ochotona wrote:
My interpretation of this concerning the Permanent Portfolio is that if you hold 10 Year Treasuries and Cash in equal measure, you're roughly in the maturity range she refers to as optimum. Personally, I'm holding 7 year Treasuries, and cash, so I'm even shorter, 3.5 years out. IEF or SCHR and Cash would the ETF options. I have price alerts set for TLO (similar to TLT, not quite as long duration).
Optimum for what? The point of holding long term bonds in the PP is twofold. 1) you receive the dividend payments. 2) their value goes up in a deflationary environment during which the value of stocks will in all likelihood be going down.
Looking at them in isolation and adjusting this one asset because you think rates have nowhere to go but up is predicting the future. Doesn't similar logic apply to stocks at this point, by which I mean aren't many pundits saying stocks are in a bubble? So, which is it? Are we headed for further deflation and perhaps a stock market bubble bursting, or have we turned the corner on this whole deflation thing and are now on the brink of a period of rising rates and inflation?
Bonds are very confusing to most investors. The confusing part is that the value of the bond, the value which gets posted in your brokerage account in a real-time basis, goes DOWN if interest rates go UP. Why is that?
It's simple, if you think about it. The bond promises a series of future interest payments ("the coupon"), but if the market interest rates go up, then someone can get a brand new bond for the same amount of money you paid and get MORE COUPON! It's like Moore's Law and buying newer, faster computers for less money each year. So, in order to sell your bond on the secondary market, you'd have a cut the price... you'd have to lose some of your original value. Bond calculators can do the Present Value (PV) calculations for you.
Now, if you hold an actual bond to maturity, you don't lose your principal, but what you do give up, if interest rates have gone up since you bought it, is the opportunity to have gotten a bigger coupon over time.
The backstory is that from January 31, 2015 and 35 years prior, interest rates pretty much fell, fell, and fell. So over those 35 years, bonds did really well. Long bonds did really well. The massive government intervention by Central Banks worldwide have brought short term interest rates to zero in the USA for years, and negative in Europe. So how much negativer can they go? So we're probably at or close to the end in the big bull market in bonds. We're not at the beginning of a big new bull market. Which is not to say interest rates won't be up-and-down volatile. They will be, guaranteed. But the long term secular bull market in bonds which gave such a nice smooth ride to bond investors, retirees, for an entire generation, is over - for a while.
The 30-year Treasury is at 2.87% now as of yesterday. In September 1981 it averaged 15.19% that month.
The Permanent Portfolio advocates US Treasuries, which is a good idea, since when markets get stressed, everyone sells off Corporate and especially High Yields Bonds are getting wrecked right now as we speak, and everyone runs to quality. There is no higher quality bond in the home currency of US investors than US Treasuries. There are better quality government bonds in the world, but they aren't in US Dollars, and they pay even less interest, and you have currency risk.
Bond funds or ETFs are OK, but the advice here will be to buy the bonds directly, and eliminate a layer or two or three of counter-party risk... someone screwing up and not having liquidity to honor redemption requests when the market is stressed. Buying bonds is easy though most any discount broker. You need to go through your broker to buy them for your IRA. If you just want the bond in a taxable account, set up an account at TreasuryDirect.gov and buy them directly, and even eliminate your broker.
rickb wrote:
Repeat after me: No one can predict the future.
Well, the problem with that is, someone DID come up with this allocation, which works well in a range of possible futures, but there are probably PP failure situations out there; the PP's own Black Swans. So the original author did make a stab at predicting the future, while denigrating all those who would come after him and try to do the same. Very political.
"Turn off your mind, repeat after me, all will be well..." I don't like that point of view. That's not how I roll. I love the design and symmetry of the PP, it's a American original like the Browing 1911 45 ACP pistol, the P51 Mustang, the Ford Mustang, but to think we can't study these archetypes, tweak them, come up with something better, more suited to our needs given the vast explosion of data and compute power and algorithms is a very limiting mentality.
Last edited by ochotona on Sat Dec 12, 2015 11:19 am, edited 1 time in total.
ochotona wrote:
"Turn off your mind, repeat after me, all will be well..." I don't like that point of view. That's not how I roll.
I won't speak for rickb, but if I had said the same thing ("no one can predict the future") I'd respond to your post above by saying, it's not so much that all will be well, but that all will be better than if you try to guess how you can do better. Statistically speaking, and over the long term.
Well, you won't go broke buying mid-range treasury notes, that's for sure.
rickb wrote:
Repeat after me: No one can predict the future.
Well, the problem with that is, someone DID come up with this allocation, which works well in a range of possible futures, but there are probably PP failure situations out there; the PP's own Black Swans. So the original author did make a stab at predicting the future, while denigrating all those who would come after him and try to do the same. Very political.
