Slowly bleeding

General Discussion on the Permanent Portfolio Strategy

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ochotona
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Re: Slowly bleeding

Post by ochotona » Sun Oct 16, 2016 10:42 am

Dutch, Faber's most important conclusion from the GAA book was that costs matter more than the exact allocation which is knowable only in hindsight anyway. The many allocations he studied were not so different in the end except the best one if burdened with excess cost suddenly performed worse than the worst one.
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 11:39 am

craigr wrote:I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.
How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).
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Re: Slowly bleeding

Post by dutchtraffic » Sun Oct 16, 2016 11:44 am

MachineGhost wrote:
craigr wrote:I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.
How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).
It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 11:46 am

dutchtraffic wrote:This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.
I think you need to seriously consider the currency effect interplay before considering a global PP. If you're Dutch, then you want something stronger, not weaker than the Euro and that would be the USD. USD will always be king of the hill in a monetary crisis so you're unnecessarily exposing yourself to sovereign risk that would not be in a PP that is USD only (there's enough foreign currency exposure in the large caps) if you're going for global assets.

Also, the private listed equity ETF is not real private equity. It's financial management companies. If you want real private equity, you have to look to the new online crowdfunding portals in the US and UK.
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 11:48 am

dutchtraffic wrote:It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.
Well then we need quantitative evidence and not gut feelings. I thought I posted that already and yields are fine in terms of providing capital gains down to about .10% or something? We're nowhere near that yet. 1% leaves too much on the table. So since we have no data on a bond bear market except the last one in terms of 20-years, we do have to be more diligent in capping the duration. I don't think the PP can survive a hit with 25% of T-Bonds at 0% with a 30-year year duration. That throws the risk parity way out of whack.
.
Last edited by MachineGhost on Sun Oct 16, 2016 11:51 am, edited 1 time in total.
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Re: Slowly bleeding

Post by dutchtraffic » Sun Oct 16, 2016 11:50 am

MachineGhost wrote:
dutchtraffic wrote:This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.
I think you need to seriously consider the currency effect interplay before considering a global PP. If you're Dutch, then you want something stronger, not weaker than the Euro and that would be the USD. USD will always be king of the hill in a monetary crisis so you're unnecessarily exposing yourself to sovereign risk that would not be in a PP that is USD only (there's enough foreign currency exposure in the large caps) if you're going for global assets.

Also, the private listed equity ETF is not real private equity. It's financial management companies. If you want real private equity, you have to look to the new online crowdfunding portals in the US and UK.
Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.
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Re: Slowly bleeding

Post by dutchtraffic » Sun Oct 16, 2016 11:51 am

MachineGhost wrote:
dutchtraffic wrote:It's pretty simple.
Yields can only go so far negative, at a certain point it becomes cheaper to stack piles of cash and/or use gold. So there is a floor.

Efforts to prevent that, such as making cash illegal, should just make you run away like hell, and not think "well it should work because even though bond yields are -7% now, there's plenty of upside left".

It's just a bad deal.
Well then we need quantitative evidence and not gut feelings. I thought I posted that already and yields are fine in terms of providing capital gains down to about .10% or something? We're nowhere near that yet. 1% leaves too much on the table.
The german 20yr etf is doing 0.35%.
And it's not gut feelings, it's just a bad deal no matter how you look at it.
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 11:55 am

dutchtraffic wrote: Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.
That may or may not be a bad trade if the Euro goes kaput which is what all those negative bond yields current imply. Speculators are betting on a return to the Mark.

USD also gets to benefit from huge capital inflows when something does go kaput. That't can be modeled in things like the Big Mac Index since its about safety and psychology, not PPP.
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Re: Slowly bleeding

Post by dutchtraffic » Sun Oct 16, 2016 11:57 am

MachineGhost wrote:
dutchtraffic wrote: Selling "cheap" euros now and buying very "expensive" dollars in 1 go right now is also a major risk, that should have been done 2 years ago.
To be honest, nothing looks good for euro investors atm.
That may or may not be a bad trade if the Euro goes kaput which is what all those negative bond yields current imply. Speculators are betting on a return to the Mark.

