modeljc wrote: ↑Thu Oct 15, 2020 4:20 pm
ahhrunforthehills wrote: ↑Thu Oct 15, 2020 1:57 pm
AdamA wrote: ↑Thu Oct 15, 2020 7:12 am
doodle wrote: ↑Wed Oct 14, 2020 11:32 pm
People like schiff or Jim rogers have been talking about hyperinflation for almost a decade and a half now though with nothing like that even on the horizon. Will it arrive someday? Maybe. Japan has been trying to get inflation going for nearly 30 years now. There are a lot of disinflationary forces on horizon as well...large swaths of retiring people with minimum amounts of money and low interest rates further robbing them of income. A relatively stagnant labor market. Potentially altered spending habits among younger generation. Increase technological advances driving down demand for labor and further increasing productivity. Rates might flatline for a looonnnggg time.
So true.
It's a duller narrative than hyperinflation so people don't discuss it as much.
Sorry for the length in advance
I agree. Peter Schiff is selling a product. Selling requires sensationalizing.
I also agree that rates might flat-line for a long time. But what does that get someone with LT Treasuries? You need increasing deflation in order to make money with those bonds. Just having things stay in a near-zero yield environment isn't going to provide a big boost to those LT Treasuries.
Also, Japan vs America is apples and oranges. 70% of Japanese government bonds are purchased by the Bank of Japan, and the other 30% is mostly comprised of Japanese banks and trust funds.
This basically prevents, to a very large extent, global markets and rating agencies from impacting their price or yield. I believe this is completely different than the United States.
Furthermore, US Dollars are used for approximately 70% of all global translations. If the US debases their currency, they have the ability to export their debt. Japan does not have that option.
I agree that there are large swaths of retiring people with minimum amounts of money... but it is also true that the money they are counting on hasn't been allocated (Social Security and Medicare).
The national debt is $27 trillion. But the Unfunded Liabilities that we are facing in the coming years (that include Social Security and Medicare) are $155 trillion. That is $470,000 per US Citizen!
So where will that money come from?
Well, lets go back to pretending that the United States is like Japan. Over the past decade Japan has pushed forward policies like their 10% consumption tax that is meant to slow down their debt (after-all, they too have a pension problem).
I guess the United States could do something similar... except that Japan also has a WAAAAYYYYY higher savings rate than the United States does.
I suppose you could always tax the richest... but there is a law of diminishing returns that start to effect economic output and reduce future tax revenues. We could let people starve to death? Nah, too politically unpopular. Rent control? Ugh, that could effect real-estate values, which could then lower property tax assessments.
I think it is pretty obvious that at some point you will inevitably need to #1 raise taxes, #2 reduce spending, AND
#3 export the debt via inflation. You could avoid #1 OR you can avoid #2, but you CANNOT avoid #3. There is no other way outside of default. Exporting the inflation is the one tool that the United States possess that Japan does not.
I am not sure you can boost productivity enough without it. That argument might be justifiable in previous decades... but the debt is simply WAAAAYYYYY too high for that now and those unfunded liabilities are WAAAAYYYYY too close now. Besides, there is a law of diminishing returns for productivity. At a certain point it is like trying to squeeze juice out of a raisin.
Technological advancements are great. Most are extraordinarily over-hyped. Besides, R&D for technology is so expensive and so easily stolen by other countries.
This assumes you even want a tech business in this country. Over the past decade tropical tax havens around the world have embraced tech startups. It wouldn't be hard to simply go to do most IP R&D in a foreign country severing US ties if/when it became clear you have a very viable and lucrative business model. The profits of tech are typically in the IP. Moving IP offshore is a lot easier than moving factories, employees, etc.
What about all that US talent? Remote work was a real thing before Covid. I know many people in tech that will only hire Americans as an absolute last resort. The sense of entitlement and the legal liability they pose doesn't even remotely justify their compensation. Besides, many of the best coders are in Russia anyways. What else do you need? Customer Service? You can setup multi-agent customer service from the Philippines practically overnight.
Sure, the US will still have some big companies. However, you may never know the ones that you lost. Meanwhile, the US companies that you do have will STILL be offshoring their IP to get lower tax rates.
People keep asking... "Where will rates end up?" But that question doesn't exist. They always keep moving. Even after you are dead. The REAL QUESTION everyone here is really asking is:
"Where will rates go from NOW until the DAY I DIE."
Obviously, this is very different if you are in your 30's vs 80's. Accepting less yield or more risk for a less significant drawdown is a very real factor.
