LTT in an inflationary environment

Discussion of the Bond portion of the Permanent Portfolio

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ppnewbie
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LTT in an inflationary environment

Post by ppnewbie » Sat Mar 28, 2020 2:45 am

What are people’s thoughts about LTT’s in an environment of unprecedented money printing. The long end of the yield curve may have to go up dramatically in order for parties to purchase LTT’s in a highly inflationary environment.
kwg2005
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Re: LTT in an inflationary environment

Post by kwg2005 » Sat Mar 28, 2020 6:45 am

I am no economist but here's my thinking. In a honest world with sound money, if the government were to bail everyone out and issue treasuries to pay for it, the interest rate would need to rise to entice buyers to buy the bonds. Supply of bonds would rise so the interest rate would have to go up to increase demand. However, the federal reserve will likely be buying many of these bonds by printing money. The money printing you speak of is what will buy these bonds keeping the interest rate down, and bond prices up. Of course the next question is, how much lower can interest rates go? If the unprecedented money printing sparks price inflation the bonds will lag and lose value in real terms (they likely already are losing value in real terms), but the gold should shoot up and compensate for that.
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Re: LTT in an inflationary environment

Post by pmward » Sat Mar 28, 2020 9:01 am

I think the upside to bonds is much more limited than inflation. We are entering a period of inflating away the debt. In other words, interest rates are likely to stay below inflation for a long time to come. While the Fed doesn't directly control the 30 year yield at the moment, they could put a ceiling on like they did in the WWII era, and buy anything that goes above their set level. I think bonds yields have less upside than most people think... even in an inflationary environment. I think bonds are going to be more volatile going forward than they have historically, and for those that invest in the PP that will mean it will give lots of opportunities to buy low and sell high with rebalancing.
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ochotona
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Re: LTT in an inflationary environment

Post by ochotona » Sat Mar 28, 2020 11:57 am

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kwg2005
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Re: LTT in an inflationary environment

Post by kwg2005 » Sun Mar 29, 2020 9:03 am

ochotona wrote:
Sat Mar 28, 2020 11:57 am
IMG_20200328_113856.jpg
So what's the forecast here? It looks like Stocks are high and bond prices are high (yields low).
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ochotona
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Re: LTT in an inflationary environment

Post by ochotona » Sun Mar 29, 2020 1:21 pm

kwg2005 wrote:
Sun Mar 29, 2020 9:03 am
So what's the forecast here? It looks like Stocks are high and bond prices are high (yields low).

I'm not going to forecast anything. Lost at that game too many times. It's an observation! Another observation... look at what happens to the iShares TIP ETF. Crashed into the basement for a few days, then boom, substantial recovery. So the market doesn't think we're going into deflation... just staying at weak but positive inflation?

Consider that out in the field in some landlocked North American markets, the cash-on-the-barrelhead price for crude oil is $5 per barrel. Soon, transporters will stop accepting it... no place to store it. So what? It means that oil prices will have literally gone to zero, and there will be no future relief from oil prices to keep inflation down... it's all up from here. Since oil reservoirs deplete, that means in a future years (I'm not going to say when) we will have a tight market... higher prices... and oil prices drive inflation. I don't think the shalers are coming back they way they were. Capital has been totally betrayed in the shale patch, it ain't coming back. Billions of dollars of capital have been incinerated. If expressed in $100 bills, it would probably circle the earth several times! Think about that the next time some politician brags about 'Murica's shale oil output.

This is why I just increased my gold slice, and why I'm still scared to death of LTT's even though they comprise a few % of my portfolio.

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Xan
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Re: LTT in an inflationary environment

Post by Xan » Sun Mar 29, 2020 2:48 pm

ochotona wrote:
Sun Mar 29, 2020 1:21 pm
Capital has been totally betrayed in the shale patch, it ain't coming back. Billions of dollars of capital have been incinerated.
I doubt I'm alone in having no idea what you're talking about. Could you expand on this for those of us who aren't in the oil & gas industry?
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ochotona
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Re: LTT in an inflationary environment

Post by ochotona » Sun Mar 29, 2020 4:51 pm

Sure... A picture says 1000 words. Plot the symbol for XOP over the last six years. XOP is the SPDR S&P Oil & Gas Exploration & Production ETF.

Shale oil is like Uber, Tesla. It makes oil, but no profit. It's a Unicorn created by low interest rates. It was a Malinvestment bubble.
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Re: LTT in an inflationary environment

Post by flyingpylon » Sun Mar 29, 2020 8:28 pm

Just happened to see this article this evening:

Save the Shale Oil Industry
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ochotona
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Re: LTT in an inflationary environment

Post by ochotona » Sun Mar 29, 2020 10:52 pm

flyingpylon wrote:
Sun Mar 29, 2020 8:28 pm
Just happened to see this article this evening:

Save the Shale Oil Industry
Shale will never stand on it's own two feet. Why try to save it? That's like Uber asking for a bailout to help it fend off foreign competition.

The excess capacity has to go offline, prices need to come back to normal, life will go on. The assets will reprice and go to new owners... Probably ExxonMobil.
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