The only prediction of the future the PP makes is that the economy will be in one of four conditions: inflation, deflation, "good times", recession/depression (and transitions between these). This is entirely different than predicting that, say, inflation must be coming soon enough that you should adjust your portfolio allocation to differentially profit from this prediction which necessarily means you'll be worse off if instead of inflation we have further deflation. "No one can predict the future" means we don't know if the next 3 years will be an inflationary nightmare, a deflationary nightmare, a full out depression, or the best 3 years the economy has ever seen.
"Turn off your mind, repeat after me, all will be well..." I don't like that point of view. That's not how I roll. I love the design and symmetry of the PP, it's a American original like the Browing 1911 45 ACP pistol, the P51 Mustang, the Ford Mustang, but to think we can't study these archetypes, tweak them, come up with something better, more suited to our needs given the vast explosion of data and compute power and algorithms is a very limiting mentality.
I'm not saying the PP is perfect, and I'm pretty sure Browne would not have claimed that either. So, definitely keep your mind turned on. But please understand the difference between modifications based on guessing what the future holds vs. modifications that preserve the portfolio's neutrality about the future.
IMO, the biggest weakness of the PP (and I believe Browne knew this) is that it does not really protect you from a recession/depression. Essentially nothing does this except holding large amounts of cash - but if you do this you're either only going to do it when you predict a recession/depression is coming (in which case you're changing your allocation based on predicting the future), or you do it all the time (in which case you're not going to do any better than inflation over the long run).
You can never just look at one of the pieces of the puzzle in isolation. It is almost a requirement that one or even 2 pieces fall while the overall portfolio rises. If you want to invest in the PP do it the right way by buying all of the correct asset classes.
Reub wrote:
You can never just look at one of the pieces of the puzzle in isolation. It is almost a requirement that one or even 2 pieces fall while the overall portfolio rises. If you want to invest in the PP do it the right way by buying all of the correct asset classes.
ochotona wrote:
The Permanent Portfolio advocates US Treasuries, which is a good idea, since when markets get stressed, everyone sells off Corporate and especially High Yields Bonds are getting wrecked right now as we speak, and everyone runs to quality.
That's not why the Permanent Portfolio holds long bonds.
I think the key question here, is:
Will long bonds respond the way we need them to during a deflationary period?
Why LTTs? The first half of the year was extremely low in volatility while the second half has been pretty crazy.
1/1/15 - 7/1/15 (open to open & div adjusted)
SPY: + 1.59%
TLT: - 7.14%
7/1/15 - 12/18/15 (open to close & div adjusted)
SPY: - 3.21%
TLT: +7.54%
YTD (open to close & div adjusted)
SPY: - 1.67%
TLT: -.013 %
SHY is the only thing that is positive YTD and GLD is - 9.28%. It has been a sucky year for everything, thems the breaks sometimes.
The PP's counterbalancing volatility is a very cool thing in action. Just for fun I looked at the time period of 7/20 - 8/24/15 and at the stock market's extreme down day of 8/24 the PP was down a whole .0675%. Meanwhile, SPY was down 12.28%. Gold was up 4.56% at the extreme and LTTs were up 7.05%. For the interested reader it is instructive to look at say Oct 2007 to Mar 2009 and review the performance of both gold and LTTs...and compare with stocks.
Was looking for this in the article and there is was:
He gave no timeframe for his latest call.
I think the real problem with China as discussed elsewhere on here is that their economic data isn't very reliable. And they now have a massive economy so the misinformation has bigger global consequences.
barrett wrote:
Was looking for this in the article and there is was:
He gave no timeframe for his latest call.
I think the real problem with China as discussed elsewhere on here is that their economic data isn't very reliable. And they now have a massive economy so the misinformation has bigger global consequences.
And it makes you wonder how many loans in China were made based upon more rosy economic expectations than are actually materializing.
And what will happen when those loans begin going bad.
Think of interest rates as a piece of soft metal sitting on an anvil and deflation is the hammer relentlessly pounding it until it is almost paper thin, and then pounding it some more.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
ochotona wrote:
Why are 5-7 year US Treasuries selling off today, simultaneously with stocks? It's weird.
Why are US Treasuries selling off again, simultaneously with stocks? It's weird. ECB lowers interest rates again, the US Dollar should go up (it is not), there should be a rush to US Treasuries, there is not, instead everyone is selling off, and gold is up. TEOTWAWKI already?
..or Draghi's comment that "this is as low as the ECB will go for interest rate levels."
If ECB is done lowering rates, this should mean the EUR is stronger than previously expected.
EUR up, USD down = Gold up.
Rates also rose in the EU which led investors out of treasuries and into GBs.
G-d only knows...
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
