ultra low / negative interest rates in Germany

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

Pfanni
Full Member
Full Member
Posts: 56
Joined: Wed Dec 31, 2014 4:11 am

ultra low / negative interest rates in Germany

Post by Pfanni » Mon Feb 01, 2016 9:55 am

Hi
German government bonds have negative rates up to 7 years now.

1 year: -0.44%
7 year: -0.05%
30 year: +1.08%

I refuse to buy a 30 year bond yielding 1%. I just refuse to do that. No thanks.
Physical EUR cash seems better and better for half the PP portfolio (cash & bond portion).

Does anybody have an idea for European PP investors what to do?
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: ultra low / negative interest rates in Germany

Post by buddtholomew » Mon Feb 01, 2016 10:05 am

I sympathize with the low yields.
Text book answer is we hold LTT's for their volatility and not yield.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
User avatar
Greg
Executive Member
Executive Member
Posts: 1126
Joined: Sun May 20, 2012 6:12 pm
Location: Maryland

Re: ultra low / negative interest rates in Germany

Post by Greg » Mon Feb 01, 2016 10:27 am

IDrinkBloodLOL wrote: You could consider PP this way:

Stocks and bonds are two types of money factories, while cash/gold are two types of stable money storage. Each does well in different circumstances, but depending on your beliefs you may have a different opinion on what circumstances are safe/advisable.

For example, I personally do not believe we will ever see real deflation again. Based on charts I have dug up, I believe the second we left the gold standard our choices were moderate inflation or hyperinflation. Therefore, I entirely skip the cash portion of the portfolio because I believe it's designed to thrive in an economic cycle we won't ever see again.

Depending on what you believe, you might add or remove things from the wealth generation or wealth storage half of your portfolio. In backtesting it's usually all the same. 50/50 REIT/gold, stock/gold and other breakdowns still pretty well line up with PP performance because as far as I can tell, the mechanism is the same.

In my view that means holding 50% cash, 25% gold, 25% stock would be the wrong thing to do. I would go 50% stock, 25% cash, 25% gold or maybe even thirds. Just my POV.
If you believed deflation wouldn't happen again, wouldn't that indicate that you don't need to hold long-term bonds? Don't you hold cash due to recessions?
Background: Mechanical Engineering, Robotics, Control Systems, CAD Modeling, Machining, Wearable Exoskeletons, Applied Physiology, Drawing (Pencil/Charcoal), Drums, Guitar/Bass, Piano, Flute

"you are not disabled by your disabilities but rather, abled by your abilities." -Oscar Pistorius
User avatar
dualstow
Executive Member
Executive Member
Posts: 14232
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: ultra low / negative interest rates in Germany

Post by dualstow » Mon Feb 01, 2016 10:43 am

Japan's yields have gone negative, too.
Sam Bankman-Fried sentenced to 25 years
User avatar
jafs
Executive Member
Executive Member
Posts: 817
Joined: Fri Nov 27, 2015 10:23 am

Re: ultra low / negative interest rates in Germany

Post by jafs » Mon Feb 01, 2016 10:46 am

My understanding is that cash is held in case of deflation, while long bonds are supposed to do well in recessions.
User avatar
Xan
Administrator
Administrator
Posts: 4393
Joined: Tue Mar 13, 2012 1:51 pm

Re: ultra low / negative interest rates in Germany

Post by Xan » Mon Feb 01, 2016 10:59 am

Long bonds are for deflation.  If you hold a promise for $x in the future, and those dollars are worth more and more, then that promise is worth more.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: ultra low / negative interest rates in Germany

Post by buddtholomew » Mon Feb 01, 2016 11:03 am

A 25% allocation to cash is an understated PP benefit.
The key is not to look at the investments in isolation.
Some see gold/cash and stocks/bonds but I see bonds/cash as IT bonds but held in a barbell.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
dragoncar
Executive Member
Executive Member
Posts: 1111
Joined: Wed Aug 10, 2011 7:23 pm

Re: ultra low / negative interest rates in Germany

Post by dragoncar » Mon Feb 01, 2016 3:58 pm

buddtholomew wrote: A 25% allocation to cash is an understated PP benefit.
The key is not to look at the investments in isolation.
Some see gold/cash and stocks/bonds but I see bonds/cash as IT bonds but held in a barbell.
You get used to it. I don’t even see the individual assets anymore.. All I see is blonde, brunette, red-head.
Fred
Executive Member
Executive Member
Posts: 318
Joined: Fri Aug 07, 2015 4:55 pm

Re: ultra low / negative interest rates in Germany

Post by Fred » Mon Feb 01, 2016 4:57 pm

jafs wrote: My understanding is that cash is held in case of deflation, while long bonds are supposed to do well in recessions.
You have it backwards according to the PP strategy.

And I don't agree at all with the statement somebody made about not ever seeing a deflationary period again. I say this as someone who saw the value of his home cut in half between 2006-2008. I believe that one year during that same period or shortly thereafter the value of long bonds went up 33%.
User avatar
jafs
Executive Member
Executive Member
Posts: 817
Joined: Fri Nov 27, 2015 10:23 am

Re: ultra low / negative interest rates in Germany

Post by jafs » Mon Feb 01, 2016 5:10 pm

It looks like that.