Thanks again! Another great post! I know you don't believe in a Teddy bear or seek one. I would be appreciative of what your current allocation is for now and where you might be in 12 to 18 months. You have said you have LTT's in a taxable account and will move out as they get a bid.
Please keep posting.
Thanks
I really appreciate the encouraging words. To be honest, a lot of times I type really long responses on here and just close the page (i.e. delete it) without ever posting it. Not sure if that makes me a weirdo or is a common practice. On one hand, writing out responses helps me ponder the current environment a little more deeply. But on the other hand, it seems like many people just refuse to ponder things that don't confirm their current view.
Simply never hitting the "Submit" button seems link a win-win. It's nice to know my input is somewhat helpful to other people.
Anyways, to answer your question...
I actually manage funds for multiple people. So I can give you some rough scenarios:
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65 Year Old (50% taxable accounts, 50% IRA), few years from retirement (however, practically no additional contribution during those last few years), Life Expectancy 95.
30% Stock
30% Gold
27.5% ST Treasuries MF (2.2 years average duration)
12.5% LT Treasury MF (18.5 years average duration)
I plan on reduce the LTT by 25% each time the 30 year yield goes down by 0.25. I have a whole spreadsheet of target allocations.
12-18 month plan:
Hard to say 100% for sure, however my goal is definitely low volatility. A real strong market correction would likely have me increase the stock position up to 40% or 50%. I actually had contemplated recently moving the remaining 12.5% LT to Stock (42.5% stock). My insides have been screaming "do it, do it!". But I just could not get the data to support the SWRs with CAPE above 30 with this investment horizon.
Mathjak's allocation might be more optimal (it seems as he has put a lot of thought into it) and it sounds like he is in a similar demographic. However, I just haven't had the chance to run my own numbers on it.
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Late 30's (mostly taxable accounts), still working (high income, comparatively low expenses), Life Expectancy 95 (age of death is moot though, this long of a investment horizon starts to target Perpetural Withdrawal Rate instead of Safe Withdrawal Rate if retirement came early).
60% Stock
30% Gold
10% ST Treasuries (approx 8 month duration)
Never rebalance (avoids taxable events). New income goes to lagging assets. Withdrawals come from outperforming assets.
However, these allocations are set to change depending on economic variables. That is NOT to say that I plan on "rebalancing", but the "target allocation" will change based on extreme market indicators.
For example:
CAPE < 10 = 72% Stock, 18% Gold, 10% Cash
CAPE > 100+ = 18% Stock, 72% Gold, 10% Cash
Again, I have a whole spreadsheet of target allocations in a sliding scale (although the sliding scale is not evenly weighted [explained below]).
12-18 month plan:
The cash is primarily to cover short-term liabilities (gold is a better hedge against the market than LTT, but the overall drawdown of the portfolio is longer). This allocation can easily have losses for 4 or 5 years in a row. However, the combination of age, the taxable accounts, and current income makes this a no-brainer.
The tax savings is what will drive the yield here. This allocation has practically no taxable income and doesn't rebalance. In retirement (based on current laws) could literally be sold in a year when no other income occurred (significantly dropping the collectibles tax rate down). Same with stock. It also has built in estate planning benefits.
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Early 40's (mostly taxable accounts), still working (high income, comparatively medium expenses)
60% Stock
15% Gold
25% ST Treasuries (approx 3 years average duration)
New income goes to lagging assets. Rebalances are attempted where possible in the taxable accounts.
12-18 month plan:
Similar strategy as above in regards to fluctuation market indicators (i.e. CAPE, etc). However, indicators have to be REALLY far out of whack to justify taxable rebalancing (i.e. there is not much of an allocation difference between CAPE 15 and CAPE 40). Looking at other countries, you can really see that markets can go from crazy, to Crazy, to CRAZY, to "OMG this cannot possibly last", to "OMG this time is ACTUALLY is DIFFERENT because [insert reason] and these crazy valuations are the new normal". IMHO Cape 30 barely even gets you to "Crazy" historically.
IMHO, A lot of these indicators just aren't that useful unless they get REALLY out of control (and even then, the madness can endure for quite a while).
Having long investment horizons, having stable income, and having macroeconomic incredibly strong market indicators is obviously the holy grail to any investor. But in a perfect world my dog would stop pooping in the driveway as well... so I guess we are all just stuck making the best of what we have to work with.
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In summary, all of these approaches have the same goal. The allocations just differ because of their circumstances.
FYI to anybody reading this....I don't recommend anybody uses anything that I have written above. I have no sure-fire crystal ball. The above allocations are really dependent on so many personal variables (current income, expenses, lifespan, country, expectations, pain tolerance, etc.).