Why should PP continue going up?

[buddtholomew]

Is the barbell and bullet approach to fixed income investing still valid as yields fall further and breach the basement floor?
--speaking of barbells, thanks to dualstow for restoring the Avatar!
For me it's not a matter of whether to hold fixed income, but rather the best approach to take and still maintain the structure of the PP.
Yields could go up from here and then down and up and down and 2.3% is still the best available globally.

[clacy]

"Why should ______ continue to go up?"

You can substitute many things for PP in that questions..... Real estate, 60/40, any number of lazy portfolios, farm land, silver, muni bonds, etc, etc.

Unfortunately no one can ever answer these with certainty.

My belief is that balanced portfolios stand the test of time better than going all in on one asset class. And I happen to think that the PP tends to be the best situated of all the standard balanced/lazy portfolios.

So with that said, a better question is what asset allocation do you think will outperform it in the next 5 years?

[dualstow]

+1 What clacy said (except you said it better than me, clacy).

"Why should ______ continue to go up?

This gets to the heart of it, and I hope my posts didn't rub you the wrong way, Sam Lowry of Brazil, but after all your thread title features the whole pp, not the bond ceiling.

[Sam Brazil]

It just sticks out like an elephant in the living room because the whole spirit of the PP is that it's supposed to be very simple, and in particular, it's supposed to be quite simple to understand how it will respond and still work in any economic environment. The plausible, simple explanation for how it will still work as rates approach zero is conspicuously missing. This is the only scenario in PPology that elicits non-straightforward answers.

Are you trolling? Yields declining == disinflation. When they go below 0%, then you have nominal deflation. What happens after that point depends all on investor sentiment. If they have high trust in their government, then things will continue as before. If not, then gold and alternatives will go up to compensate. What about this is hard to understand? Its out of our control what central banks and governments want to do to try to put a chicken in every pot.

Why would I be trolling?

At rates persistently below 0% the business models of banks and insurance companies are broken. This isn't just me saying this. The BIS also says this https://www.bis.org/publ/qtrpdf/r_qt1603e.htm:

...more recently, the debilitating impact of persistently negative interest rates on the profitability of the banking sector has emerged as an important consideration (BIS (2016)). Even more directly, such rates can weaken the profitability and/or soundness of institutions with long-duration liabilities, such as insurance companies and pension funds, seriously challenging their business models

Please understand I'm not saying the BIS is an economic/market oracle. I'm pointing out that the 0% bound is fundamentally different than every other circumstance that deals with economics and investor sentiment. All of these various economic/asset levers go up and down all the time, without any lines after which crossed everything turns upside down.

However, for LTTs, unlike stocks or gold, there is a line near the 0% yield bound, even if no one knows precisely where it is, where the stability of the entire financial system goes into disarray. No other economic scenario has this dynamic, and I don't know that the PP's internal logic accounts for it.

If they have high trust in their government, then things will continue as before. If not, then gold and alternatives will go up to compensate. What about this is hard to understand? Its out of our control what central banks and governments want to do to try to put a chicken in every pot.

That's the point. Even if people have trust in the government, things will not necessarily continue as before, because of the special-case dynamics of 0% yields, which I just described above. That is the scenario I'm asking about - how do things continue as before, when banks and insurance companies can no longer function? If the answer is the Fed would have no choice but turn on the biggest money printer ever, which means gold would save the day, OK, I get it. If the answer is that no one knows how the world would work without banks and insurance companies functioning below 0%, and the PP would have LTTs disabled as a return driver like never before in its history, but don't worry...it'll somehow work out, I don't get that. Maybe I'm dense.

Ultimately what I'm asking about is this -- LTTs were designed as the PP's major lever against disinflation. At somewhere near the 0% bound LTTs no longer work because of their unique mechanics that depend on rates, as opposed to gold and stocks. So how does the PP still work, with its "disinflation responder" broken, such that it still overall nets out positive?

[Sam Brazil]

We're in uncharted territory here. The pp could turn out to be a miserable performer. I just can't think of a better way to invest, and long bonds appear to be a crucial part of the plan.

I get the "I can't think of a better way to invest sentiment." I wouldn't be here or waste my time thinking about this if I didn't find something deeply lacking in traditional approaches and something very appealing about the PP.

But isn't it pretty disingenuous to say you can't think of a better way to invest?

No, I am never dishonest.

Without the benefit of precognition, all investments are a crap shoot. The pp is the best way I can think of to hedge my bets.

