Why should PP continue going up?

[gaston]

One cannot escape the fact that believing one can predict what an asset will do is in effect saying that one is smarter than the market (as Harry Browne said). Are all the people pushing yields that low (banks, pension funds, insurance companies, states, fund managers, etc.) really dumb or completely misinformed? Am I smarter than them as a whole? That's the real question.

I had my doubts for bonds in my PP when yields were 2.19%. I bought anyway around 1.9%, thinking I'd probably lose on it but knowing the gold/stocks were here to balance in that case. Today long term yields are 1.577%.

I think the reason yields are so low is because investors are afraid of banking failures. They think the chance of getting your money back with the government is better than with a bank. You can see that this is what it's all about because in Europe for example, the bonds of the governments that are viewed as the most reliable have the lowest yields (Switzerland, Germany etc). In that context, whether yields are at 1% or -5% is almost irrelevant (it's all about saving what you can). Also if we get real deflation (prices of stuff, real estate etc. dropping), you could lose money on bonds in negative interest, but still gain in real terms (you would see that in the inflation adjusted return, which is what matters).

So if we do get massive bank failures then yields could probably drop through 0 like it's nothing.

[ILoveMoney]

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.

May I point out that the bond you are referring to (the one that is up 30% YTD) has a 2% coupon? (It's not a negative yield bond, which is what I understood from reading your post.)

http://www.gyroscopicinvesting.com/foru ... 24#p150882

[MachineGhost]

One cannot escape the fact that believing one can predict what an asset will do is in effect saying that one is smarter than the market (as Harry Browne said). Are all the people pushing yields that low (banks, pension funds, insurance companies, states, fund managers, etc.) really dumb or completely misinformed? Am I smarter than them as a whole? That's the real question.

That's really the wrong question to ask and its the type of baloney Efficient Market Hypothesis True Believers like to throw out as justification for just accepting aggregate "wisdom of the crowds" mediocrity. Not everything in the market is always about dumb money vs smart money. Smart money can act dumb for extended periods of time and the dumb money happily joins them by nature. The real question is whether the reward is worth the risk when situations like those arise and whether or not you can still reach your investment goals by avoiding such permament loss of capital risks.

For instance, yesterday looked at the yields on investment grade corporate bonds out to 2025. After management fees, they are neck and neck with CD rates! Hence, there's absolutely no point in buying them. They don't offer a superior reward-to-risk ratio.

Being desperate and chasing yields (lower) in the markets is not a good position to be in because you will ultimately be screwed over by the less desperate. This is the core problem facing insurance companies and pension plans world over as they flock to positive-yielding Treasuries. It's not going to end well.

What is the ultimate anti-central bank play? Because I want to flip a gigantic middle finger and gold just seems ho-hum.

[MachineGhost]

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.

May I point out that the bond you are referring to (the one that is up 30% YTD) has a 2% coupon? (It's not a negative yield bond, which is what I understood from reading your post.)

http://www.gyroscopicinvesting.com/foru ... 24#p150882

Yeah we have to be careful about negative YTM. It's not the same thing as a negative coupon rates being freshly auctioned on the run. When we have negative coupon rates being issued, then that's the time to panic.

EUs an interesting situation though. Bondholders are betting on serious reforms to happen to allow the EU to become a currency issuer because there is no way in hell the EU could pay all of the outstanding liabilities without massive borrowing via fiscal policy. That's at odds with austerity. So far all you have is the ECB reluctantly and slowly jiggling accounting entries of member state bank debts to deal with banking system insolvency (i.e. Greece) and nothing being done about systemic insolvency.

And Japan is so ridiculously homogenized to the extent that they have a sickening faith in their government that a Yankee would pass gas over.

[Libertarian666]

What is the ultimate anti-central bank play? Because I want to flip a gigantic middle finger and gold just seems ho-hum.

A currency reset, i.e., going back to a gold standard, is the only way that a person of relatively modest means can become extremely wealthy without taking enormous risk. By holding gold.

That is the ultimate middle finger to the central banks.

How is that ho-hum again?

[MachineGhost]

A currency reset, i.e., going back to a gold standard, is the only way that a person of relatively modest means can become extremely wealthy without taking enormous risk. By holding gold.

That is the ultimate middle finger to the central banks.

How is that ho-hum again?

Why is that an ultimate middle finger to central banks? The Fed was created during a gold standard. Fat lot good that did. Maybe you have something more specific in mind than just returning to a failed and bygone era of fixed exchange rates and wildcat banking?

[Libertarian666]

A currency reset, i.e., going back to a gold standard, is the only way that a person of relatively modest means can become extremely wealthy without taking enormous risk. By holding gold.

That is the ultimate middle finger to the central banks.

How is that ho-hum again?

Why is that an ultimate middle finger to central banks? The Fed was created during a gold standard. Fat lot good that did. Maybe you have something more specific in mind than just returning to a failed and bygone era of fixed exchange rates and wildcat banking?

People who held gold were protected when the government decided to devalue the currency in 1932... if they had it outside the control of the government.

I'm not advocating fixed exchange rates or wildcat banking. I'm advocating gold as money and honest banking (that is, 100% reserves, verifiable at any time by depositors).

