The dollar and purchasing power

[LNGTERMER]

I have been tracking UUP the bullish dollar ETF and it is obvious that some of the other assets are some what inversely correlated with it.
So for instance as it moves south the stocks go up by some percentage. This means the dollars you think you are making from the stocks appreciation have lost a value equivalent to the decline of the UUP.

Does any one know of a chart of the daily changes of inflation? That would perhaps shed some light on the moves of the UUP.
Thanks

[MediumTex]

A loss in value of the dollar compared to other currencies doesn't necessarily mean I have lost purchasing power at my neighborhood grocery store.

[LNGTERMER]

That is true however, raw materials and commodities will eventually go up in response to a falling currency and that rise might be reflected on my immediate consumption items.

For the cash portion an RS system can be put together to detect the dollars relative weakens and switch to TIPS for instance. I know that is a deviation from the PP but this is a project I am currently perusing. I found BWX to counter the UPP in this regard. I posted this question to see an alternative.

Edit:
Thanks MT, I do enjoy your excellent insights to our current economic climate and future prospects. In one of my previous posts I tried to entice you to refute the argument I put forth so that we can gain more insight but perhaps I framed it so badly that it confused what I was trying say instead. Keep up the good work. In truth I am a system guy more like Clive and I am learning a ton from thinkers like you, craigr and others.

[LNGTERMER]

Good to hear from you Clive. I am working on a system which in part was inspired by your RS posts as follows:
Still PP 4x25 but with a twist:
1- Stocks should be divided by between VTI, IJS, EM.
2- Cash between SHY and whoever stronger BWX or UUP.
3- Bonds whoever stronger LTH, IEI and TLT.
4- Gold: GLD, SLV and commodities.

The idea is to still stay within the four areas but use monthly RS to favor the stronger. I found the yearly reviews a bit dangerous.
You are right that trends span years but luck always can put you at the worst outcome. Anyways this is a big project for me since I do not use spread sheets.

One other point I need to alert you to is that draw downs of the PP are much steeper when yearly or monthly data are being used. If you use daily data you will see what I mean.

[MediumTex]

Thanks MT, I do enjoy your excellent insights to our current economic climate and future prospects. In one of my previous posts I tried to entice you to refute the argument I put forth so that we can gain more insight but perhaps I framed it so badly that it confused what I was trying say instead.

Try teeing it up again and I will take another crack at it.

[LNGTERMER]

I will take you up on that when the opportunity presents itself again. I am really fascinated by the effects short term or long term of the intersect between fiscal and monitory policy have on our portfolios. Thanks there are a few interesting points you raised lately and I will put those question forth again when I get the chance.

[LNGTERMER]

That was quick, I am in the process of writing the program, so I do not have any results for comparison yet. I will post those once I am done. I will also post the draw downs of the conventional PP using daily data.

The idea here is to fight draw downs while in keeping within the 4 assets of the PP. My program will use a stop loss form. The funds from stopped out asset will be rolled into whichever others that are still long. While the position is still long, the strongest asset in the category will be used, for example if the emerging markets have a higher RS then switch from VTI and vise versa.

Caution:
I do not want to encourage tinkering with the PP, you do so at your own peril, however if you are a system developer, then using this you might gain a few percentages. Currently I am using the PP as it is, which I tested myself before I started the use. It works just fine. For me I hate draw downs. Just seeing the LT going south made think of this, but this might just be the time to buy it, who knows.

The other danger of this approach just from looking at the charts is the countless whipsaws, so I will see what the tests tell me.

[LNGTERMER]

The results however over that test period/test criteria aren't that good, around much the same as the normal PP (that endured less trading/costs) AFAICT.

You are right. The problem is the RS switch is similar to MA switch there is a lag built into it. That means you are essentially selling at bottoms and buying at tops, and hence the observation you are noting. In a rising market the theory is you will be switching to the better performing, but the danger is you could simply be whipsawed. In a declining market you will be doing the same by buying the one that has a lower rate of decline. This means the rate of loss of money is slower, i.e the draw down might be less. This is the the hypothesis I still need to test it though.

You are also right you should not be riding all the way to the bottom in declining market so a stop loss is necessary. Also re balancing between the assets is still needed. The RS is within a category and re balancing is between categories. I would not include cash in other categories. Cash in might be RSed with UUP and BWX or whatever other asset that you deem better.

[LNGTERMER]

Testing your SL7 system is one of the things on my list. One of the side effects of this system is that it keeps retrying to enter a position during falling markets. I can see how eventually it will more or less nail the bottom, but perhaps there is a trade off between this method and using MA as a cutoff point. For instance you can re-enter position that are above there 200ma this way you will never catch a falling knife for instance. The use of the ma of course will never catch the bottom.

[LNGTERMER]

The extra effort/costs however might instead be seen as potentially better insurance rather than targeting better rewards.  And personally I don't mind that extra effort/costs as I view the activity more as a hobby than a chore.

We are on the same page. The strength of the PP is fact that assets are not correlated on the long run however in the interim there are periods when they are indeed correlated. You can see that on days when everything is up. This correlation cuts both ways. The other strength is re-balancing philosophy which is not necessarily a PP specific but nonetheless its a feature. So you are right at the end of the day a loss is a loss the challenge is how to mitigate those weaknesses while keeping the strengths. There are many ways that lead to this end. Your is one of them.

On a side note- I am sure you thought of this- its better to use daily data even if your entries/exits are monthly or yearly. This way you will capture the true draw downs and risk.

[LNGTERMER]

There's something to be said for a fixed mechanical approach however.

you are quite correct, the thing is the more time and sweat you invest in such a systems the more you can trust it and hence follow. Take for instance the current TLT correction, I bet you many did not re-balance down to it, the reason is because it's really hard to buy into a falling asset. This is where a mechanical system comes handy. The thing is the PP is a low maintenance system as such but still the fear factor I bet you is there so in the long run most people will trail the average PP. I do think the PP is a god sent however, for the average investor, the reason is because it actually disarms wall street professionals a bit. They perpetuate this myth of buy and hold while they use PhDs in mathematics, psychology and Engineering to define the most sophisticated systems while at the same time driving the streets psychology. They have convinced people to invest there retirements and life savings on this system which for all honesty is rigged against the average investor. This is why I appreciate this forum because it sheds fundamental light on issues from many prospectives.

[LNGTERMER]

The PP's choice of assets was an enlightenment as to how that might be smoothed.

The PP'd lightning rod idea for me was the consideration of assets in distinct categories. For instance a category for stocks. before, I used to switch between domestic, foreign or small cap/large cap. Often this led to more compounding of losses. The fact stocks of the world are correlated is absolutely clear to me. So I will never make that mistake again I might RS between them for instance but as single category they will be collectively dumped when it's clear the stocks or out of favor.

[Storm]

Clive,

I find your SL7 method intriguing.  Prior to going full PP, earlier this year I had SL8 on all of my positions, and got stopped out on SLV when it dropped to around $17.35 (I purchased it at $12, so it was still a profit) and then seeing it rise later in the year to $26-27.

How do you avoid these type of scenarios?  I kick myself for getting stopped out of a winning position just because of a few days of market uncertainty.

[Storm]

Thanks for the amazing insight, Clive.  I think if I ever implement SL7 in a VP I will have to go the 12 month route you mentioned.  It seems to eliminate market timing, as well as allow for certain purchases, like you said, of stocks at very nice bottom prices.