Sorry, I didn't mean dishonest, as in you're lying to us all or I'm questioning your character. I meant more "are you sure you're being honest with yourself," in the sense that we all have to play the internal mind game of convincing ourselves that our investment choices are correct, so that we have the fortitude to stick to our plans, whatever they may be. The price of that fortitude is usually, to some extent at least, closing our minds to alternatives or new information. In this case, the new information is the entire world seemingly closing in on the 0% bound, which has never happened before.

[Sam Brazil]

Just jumping in to remind folks of the Swiss PP YTD results that Lang posted somewhere in the last couple of days. He had the long Swiss bond (50-year issue maturing in 2064) returning about 30% YTD.

And thanks Sam for pushing the issue. I think we're all interested in what happens to long bonds if/when rates go negative. But it seems to me that paying close attention to Japan and Europe can provide a lot of insight as both "economic zones" seem to be a few years ahead of us in terms of disinflation/deflation.

Not sure how this ends or morphs into something else but I do agree that gold is the logical choice to carry the PP under current conditions. Outright deflation should be terrible for stocks. Ditto for cash. Whether or not there is a bond floor (or basement... kudos Dualstow!), I guess we'll find out. But gold may not have to perform sensationally well in order to carry the PP. Something along the lines of what stocks did here in the US from 1982 to 2000 might do the trick. If, for example, we had an economy that was shrinking by 1% each year, the PP would need to return 3% to 4% to yearly to keep up with its historical performance.

And are banks necessarily broken with sustained negative rates? Can't they charge you to hold your money while also charging 2% to lend it to you? I mean, there is still a spread which is how they have always made money. The obvious retort is that a deflationary environment is unlikely to produce a lot of lending activity. But less lending is different than no lending.

It's not just banks that may be broken with sustained negative rates. It's also insurance companies and pensions.

Even if there's a theoretical way for it to all work, human behavior in a negative rate environment is also a wildcard. E.g., if everyday people freak out and run on the banks because the banks are now "taking their money," even if that's not technically the rational thing to do, that is a problem that could threaten the entire system, and the FDIC doesn't have enough money to fix it.

So does that mean the government would start clamping down on cash to prevent that from ever happening? Or the banks? OK, well anything that threatens people's ability to cash out, or even anything that smells like it, could easily grow into a panicked stampede to cash/gold/hard assets. That also is a threat to the entire system.

The 0% bound is a pretty scary area, IMO, because it's one thing for the world to be above 0% while the Japanese are playing with it. It's becoming another thing when Japan and Europe start dipping below 0%. It could be entirely another thing when it's the entire world + America.

[Sam Brazil]

+1 What clacy said (except you said it better than me, clacy).

"Why should ______ continue to go up?

This gets to the heart of it, and I hope my posts didn't rub you the wrong way, Sam Lowry of Brazil, but after all your thread title features the whole pp, not the bond ceiling.

Not at all.

My thread features the whole PP because I'm asking if the PP plane can stay airborne with one of its engines broken. The PP is meant to be a self-contained dynamic system, so I don't see how one can discuss LTTs in isolation.

[Sam Brazil]

"Why should ______ continue to go up?"

You can substitute many things for PP in that questions..... Real estate, 60/40, any number of lazy portfolios, farm land, silver, muni bonds, etc, etc.

Unfortunately no one can ever answer these with certainty.

My belief is that balanced portfolios stand the test of time better than going all in on one asset class. And I happen to think that the PP tends to be the best situated of all the standard balanced/lazy portfolios.

So with that said, a better question is what asset allocation do you think will outperform it in the next 5 years?

The difference is that, like the forum is named, the PP is a "gyroscope." It requires counterbalances to work or it falls apart. If the zero rate bound throws off the balance, does the entire portfolio go out of balance? Or can the remaining forces compensate to keep the balance? That's the unique question the PP has to deal with. It's why it's difficult to talk about one asset class in isolation.

Stocks don't have to deal with that. Zero bound or not, companies will still continually increase productivity because of technological innovation and other increases in efficiency. Stocks' success or failure as an asset class doesn't depend on another counterbalancing it. There's no limit to the increase in productivity from technology or human ingenuity, which means there's no limit on how high stocks can go. In fact, we are on the cusp of exponential innovation in AI and computing which will likely bring increases in productivity we can't imagine. LTT prices, in contrast, have a ceiling from their tie to interest rates.

