Something is very off in the bond market

[MachineGhost]

Hedonics?

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

That's a natural reaction!

This should help: https://www.youtube.com/watch?v=koo1QSeHXvw

And this: https://en.wikipedia.org/wiki/Hedonic_treadmill

[Greg]

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

Hedonics?

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

It's 50/50.  MG has reached perfect parity between IQ and BS. 

Does he have to rebalance when one gets too high? (B.S. or IQ)

[gizmo_rat]

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

Impossible to call, I suspected the latter, but MG raised a few things years ago that directly impacted me in the fullness of time and I think are uncontentious now. (Wheat, Statins, UK Vit D depletion ) So I wouldn't rush into any judgement. 

[Greg]

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

Impossible to call, I suspected the latter, but MG raised a few things years ago that directly impacted me in the fullness of time and I think are uncontentious now. (Wheat, Statins, UK Vit D depletion ) So I wouldn't rush into any judgement.

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

[Kbg]

I've never been a doom and gloomster as it is not in my nature. I think the actual reality is that the world is simply getting more in balance vice the US going down the proverbial tube. 1945 was a unique time in history caused by global war and we were a major beneficiary of the aftermath. It was good to be one of the winners, the major lender and probably most important not a battleground.

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

What are pro-growth policies that will directly flow into the pockets of middle Americans? The Pubs seem to be good at pro growth for rich guys and Dems are good at redirecting money to the lower strata but I'm not seeing much for the mid section from either party.

[MachineGhost]

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

I would much prefer to be PS's right hand man and he can be the puppet in the spotlight.  Besides, he has much better emotional control than when I'm feeling sadistic (which is often, although it's all for a good cause!).

[MachineGhost]

What are pro-growth policies that will directly flow into the pockets of middle Americans? The Pubs seem to be good at pro growth for rich guys and Dems are good at redirecting money to the lower strata but I'm not seeing much for the mid section from either party.

I think its a little more involved than just an ideological power shift in the Beltway because there needs to be a wholesale cleaning and restructuring of government and business at all levels, not campaign trail rhetoric just to get elected.  It's all a game and the game must come to an end.  Only we the people have the power and will to get that done bottoms up, because everone else will fight to tooth and nail to preserve their whale-corpse-sucking-make-work jobs.

The middle class actually does get more back in government subsidies then they pay out, otherwise they would be revolting too.  Imagine the uproar in ending the charity and mortgage deductions which aren't even a core fundamental issue with government.  It's window dressing.  "We are all Socialists now."

I just don't think people are ready yet, although there's lots of piehole flapping as usual.  Everyone is comfortable with the status quo, no matter how crony and corrupt it is and is becoming.  Isn't there a saying by someone that the familiar enemy is better than the unknown or something like that?

I suspect only WWIII or a a global synchronized recession will really motivate people to vote for permanent change to business as usual.  Right now its just vanguard "activist fringe elements" like me interested in practically reforming DC.  It certainly doesn't help having the RIFFF problem in the interim which is yet another sideshow for power consolidation and civil liberty diminishment.  We the people are either going to ultimately throw these fuckers all out of their Bullshit jobs or we're going to wind up in an Orwellian Dystopian State and so far the latter is winning each and every day.

As for pro-growth within the current status quo, Trump best illustrate's how it would be.  It's not Shock Therapy like in Poland, just gradualism.  But far more aggressive than "Reform Republicanism" as embodied by Bush and Rubio.  Politicians don't like to do anything too "extreme" that diminishes their own self-importance and power of being "needed".

[buddtholomew]

MG, what happened to all your models and gold bottoming out at 1170? Seriously, you know everything there is to know in the world. Tell us, when will gold bottom again, how stocks and bonds will do and whether the Golden State Warriors will win the championship. Give me something I can use.

[MachineGhost]

MG, what happened to all your models and gold bottoming out at 1170? Seriously, you know everything there is to know in the world. Tell us, when will gold bottom again, how stocks and bonds will do and whether the Golden State Warriors will win the championship. Give me something I can use.

I recall I said if it bottomed.  It was looking really good for a while for it to do so, but it ultimately did not.  Dat's dem breaks.  Back to the siesta.  There's only a point of action or not once a month.

[img width=800]http://i.imgur.com/jQoGdXN.png[/img]

[Greg]

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

I would much prefer to be PS's right hand man and he can be the puppet in the spotlight.  Besides, he has much better emotional control than when I'm feeling sadistic (which is often, although it's all for a good cause!).

Ahh so you want to Rubio PS. Or this relevant 18 second clip (https://www.youtube.com/watch?v=5ogVr3yXJ2A) from Scrubs

[ochotona]

Seen in SeekingAlpha

Stay on the Shorter End of the Yield Curve

"One of the things that we have noticed in long interest rate cycles is that the reversal from rising rates to falling rate cycles have been very sharp inverted 'V'-affairs because the Fed usually comes in to curb inflation and jacks up interest rates and then things subside. But the transitions from falling rate cycles to rising rate cycles have been multi-year saucer like affairs that have lasted from 2-14 years. If you think about the 1929 decline into '32, we didn't see the rise in interest rates until 1946 and that was 14 years after the bear market low so I think we are initiating a new rising rate cycle. I think it will probably be slow moving but I would suggest that one not be terribly long out on the yield curve. If you ladder 2-year, 5-year bonds - something like that - or 1-year, 2-year bonds, you'd be able to rotate into whatever the new higher rate cycle is once your Treasuries come due but I don't think I'd want to be out 10 years or longer at all."

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).

[fi50@fi2023]

Thanks for this post.  I started a PP this year and bonds are the most confusing part for me given the status of interest rates and their potential to start the long slow climb you speak of.  Could you help a new member out and explain your strategy in more detail?  Any help from members of this forum would be much appreciated.  I struggle to understand how it makes sense that I'm buying 30 year bonds at current rates.

[rickb]

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?

Repeat after me: No one can predict the future.

[ochotona]

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.

[ochotona]

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.

[dualstow]

"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]

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).

[Reub]

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]

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.

[Jack Jones]

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?

Not:

Are they at the end of a bull market?

Will interest rates go up?

etc.

[Kbg]

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.

[economicsjunkie]

Corporations, pension funds, insurance co's, mutual funds. Even if interest rates go negative, they can't keep billions in $100 bills.

..., foreign central banks, corporate CEOs cashing out stock options by the billions, banks.

Just to name a tiny few that would jump to mind immediately.

[ochotona]

S&P will plunge 75% on China deflation: SocGen bear

This analyst is always a bear, but it's worth keeping in the back of your mind, esp. what he says about negative interest rates.

http://www.cnbc.com/2016/01/13/sp-will- ... -bear.html

[barrett]

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.

[MediumTex]

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.

[img width=500]http://blogs.nottingham.ac.uk/chinapoli ... na-gdp.jpg[/img]