PP protection against financial repression

[AdamA]

That is the "small fortune on the way down" part.  I agree with that.

The magnitude is the same, only the direction is different.

Is the magnitude really the same?  On the way down, I would have sold off a lot of my higher yielding bonds to buy other asset classes, and therefore the loss I would take on the way back up would be less (albeit, still significant, especially if rates started to rise from as low as .2%). 

[AdamA]

And the gov't would not have to set rates that low, it doesn't "set rates" on LTTs.  The auction sets the rates.  In the modern world, that means the Fed does or could set LTT rates.  The Fed could just bid enough that rates would be that low.  If you didn't like it, you don't buy LTTs.  Everybody could avoid buying LTTs and the rate would still be that low and all the bills would be sold.  BTW, that is called Quantitative Easing aka QE aka "printing money."

The whole concept of the government printing money is one I have never been able to understand.

The argument you make above makes sense, but I always hear people say it's not that simple.  I'll attempt to explain why these people say this, and maybe you can shed more light on it for me.  (I have a very incomplete understanding of this, so forgive me if it doesn't make any sense, and feel free to ignore).

Basically it involves the carry trade.  The Fed, for some reason, cannot loan money directly to the Treasury.  Big banks have to first borrow from the Fed and then use the money to buy debt from the Treasury. 

What happens right now is that banks borrow from the Fed at an very low rate and then use the money to buy government debt at much higher rates. 

The very low rate that the Fed offers banks right now is what you're calling QE, which makes sense.

BUT...if the rate offered by the Fed to banks begins to approximate actual Treasury rates, the incentive for the banks to borrow from the Fed diminishes.  There is therefore a limit as to how much the Fed can influence rates, even through QE. 

For example, 10 year gov bonds are around 3% right now.  If the Fed loans to a bank at 1%, and the bank buys 10 year bonds, the bank gets 2% to sit on the cash.  If the banks keep doing this, they will bid down the rate on the 10 year to near 1% where it's no longer worth their while to buy it.

Does that make sense? 

[AgAuMoney]

Is the magnitude really the same?  On the way down, I would have sold off a lot of my higher yielding bonds to buy other asset classes, and therefore the loss I would take on the way back up would be less (albeit, still significant, especially if rates started to rise from as low as .2%).  

The magnitude won't be exactly the same to the penny, but if you had the same $ amount in t-bonds with rights going up as you had with rates going down it would be pretty close.

edit:  ... with RATES going up ... 

[AgAuMoney]

That is the "small fortune on the way down" part.  I agree with that.

The magnitude is the same, only the direction is different.

Is the magnitude really the same?  On the way down, I would have sold off a lot of my higher yielding bonds to buy other asset classes, and therefore the loss I would take on the way back up would be less (albeit, still significant, especially if rates started to rise from as low as .2%).  

No the magnitude isn't the same. The PP as a set generally maintains relatively stable total capital value over time, as one asset loses value so one or more of the others counter that loss.

Right.  But originally we weren't discussing the PP as a set, but only the performance of the LTT and cash components in the proposed scenario.  Without making assumptions as to the performance of the other two components we have no way to know the effect on the total PP balance.  Still, for a given $ amount in LTT and a given change in LTT rates there is (nearly always as the LTT market is typically rational) a calculable discount or premium for existing bonds.

Given that knowledge, and with a given $ amount in LTTs, if you really do make "a small fortune" and rebalance out on the way down, you will have at least the same $ amount in LTT at the bottom as you had before the rates dropped.  So now you have the same amount in LTT when rates go up, and the loss as rates go up will be the same magnitude as the gain when rates dropped.  If you did good on the way down and now have a higher dollar amount in LTTs than you did before (because 25% of a bigger portfolio is more than 25% of the original portfolio), you will lose more on the way up, and if you rebalance back in you will continue to lose until you end up approximately back where you started.

Now if the other components do something else you may end up with an overall gain or loss depending on what they do, but that is a different scenario and we cannot predict what will happen to the other components when in our scenario we are given only that LTT rates went from 4% to 2% and back to 4%.

[AgAuMoney]

originally we weren't discussing the PP as a set, but only the performance of the LTT and cash components in the proposed scenario.  Without making assumptions as to the performance of the other two components we have no way to know the effect on the total PP balance.

But rebalancing its a form of opaque d'Alembert betting sequence type play - that will be up in profit even back at the original price LTT price level after a decline.

You are far more familiar with trading/betting methods, etc. than I, but it appears in the d'A. you will only be up in profit if both elements change.  If only one element (the LTT) goes up X and then down X while the other element(s) remain unchanged, the net total at the end will also be unchanged.

Anyway, I was just trying to help people understand how interest rates affect LTTs -- It's not black magic creating profits out of thin air.  Mostly it's just math, repeatable and predictable.

Now if someone could just predict future interest rates for me to plug into my formula...  And maybe some stock prices while you are predicting?  :-)

[AgAuMoney]

d'A can be in profit if only one element changes
...
Or put another way if LTT rise 40% so that the 25 in LTT rises to 35 and you sell/reduce by 10 back down to 25, and then later LTT declines 40%, 25 down to 15 and you buy back 10, then, assuming $25,000 invested initially :

1000 shares bought at 25 share price = $25,000 cost
at 35 share price $10,000 sold = leaves $25,000 invested, $10,000 cash, $35,000 total
at 0.6 lower price (-40% down) = 21 price (35 x 0.6) the $25,000 prior stock value declined to $15,000. Buy $10,000 more stock = $25,000 stock, $0 cash.

OK....

start:  LTT=$25,000
+40%:  LTT=$35,000
rebalance:  LTT=$25,000; cash+=$10,000
-40%: LTT=$15,000; cash=$10,000
rebalance:  LTT=$25,000

Where's the gain?

No voodoo or high altitude air involved - its all basic math and is repeatable/predictable :-)