USD also gets to benefit from huge capital inflows when something does go kaput. That't can be modeled in things like the Big Mac Index since its about safety and psychology, not PPP.
That's true but it's a gamble I cannot take.
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 12:03 pm

dutchtraffic wrote:The german 20yr etf is doing 0.35%.
And it's not gut feelings, it's just a bad deal no matter how you look at it.
It is gut feelings until you provide statistical evidence that a .35% yield doesn't have enough "juice" anymore. Calculating it, .35% is 19.33 years duration and 25% of that is 4.8325 years. Still within the PP ball park. .35% is "locked in" in both yield and duration so it doesn't matter what the yields are after you buy. Even at 0% it will still do the job but you may have to adjust the 25% weight a bit.

I don't see anyone complaining about buying Zero Coupon bonds which are 0% yields, so why make a mountain out of a molehill?

I think your real risk is not low yields but repudiation. So buy T-Bonds.
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Re: Slowly bleeding

Post by craigr » Sun Oct 16, 2016 4:56 pm

MachineGhost wrote:
craigr wrote:I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.
How do you figure that? The convexity will increase so that it's still capable of generating the necessary capital gains, even when capping the duration. I think your argument would hold much more merit at 0% yields on the off hand chance yields "can't" go negative (which they clearly can and have).
At 1% there is some capital gain from going to 0.5%, but the damage going to 2.0% is much worse.

I just pulled up a convexity calculator to get a feel for this. The assumption is a 20 year bond with current yield of 1.0%

Rates drop by -0.5%: +9.50% gain
Rates increase by +0.5%: -8.61% loss

Rates drop by -1.0%: +20% gain
Rates increase by +1.0%: -16.42%

So yes there is a potential for gain, but it's not the out of the ballpark figure as it would be if yields started higher. If LT bonds go negative (which I am not assuming, but maybe that's wrong), then there is potential for larger gain. But how negative will LT go before people just don't want them outside of financial institutions shuffling money around?

At 1% I don't think bonds are a good deal in terms of the risk and below 1% they are toxic waste and I wouldn't own them. Again, it's dogma vs. reality here.
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Re: Slowly bleeding

Post by ochotona » Sun Oct 16, 2016 8:47 pm

Europe and Japan realizing NIRP is not working as hoped. I think the rubber band is near to fully stretched and it will come back in a nasty way on a new buyer of long bonds... someday.
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Re: Slowly bleeding

Post by ochotona » Sun Oct 16, 2016 8:49 pm

Oh and everything is a bet on something. Every position is based on some assumption. Buy and hold is not somehow ideologically purer than any other way to allocate
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Re: Slowly bleeding

Post by MachineGhost » Sun Oct 16, 2016 10:47 pm

craigr wrote:So yes there is a potential for gain, but it's not the out of the ballpark figure as it would be if yields started higher. If LT bonds go negative (which I am not assuming, but maybe that's wrong), then there is potential for larger gain. But how negative will LT go before people just don't want them outside of financial institutions shuffling money around?
But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).

We only have a historical record of rates rising from "low" yields on 20-year bonds so if you want a quantifiable yield level to stop buying under, here it is (it is 30yr 1977+):

Image

20yr was last under that rate on Oct. 3rd so I guess we're there already. Allow a 1% margin to account for a different macro-environment and I guess 1% doesn't sound that unreasonble as a battle stations point if we actually get there. But you guys better figure out what exactly you're going to do to hedge your stocks and gold if you go to all cash.
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Re: Slowly bleeding

Post by craigr » Sun Oct 16, 2016 10:56 pm

MachineGhost wrote:But calculate it for .75%, .5% and .25% yields and it still holds up because the duration is also increasing to make up for the "missing" yields, i.e. it just becomes more like a zero coupon bond. At 0% nominal yields it will definitely be objectively questionable as to any future capital gains. But, worrying about the potential losses on a rise in yields is market timing and I'm going to argue with the way the PP is constructed, you don't want to manage the duration exposure based on what yield levels "should" and "should not" be (because frankly, we'd be all in cash right now which offers no capital loss protection to stocks or gold).
I totally get it.

But each investor has to make their own judgment call on this. At 1% or lower I'm simply not a buyer of long-bonds and I will not likely hold onto them. For people in Europe with yields under 0.50%, they should definitely not be buying them. There is just no juice left vs. the risk.

I couldn't in good conscience tell someone to buy and hold onto long-bonds under 1% in yield. I wouldn't do it myself so I wouldn't recommend someone else to do it.