But it makes more sense to me that cash would be good in case of deflation, since it would be worth more and have more purchasing power.

I've looked for the basic statement and reasoning for the PP strategy, but haven't found it.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: ultra low / negative interest rates in Germany

Post by MediumTex » Mon Feb 01, 2016 5:33 pm

jafs wrote: It looks like that.

But it makes more sense to me that cash would be good in case of deflation, since it would be worth more and have more purchasing power.

I've looked for the basic statement and reasoning for the PP strategy, but haven't found it.
A couple of guys wrote a book back in 2013 (I think) that provided a pretty good overview of the PP strategy.  You might want to check it out.  The Amazon reviews are pretty good and I think a lot of the people here have read it and found it to be a good resource. 

Harry Browne's Fail Safe Investing and Why the Best Laid Investment Plans Usually Go Wrong are the two original reference texts for the PP strategy.  The former is an overview of the strategy, and the latter is a deeper dive.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Pfanni
Full Member
Full Member
Posts: 56
Joined: Wed Dec 31, 2014 4:11 am

Re: ultra low / negative interest rates in Germany

Post by Pfanni » Tue Feb 02, 2016 12:15 am

I don't want to defect from PP.
But the question is, do Harry Browne's thoughts on bonds have validity in an age where negative rates on the safest bonds are normal?

1) Why take on 30 year duration risks for 1% return? When I can get no duration risk for 0% return, that seems to be a much better deal (cash).
2) Aren't Europeans like me already meddling with the original PP strategy when we replace short term gov bonds for the cash portion (negative rates) with things like saving accounts?

Going out on a limb here, but I am convinced Harry Browne would not have bought a 1 year German government bonds yielding MINUS 0.4x%.
USA saw very low nominal rates during the Great Depression - but there was deflation, so real rates very quite high. In Germany we have low, but steady inflation, so negative rates make no sense.. it is ECB policy, not a natural market-driven event.
User avatar
lordmetroid
Executive Member
Executive Member
Posts: 200
Joined: Wed Nov 26, 2014 3:53 pm

Re: ultra low / negative interest rates in Germany

Post by lordmetroid » Tue Feb 02, 2016 12:50 am

Another question I am mulling over, is it better to have the very volatile USD denominated TLT 20+ years bonds rather than the 2-10 years bond mutual fund available to me in Sweden.

[img width=500]http://i.imgur.com/Aif92pz.png[/img]
Pfanni
Full Member
Full Member
Posts: 56
Joined: Wed Dec 31, 2014 4:11 am

Re: ultra low / negative interest rates in Germany

Post by Pfanni » Tue Feb 02, 2016 1:10 am

Food for thought in regards to bonds.

----
Nobel laureate #1 is Maurice Allais, a French economist who received the prize in 1988 and is most famous for a paradox that he discovered in the 1950’s. As an example, imagine that you can choose between getting one million dollars with certainty vs. one million with a 89% chance, nothing with a 1% chance, and five million with a 10% chance. If you’re like most people, you’ll opt for the sure bet. Now you’re given a second choice between nothing with an 89% chance and one million with an 11% chance vs. nothing with a 90% chance and five million with a 10% chance. If you’re like most people, you’ll go for the 5 million, even though you have a slightly higher chance of getting nothing. These decisions reflect the fact that when real people make decisions, they are sensitive to both the average outcome and variation around the average. So are other animals. My evolutionist colleagues have performed dozens of experiments on birds and other creatures showing that they will choose either risky high-payoff options or safe low-payoff options depending upon how well fed they are. Their flexible behavior with respect to risk makes perfect sense from an evolutionary perspective.
---

So, can my dislike for bonds have a correlation to how good a breakfast I had? :-9
LazyInvestor
Executive Member
Executive Member
Posts: 193
Joined: Thu Aug 02, 2012 5:37 am

Re: ultra low / negative interest rates in Germany

Post by LazyInvestor » Tue Feb 02, 2016 3:07 am

Just imagine the upside at the point when 30 yrs German bonds are paying -2.0%. You'll have great returns if you buy at 1%.
User avatar
lordmetroid
Executive Member
Executive Member
Posts: 200
Joined: Wed Nov 26, 2014 3:53 pm

Re: ultra low / negative interest rates in Germany

Post by lordmetroid » Tue Feb 02, 2016 4:50 am

LazyInvestor wrote: Just imagine the upside at the point when 30 yrs German bonds are paying -2.0%. You'll have great returns if you buy at 1%.
I believe bonds will stay around this level for the next 10 to 20 years, that was what they did last time after the great depression.
User avatar
dualstow
Executive Member
Executive Member
Posts: 14232
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: ultra low / negative interest rates in Germany