I don't know what if anything will outperform the PP over 5 years. My question actually wasn't about 5 years. I don't really care about 5, although the next 5 could be particularly interesting. It was about the next 30, because what sparked this question was the 30 year period before the PP, where rates were persistently rising, and the PP didn't exist. For the next 30 years, that cannot happen, unless there's a way for rates to continue declining past zero for the next 30 years.

I do wonder if any number of portfolios that don't rely as heavily on LTTs will outperform the PP. Even the PP minus LTTs (with some kind of substitute as machine ghost suggested could outperform the PP).

[clacy]

It's not just banks that may be broken with sustained negative rates. It's also insurance companies and pensions.

Even if there's a theoretical way for it to all work, human behavior in a negative rate environment is also a wildcard. E.g., if everyday people freak out and run on the banks because the banks are now "taking their money," even if that's not technically the rational thing to do, that is a problem that could threaten the entire system, and the FDIC doesn't have enough money to fix it.

So does that mean the government would start clamping down on cash to prevent that from ever happening? Or the banks? OK, well anything that threatens people's ability to cash out, or even anything that smells like it, could easily grow into a panicked stampede to cash/gold/hard assets. That also is a threat to the entire system.

The 0% bound is a pretty scary area, IMO, because it's one thing for the world to be above 0% while the Japanese are playing with it. It's becoming another thing when Japan and Europe start dipping below 0%. It could be entirely another thing when it's the entire world + America.

Essentially you're saying that the entire global economic model is broken and LTT yielding zero is a symptom.

I personally don't think the US 30 yr (or even 10 yr) will dip into negative territory but I guess only time will tell.

I think gold is as good of a hedge against a broken global economy that you can find, so at least we have some peace of mind with a quarter of our portfolio in the shiny metal.

If you are that concerned with LTT imploding, then maybe you could swap some of the LTT for gold or real estate? Maybe 50% stocks / 50% gold will be the ideal portfolio going forward, but it's hard to know without a crystal ball.

[Sam Brazil]

Is a simple solution the LTT "price ceiling problem" zero coupon bonds? E.g., using something like ZROZ?

If the problem with LTTs is that their price is capped because their yields are "basemented" near the zero rate bound, then wouldn't zero coupon long term bonds be the answer instead? They have no coupon to create a ceiling. Or am I missing something?

[MachineGhost]

Ultimately what I'm asking about is this -- LTTs were designed as the PP's major lever against disinflation. At somewhere near the 0% bound LTTs no longer work because of their unique mechanics that depend on rates, as opposed to gold and stocks. So how does the PP still work, with its "disinflation responder" broken, such that it still overall nets out positive?

It seems simple to me. Under disinflation, yields will keep declining in negative territory. Insurance companies and pension funds blowing up will just add fuel to that fire. Bonds are just math and math works under both signs. Hence, manage your duration exposure because the more negative yields become, the higher the effective duration will be.

Anything else and that is what cash, stocks and gold is for. I can sleep at night even if I have trouble actually lump sum investing into the PP.

THE ZERO RATE BOUND IS NOT A BOUND!!! You're trying to create a hypothetical for trolling purposes. No bank is passing along negative rates to their customers because all central banks are offsetting it by paying interest on the bank's reserves. So its all smoke and mirrors.

I can't comment on this subject anymore; it's getting too much on my nerves. Either you understand how the PP really works at a deep level or you don't and should go find a Boglehead portfolio.

[Sam Brazil]

I can't comment on this subject anymore; it's getting too much on my nerves.

Sorry my questions about the PP have made you so angry. Are you doing OK? Because this really isn't something to raise your blood pressure over. I'm talking about a portfolio here, not religion or politics. Maybe after more remedial research and conversation here I'll reach your level of enlightenment. Until then I can only hope my questions don't upset you any further.

[dualstow]

You'll have to forgive MG. He's cranky because he doesn't know how to eat a balanced meal,
tee hee hee.

[barrett]

It's not just banks that may be broken with sustained negative rates. It's also insurance companies and pensions.

Even if there's a theoretical way for it to all work, human behavior in a negative rate environment is also a wildcard. E.g., if everyday people freak out and run on the banks because the banks are now "taking their money," even if that's not technically the rational thing to do, that is a problem that could threaten the entire system, and the FDIC doesn't have enough money to fix it.