But that's not exactly what I was talking about. What I was referring to is that during the transition back to the gold standard after the hurricane of paper money blows away, gold will have enormous purchasing power, maybe 100x what it has today. During that transition, holders of gold will have the opportunity to buy productive assets at maybe 1c on the dollar.

[Sam Brazil]

This is where I'm personally more comfortable with a trend following layer on top of the PP, like a 200 day MA, so that if it turns out long bonds are "broken," the PP won't continue plowing more and more money into them during rebalance events. If I'm wrong and LTTs can continue to skyrocket all the way to -50% yields, then no problem either, the system dictates to continue putting money into them.

[Sam Brazil]

It's wacky time!

I'm starting to thing a 2-5% allocation to bitcoin could be prudent. I think we all agree cash is going to be clamped down on in the coming years. That's already the global trend. Without all digital USD, government policies to spark inflation with negative rates won't work. Tax collection is more difficult. Illicit trade is more difficult. Moving money out of the country is more difficult. Etc. Just look at how much yuan has flowed out of China and into bitcoin despite government efforts to the contrary.

Gold has traditionally been the answer to those problems. However, gold is much easier for government to clamp down on as well because they can simply go after retail gold dealers and kill liquidity. And of course taking gold out of the country is not easy in any large quantities. Gold is also not a medium of exchange, practically, although it is a store of wealth. I'm much more easily able to buy things with BTC (directly) than I am with Krugarands (directly).

Until a few years ago, despite gold's imperfections, there was no viable alternative. Enter bitcoin. It's decentralized and impossible to clamp down on easily. You can exchange it easily and even carry it in your "brain" with a mental password. It's literally simultaneously invisible to transport and impossible to counterfeit. It can be completely anonymous if you take certain precautions, and there are even certain alt coins being developed with even better built-in anonymity.

People always find a way to circumvent government restrictions on free trade, including the free trade of currency. I'm not saying bitcoin is going to replace gold, especially not tomorrow. But if everyone agrees these problems with cash are looming, and gold is a problematic answer, and a new solution has come along with surprising traction and better features, then it may deserve a small place in the PP, in the spirit of "truly all weather."

[iwealth]

and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

[Libertarian666]

and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

[MachineGhost]

This is where I'm personally more comfortable with a trend following layer on top of the PP, like a 200 day MA, so that if it turns out long bonds are "broken," the PP won't continue plowing more and more money into them during rebalance events. If I'm wrong and LTTs can continue to skyrocket all the way to -50% yields, then no problem either, the system dictates to continue putting money into them.

The problem is if you're out of gold or bonds while equity decides to take a dump, you have no protection. How to reconcile this? Grin and bear it? Keep a small eternal position even when it is still "risk on"? Ultimately you wind up back at the PP.

[MachineGhost]

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

I was there. They all collapse eventually due to hucksters and fraudsters using it. Attracts unwanted government attention. But they weren't decentralized. Bitcoin isn't either really since four Chinese companies own the entire blockchain in practical terms, but at least its in the right direction.

What I don't like about Bitcoin is its got a limited supply, a limited number of decimal places and a limited number of transanctions that can be processed per second, i.e. perpetually deflationary and perpetually slowing down which doesn't make it useful as stable or practical money. OTOH, there was a cryptocurrency that was the opposite of Bitcoin and it attracted no attention at all and I was probably the only one even mining it. So my verdict is people are purely speculating on cryptocurrencies and not because they think its going to replace legal tender. Come on, people aren't that much of deep thinkers in the aggregate, especially the Chinese.

First mover advantage also works most of the time, hence Bitcoin is King of the Hill. The rest are me too tier players that aren't worth a moment's notice other than if it is cheaper to mine and convert to Bitcoin. However, Ethereum and Maidsafe are disruptive exceptions out of the payments realm, so they're worth paying attention to.

[Sam Brazil]

and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

You're right. There are no barriers other than branding, or more specifically, the network effect. That's a really powerful barrier, though, and I tend to think people dismiss it too lightly.

For example, what is to stop someone else from copying LinkedIn? Facebook? Twitter? Ebay? Paypal? The tech to create a social website is trivial. Their real value is in their 2 sided network popularity.

Once you've reached a certain critical mass of popularity in a two sided market, it becomes extremely difficult for others to compete. It's not impossible. Facebook's takeover of Myspace is an example, but it's generally speaking one of the most durable competitive advantages you can get, short of a patent.

Isn't that exactly the same thing as Bitcoin?

[Sam Brazil]

This is where I'm personally more comfortable with a trend following layer on top of the PP, like a 200 day MA, so that if it turns out long bonds are "broken," the PP won't continue plowing more and more money into them during rebalance events. If I'm wrong and LTTs can continue to skyrocket all the way to -50% yields, then no problem either, the system dictates to continue putting money into them.

The problem is if you're out of gold or bonds while equity decides to take a dump, you have no protection. How to reconcile this? Grin and bear it? Keep a small eternal position even when it is still "risk on"? Ultimately you wind up back at the PP.

Diversifying isn't a bad idea. One conventional PP. One trend following PP. Who knows which will end up better off.

