an appreciation centered game . the tips are just an opposite bet from conventional bonds ... the bonds will get a kicker if inflation rises.

i think any portfolio weighting for inflation , but not severe inflation , should have tips at the base of the pyramid .

if you look at most real return funds that is exactly what they hold along with other inflation oriented assets .....

fidelity's strategic real return is tips , floating rate loans , mortgage reits and commodities..

"• The fund's assets are allocated among inflation-protected securities (including U.S. TIPS),
floating-rate high-yield bank loans, commodities and related investments, and real-estate-related
securities (including REITs), using a target weighting of 30%, 25%, 25% and 20%, respectively.
This strategic allocation attempts to take advantage of the low correlation among these security
types in effectively hedging inflation over time."

[mathjak107]

one thing i want to add is the conventional model is the fidelity insight income model , so it too is dynamic , only i don't have to think about what to do , they do ...

so while the assets in that model are positioned a particular way , every so often that mix can change and does ...

[Kbg]

This is all true...but fundamentally they are no different than any other treasury other than the base value being increased annually due to CPI adjustments. The bigger, much bigger drivers are stated interest rate and duration which will hammer both Ts and TIPs.

[Kevin K.]

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?

[Vil]

https://movement.capital/the-largest-ar ... s-in-2008/

Thanks Kevin, that's a nice read. Though wondering how much TIPS Lehman has owned to flood the market so vastly..

But while Mathjak107 has his conventional and his inflation-fighting portfolio, I've decided after years of thinking about it to diversify across active and passive strategies,

No worries, I am not taking anyone else's word for granted. I do have passive and active parts of my portfolio as well. I do use the active one really active for my day/swing trading adventures, however I was already contemplating a (tiny) bit on the allocation scheme of the passive. Was thinking in some re-allocation and moving forwards to X% of 7-10 treasuries vs Y% of TIPS (most likely the same maturity). But that's only a thought, apart of some quick backtest checks on some portfolio allocations - nothing more that I had the time to do. Anyway, nice thread (I am not quite interested in the many Trump vs Biden topics around )

[mathjak107]

This is all true...but fundamentally they are no different than any other treasury other than the base value being increased annually due to CPI adjustments. The bigger, much bigger drivers are stated interest rate and duration which will hammer both Ts and TIPs.

which is why i would only use short term tips ...

[Kbg]

Concur with whomever mentioned it earlier...this has been a high quality discussion with good perspectives all around. Thanks for everyone's well considered posts.

[modeljc]

Concur with whomever mentioned it earlier...this has been a high quality discussion with good perspectives all around. Thanks for everyone's well considered posts.

I agree! Good discussion for changing times!

[mathjak107]

Adding some more to the inflation model , I have some limit orders in .

I already am up more in vtip than I got in interest in shy

[ahhrunforthehills]

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.