Post by dualstow » Tue Feb 02, 2016 10:15 am

Pfanni wrote: My evolutionist colleagues have performed dozens of experiments on birds and other creatures showing that they will choose either risky high-payoff options or safe low-payoff options depending upon how well fed they are. Their flexible behavior with respect to risk makes perfect sense from an evolutionary perspective.
---
So, can my dislike for bonds have a correlation to how good a breakfast I had? :-9
I have no doubt that there is a correlation!
The trick is to fight that feeling.  ;)
Sam Bankman-Fried sentenced to 25 years
User avatar
dualstow
Executive Member
Executive Member
Posts: 14232
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: ultra low / negative interest rates in Germany

Post by dualstow » Tue Feb 02, 2016 11:08 am

TennPaGa wrote:
dualstow wrote: The trick is to fight that feeling.  ;)
Damn you.
Maybe you are my evil twin. I didn't even have to hover on the link to know.  ;)
Sam Bankman-Fried sentenced to 25 years
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: ultra low / negative interest rates in Germany

Post by MediumTex » Tue Feb 02, 2016 12:05 pm

dualstow wrote:
TennPaGa wrote:
dualstow wrote: The trick is to fight that feeling.  ;)
Damn you.
Maybe you are my evil twin. I didn't even have to hover on the link to know.  ;)
No need for me to click the link either.

What started out as friendship, has grown stronger
I only wish I had the strength to let it show
I tell myself that I can't hold out forever
I said there is no reason for my fear
Cause I feel so secure when we're together
You give my life direction
You make everything so clear
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
bedraggled
Executive Member
Executive Member
Posts: 705
Joined: Sat Sep 13, 2014 4:20 am

Re: ultra low / negative interest rates in Germany

Post by bedraggled » Tue Feb 02, 2016 12:46 pm

You gotta stoop to REO Speedwagon?

Is Rod Serling standing in the corner?
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: ultra low / negative interest rates in Germany

Post by MediumTex » Tue Feb 02, 2016 1:00 pm

bedraggled wrote: You gotta stoop to REO Speedwagon?

Is Rod Serling standing in the corner?
[img width=480]http://i.kinja-img.com/gawker-media/ima ... hh5jpg.jpg[/img]

Rod Serling?  I love him!  If you see him, will you tell him I wrote a song for him?  It goes like this:
Creepy Girl Dummy wrote:I stumbled around with my eyes half closed
And curse the sun for being so bright
I hold you close, feel your warmth and wonder why
The river of life for you runs right.

And all the morning birds may laugh at me
But they've got the same straight jobs to do
And I can't see who is the biggest fool of all
With my eyes all scarred from a whiskey night.

My head is poundin' as I'm sittin' here
And my mind's not workin' like it should
Come on, guitar, you've got to save me
And get me back feelin' like I should.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
bedraggled
Executive Member
Executive Member
Posts: 705
Joined: Sat Sep 13, 2014 4:20 am

Re: ultra low / negative interest rates in Germany

Post by bedraggled » Tue Feb 02, 2016 2:14 pm

Last I saw him, he was on SNL in the 70s.  He looked a lot like Dan Akroyd in a skit with Garrett Morris and Jane Curtin.  Akroyd stood in the corner.  Like Boo Radley?

Never could find someone as good as Garrett Morris.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: ultra low / negative interest rates in Germany

Post by MediumTex » Tue Feb 02, 2016 2:36 pm

bedraggled wrote: Last I saw him, he was on SNL in the 70s.  He looked a lot like Dan Akroyd in a skit with Garrett Morris and Jane Curtin.  Akroyd stood in the corner.  Like Boo Radley?

Never could find someone as good as Garrett Morris.
I only ever watched one episode of SNL.  Elliot Gould was hosting and Anne Murray was the musical guest.  (I love Anne Murray!)  Anyway, I was enjoying the show and chuckling quietly when my master stormed in, saw what was on TV, and poked out one of my eyes.  That was my last SNL viewing experience, but I hear it's been up and down since then.

[img width=480]http://theghostdiaries.com/wp-content/u ... uist-3.jpg[/img]
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
bedraggled
Executive Member
Executive Member
Posts: 705
Joined: Sat Sep 13, 2014 4:20 am

Re: ultra low / negative interest rates in Germany

Post by bedraggled » Tue Feb 02, 2016 4:04 pm

Old SNL stuff can be found on Youtube.
barrett
Executive Member
Executive Member
Posts: 1982
Joined: Sat Jan 04, 2014 2:54 pm

Re: ultra low / negative interest rates in Germany

Post by barrett » Tue Feb 02, 2016 4:23 pm

Wow! That REO Speedwagon music video has to be one of the worst I have ever seen!

Can we pull the discussion back to Pfanni's Dilemma? Would anyone on here buy 30-year bonds that were yielding 1.08%? My solution in a super low interest rate environment would be to go with more cash. But I've said that before. At 1.08%, doesn't the interest rate risk overwhelm the potential for long bonds to really perform as they are supposed to in the PP?

Cash is good to have if we have true deflation. And I'd love to see this discussed because it's not totally inconceivable (no Princess Bride tangents, please!) that we US PPers could find ourselves in a similar position within a couple of years.
Post Reply