[Sam Brazil]

and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

At what point is it no longer Bean Baby currency, though? How long does it need to maintain its growth in popularity to transition from a fad to a legitimate new technology that's disruptive and here to stay.

[Libertarian666]

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

At what point is it no longer Bean Baby currency, though? How long does it need to maintain its growth in popularity to transition from a fad to a legitimate new technology that's disruptive and here to stay.

I think it would be reasonable to conclude that it is here to stay as soon as it has half the duration of gold's use as money. Let's call it 1000 years for a round estimate.

[dualstow]

Bitcoin is still very "nubile."

[blackomen]

"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?

Agreed.

Reality check: we don't invest in the PP because we believe it's gonna deliver superior returns. We invest in it in order to shield us from massive losses in case we're wrong. Even holding cash could lead to massive losses if we get hyperinflation (like the double digit inflation rates of the late 70s and early 80s.) Back in the beginning of 2013, I had a strong intuition that stocks were gonna be the winner that year and I was right, but I had chosen the PP which lost 3% vs stocks which gained 30%. On the other hand, Gold and Bonds both lost around 20% and had I picked the wrong asset, I could have been staring at those losses instead of the mere -3%.

The purpose of the PP, as stated by Harry Browne, is to protect the purchasing power of your assets, not to deliver superior real returns, without knowing what the future holds. So far, it seems to be doing its job well, but if you're still not satisfied with the returns you're getting, there's always the VP.

[Kbg]

For what it's worth (not much), I would wave off a trend following PP. Gold is the only asset of the three that trends well. Band rebalancing (return to mean) is a much better approach for this particular portfolio. Having noted this, one could use a discretionary mix. When you hit a rebalance band slap a MA on the asset(s) that are showing good trending and wait until the asset stalls or is potentially reversing and at that point pull the rebalance trigger. Just make sure you decide your mechanics ahead of time and pull the trigger with no regrets when it happens. This may get you a bit more juice if the trend continues or lose a bit if the rebalance hits right around the extreme.

There is no way to backtest this as it is all discretionary. It may help and won't hurt that much.

[belgo]

I am coming a bit late to this very interesting discussion. Sam, you are raising a number of very valid questions. I set up an EU PP only 4 months ago and the bond issue was a big question for me. The 30y Bund was trading at 0.87% at the time ... In Europe we are basically already facing your theoretical questions about the bond floor. And guess what: 4 months later, the same bund is at 0.42% yield and the Long term bond part has generated close to 10% return so far in the EU PP. So it does seem to fulfil what it needs to do even at yields that are ridiculously low. People have to put their money somewhere when they panic. I do agree that somewhere there must be a floor or things become ridiculous. But I believe that floor is well below 0% as there is a cost to storing cash under your mattress on a large scale. And i noticed that the Swiss bonds are all trading well below 0% even the very long ones; it does not seem to immediately "kill" the Swiss banks. So I can see a scenario where the long term rates will remain very low for very long and that you do not hold them for their yield but because they act as a safe haven in a panic scenario. And once, who knows when, rates will go up and the bund will show losses, but my hope is that the other assets will have risen enough to compensate for this scenario. We are indeed in unchartered territory but I am quite happy with the Bunds so far.

[Kbg]

I was listening to a podcast yesterday and the interviewee made a very interesting case for the US eventually getting to the same/close to the same rates as Japan and Europe. Several points why but the big ones were better government finances and international money flows into the US as a result of NIRP/ZIRP in the other major economic blocks. If you are a foreign investor you get the carry spread and dollar appreciation. He gave an anecdote where several rich Russians in his neighborhood are up like 60%.

[MachineGhost]

For what it's worth (not much), I would wave off a trend following PP. Gold is the only asset of the three that trends well.

There is no way to backtest this as it is all discretionary. It may help and won't hurt that much.

What a bunch of rubbish! All three assets trend well. You don't think T-Bonds have been trending for 30 years? Or stocks in the 90's? LOL!

It's a great idea though but rebalancing bands are not hit that frequently so it could be risky. Then again, true bear markets don't occur all that often either. Definitely anything that reduces the whipsaws of trend following is a plus to the CAGR. I've seen it in my own backtests.

It can be backtested. Just need to add an additional check after a rebalancing band is triggered. But certainly not in AmiBroker until someone figures a way to get the rebalancing bands implement. Support is no help.

Rather than using one size fits all rebalancing bands for the portfolio, just use trend following on each individually. That's what I hav to do as it's the only way I can sleep at night.

[MachineGhost]

Bonds below the zero bound rely on the Greater Fool theory to work.

[MachineGhost]

Just as with gold, smart money is massively short Treasuries. But unlike gold, the dumb money is massively long Treasuries. Both are at 21 year highs.



"Bond King" Gundlach said he has fielded more investor questions about buying Treasureis recently than at any other point in his career. And no one he talks to thinks interest rates can go higher today. He thinks a reversal could be an "unexpected" move by central banks to quit QE and move to "helicopter money".

Boy, I think I'm gonna speed up my final gold accumulation... might even now be cheaper to buy it in Britain, eh?