Again, each person needs to make up their own mind based on the risks they see.
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Re: Slowly bleeding

Post by AnotherSwede » Sun Oct 16, 2016 11:18 pm

How horrible would a return to 5-10% interest rate be? What would happen to pension funds, real estate prices?

I suppose pensions would have to be fully funded by tax money.
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Re: Slowly bleeding

Post by dutchtraffic » Mon Oct 17, 2016 1:19 am

AnotherSwede wrote:How horrible would a return to 5-10% interest rate be? What would happen to pension funds, real estate prices?

I suppose pensions would have to be fully funded by tax money.
5-10% ? :o
As of right now, the world's financial system would pretty much implode entirely.
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Re: Slowly bleeding

Post by dutchtraffic » Mon Oct 17, 2016 1:22 am

Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Image
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Re: Slowly bleeding

Post by craigr » Mon Oct 17, 2016 1:28 am

dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Image

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.
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Re: Slowly bleeding

Post by dutchtraffic » Mon Oct 17, 2016 1:32 am

craigr wrote:
dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.
With 50% of the portfolio at -100% (bonds and bills), and stocks at -90% or worse, I'm not sure if the portfolio would be doing "ok" ;D
Only thing you have left at that point is gold, and you better have phydical bars at that point, because it would be a massive questionmark if your fancy ETF would be working at that point.
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Re: Slowly bleeding

Post by craigr » Mon Oct 17, 2016 1:40 am

dutchtraffic wrote:
craigr wrote:
dutchtraffic wrote:Looking at this, the PP would have been totally destroyed in quite a few cases. Some more evidence for geographic diversification.

Certainly, a widely diversified portfolio like the Permanent Portfolio is way better in those cases than one just using stocks/bonds which is what many would recommend.

But to your point, yes geographic diversification (especially with gold), is not such a bad idea when you can see what can happen to sovereign debt.
With 50% of the portfolio at -100% (bonds and bills), and stocks at -90% or worse, I'm not sure if the portfolio would be doing "ok" ;D
Only thing you have left at that point is gold, and you better have phydical bars at that point, because it would be a massive questionmark if your fancy ETF would be working at that point.
Yeah I understand. But you know no other portfolio is going to be doing any better, and most a lot worse. Iceland was a recent example where most people got pummeled, but if you were widely diversified across four assets you did a heck of a lot better than your countrymen.

And yes again, not many portfolios advocated holding gold assets outside the country where you live as a back up plan. I don't recommend using ETFs for gold unless you have no other choice or for a small allocation for rebalancing purposes. Physical gold held in a far off first-world stable country is a better idea.
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Re: Slowly bleeding

Post by dutchtraffic » Mon Oct 17, 2016 1:46 am

A global PP (using https://www.ishares.com/uk/individual/e ... -ucits-etf for the bonds), and using a total world ETF for stocks would have never broken down completely.

It does break the PP concept entirely though.
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Re: Slowly bleeding

Post by Hal » Mon Oct 17, 2016 2:10 am

stuper1 wrote:There was a controversial guy who used to post on here whose portfolio was basically 50% stocks and 50% gold. He claimed it was less volatile than one might imagine. If you have a fairly long time horizon to ride out some volatility, you might consider that portfolio, since you seem to want to avoid long bonds and short bonds.

Another idea is a foreign currency ETF as a separate asset class. Would that have the same tax problems for you?
Vaguely remember that..... Here is an analysis on that theory.

http://www.merkinvestments.com/download ... cation.pdf

and if all else fails go back to the fundamentals

https://en.wikiquote.org/wiki/Benjamin_Graham

and my favourite

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
― Benjamin Graham
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Re: Slowly bleeding

Post by AnotherSwede » Mon Oct 17, 2016 10:07 am

5-10% ? :o
As of right now, the world's financial system would pretty much implode entirely.


Someone suggested return to normalcy. Even you implied it. If yields stay around zero, or get more and more negative, until meltdown, I don't see why PP couldn't "work", and ultimately give you 25% gold and whatever could be saved of the rest.
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Re: Slowly bleeding

Post by dutchtraffic » Mon Oct 17, 2016 10:40 am

AnotherSwede wrote:25% gold and whatever could be saved of the rest.
It doesn't make any sense to hold a portfolio where you have a chance of retaining a part of your capital.
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