So does that mean the government would start clamping down on cash to prevent that from ever happening? Or the banks? OK, well anything that threatens people's ability to cash out, or even anything that smells like it, could easily grow into a panicked stampede to cash/gold/hard assets. That also is a threat to the entire system.

The 0% bound is a pretty scary area, IMO, because it's one thing for the world to be above 0% while the Japanese are playing with it. It's becoming another thing when Japan and Europe start dipping below 0%. It could be entirely another thing when it's the entire world + America.

I would not be at all surprised to see a government clamp down on cash. It's already happening or being discussed in other parts of the world. I remain pleasantly surprised that I can still go into a bank and cash a check as opposed to depositing it, but I won't go too far off on that tangent.

And agreed that negative rates on long instruments like the 50-year Swiss bond can't be good. I just don't know where the breaking point is, and until we reach that point, bonds seem to still be capable of positive returns. Lang posted in the one-day Swiss currency crisis thread that his bonds are up 30% YTD. I do believe that we here in the US have the luxury of seeing how this plays out in the rest of the world. If it does in fact lead to a banking crisis overseas, that will likely spread here in some form or another and gold should come to the rescue.

But I am far from an expert. I just find this topic interesting and it is not causing me stress to discuss it.

[buddtholomew]

Barrett, I really look forward to your synopsis.
Thank you.

[dualstow]

Me, too. Always a pleasure to read your posts, Barrett.

[Libertarian666]

The answer is that with negative interest rates the PP may be the prettiest horse in the glue factory.
Personally, I'm betting on wild money creation driving gold to the moon.
All I have on my side is Austrian economics (and a few thousand years of history), though, so who knows what will happen?

[dualstow]

Now that NASA has discovered that second moon, your odds are doubly better!

[MachineGhost]

The answer is that with negative interest rates the PP may be the prettiest horse in the glue factory.
Personally, I'm betting on wild money creation driving gold to the moon.
All I have on my side is Austrian economics (and a few thousand years of history), though, so who knows what will happen?

Not gonna be any "wild money creation" without a growing economy demanding it first. Gold doesn't need "wild money creation" to attract demand. It typically goes up right before or at the beginning of a recession anyway.

So get prepared for 0% yields. The Treasury yield curve is starting to flatten (60% recession probability) and the high yield curve is already inverted.

[Libertarian666]

The answer is that with negative interest rates the PP may be the prettiest horse in the glue factory.
Personally, I'm betting on wild money creation driving gold to the moon.
All I have on my side is Austrian economics (and a few thousand years of history), though, so who knows what will happen?

Not gonna be any "wild money creation" without a growing economy demanding it first. Gold doesn't need "wild money creation" to attract demand. It typically goes up right before or at the beginning of a recession anyway.

So get prepared for 0% yields. The Treasury yield curve is starting to flatten (60% recession probability) and the high yield curve is already inverted.

Apparently you will be very surprised when the USD becomes worthless.

[sophie]

Barrett has a talent for describing things in simple plain English, indeed.

Sam - I think the point you're confused about is whether 0%/negative yields mean that bonds are broken. They don't. Bonds are working exactly as they should mathematically and there's no reason to think that will change.

It's implications of those negative yields that are going to be interesting. I don't know what those are going to be, though there have been some very astute guesses on these pages. All I know is that the PP is probably one of the best lazy portfolios for navigating unpredictable environments like this.

The last portfolio I would want to own in such an environment is the one that most people own: stock/bond mixes. Well, second-to-last; last would be cash in the bank. When critiquing the PP, it's important to compare it not to your ideal investment return scenario, but to what you'd actually hold in its stead.

[buddtholomew]

Hey Sophie, you're no chopped liver in your writing style...

[Libertarian666]

Barrett has a talent for describing things in simple plain English, indeed.

Sam - I think the point you're confused about is whether 0%/negative yields mean that bonds are broken. They don't. Bonds are working exactly as they should mathematically and there's no reason to think that will change.

It's implications of those negative yields that are going to be interesting. I don't know what those are going to be, though there have been some very astute guesses on these pages. All I know is that the PP is probably one of the best lazy portfolios for navigating unpredictable environments like this.

The last portfolio I would want to own in such an environment is the one that most people own: stock/bond mixes. Well, second-to-last; last would be cash in the bank. When critiquing the PP, it's important to compare it not to your ideal investment return scenario, but to what you'd actually hold in its stead.

Exactly.

[dragoncar]

me write good too

[buddtholomew]

me write good too

You meen me right well to