Ray Dalio on Bonds

[Xan]

Aren't you guessing by saying you don't want to hold them anymore?

[mathjak107]

yep , it is a weighted educated guess just based on risk vs reward and fed policy . but i have no idea how bad it can get for long term bonds

[mathjak107]

i am toying with a quick trade in TLT .. it is getting beat up today .

[mathjak107]

Took a shot with Tlt . 625 shares 159.63.

[ahhrunforthehills]

this is why i said above we need to stop with the mental masturbation by reading what was or used to be , or how things may have back tested and concentrate on how things are reacting going forward .

driving and looking in the rear view mirror may not be a great idea .

What do you guys think the worse case scenario is for the Long Term Treasury market?

I think negative rates are unlikely. If you do get them, I can't imagine them being more than -.25% or -.5%. Anything more than that would be way too much stress on the financial sector and would force too many people towards alternative stores of wealth.

Again, keep in mind that gold is effectively a 0% treasury with no counter-party risk. Not to mention the long-term inverse correlation between stocks/gold is stronger than stocks/bonds. The only real downside is the spread.

But also keep in mind that your Uncle Sam has other options as well. If he hits zero at the long-end of the yield curve, he could just as easily create a 50 year or 100 year treasury to squeeze more juice out of it (albeit with diminishing results).

You could be telling your great-grandkids "I remember when 1,000 year treasuries were yielding 0.35%... those were the days!"

Would that make the PP still viable with ultra-long duration bonds? It does in theory.

However, if you take a look at that latest report from the Congressional Budget Office for the next 30 years... I think it would be obvious to a 4 year old that based on current yields and future expenditures... holding Long-Term Treasuries over the long term is pretty crazy. Another industrial revolution wouldn't be enough to get America out of our hole. You are staring down the barrel of either default or hyperinflation.

I am only aware of one leader who was able to effectively bring his people out of a mountain of debt, made sure his people were well fed, provided lots of social programs, and boosting wages more than double that of other leading nations. His people loved him. The guy was a German named Adolf.

Even if this happened in america, I suspect rates will rise BEFORE we start brutally robbing people in other countries.

So obviously ultra-long duration bonds start really walking up that risk curve. How much risk is really dependent on how things play out over the rest of your life.

The PP has short-term volatility. I suspect it will be a dog performance-wise in the future. You can either go with the dog or extend the length of that short-term volatility. If you can stomach 4 or 5 years of volatility, being in a 2:1 or 3:1 stock/gold allocation would probably provide you with much better "safety" while maximizing yields in regards to risk over the long-term.

Obviously, if you are near retirement, you do not necessarily have that luxury of 4 to 5 years of volatility. At which point, you would want to look towards shorter duration bonds (like mathjak has done).

[modeljc]

this is why i said above we need to stop with the mental masturbation by reading what was or used to be , or how things may have back tested and concentrate on how things are reacting going forward .

driving and looking in the rear view mirror may not be a great idea .

What do you guys think the worse case scenario is for the Long Term Treasury market?

I think negative rates are unlikely. If you do get them, I can't imagine them being more than -.25% or -.5%. Anything more than that would be way too much stress on the financial sector and would force too many people towards alternative stores of wealth.

Again, keep in mind that gold is effectively a 0% treasury with no counter-party risk. Not to mention the long-term inverse correlation between stocks/gold is stronger than stocks/bonds. The only real downside is the spread.

But also keep in mind that your Uncle Sam has other options as well. If he hits zero at the long-end of the yield curve, he could just as easily create a 50 year or 100 year treasury to squeeze more juice out of it (albeit with diminishing results).

You could be telling your great-grandkids "I remember when 1,000 year treasuries were yielding 0.35%... those were the days!"

Would that make the PP still viable with ultra-long duration bonds? It does in theory.

However, if you take a look at that latest report from the Congressional Budget Office for the next 30 years... I think it would be obvious to a 4 year old that based on current yields and future expenditures... holding Long-Term Treasuries over the long term is pretty crazy. Another industrial revolution wouldn't be enough to get America out of our hole. You are staring down the barrel of either default or hyperinflation.

I am only aware of one leader who was able to effectively bring his people out of a mountain of debt, made sure his people were well fed, provided lots of social programs, and boosting wages more than double that of other leading nations. His people loved him. The guy was a German named Adolf.

Even if this happened in america, I suspect rates will rise BEFORE we start brutally robbing people in other countries.

So obviously ultra-long duration bonds start really walking up that risk curve. How much risk is really dependent on how things play out over the rest of your life.

The PP has short-term volatility. I suspect it will be a dog performance-wise in the future. You can either go with the dog or extend the length of that short-term volatility. If you can stomach 4 or 5 years of volatility, being in a 2:1 or 3:1 stock/gold allocation would probably provide you with much better "safety" while maximizing yields in regards to risk over the long-term.

Obviously, if you are near retirement, you do not necessarily have that luxury of 4 to 5 years of volatility. At which point, you would want to look towards shorter duration bonds (like mathjak has done).

If you can stomach 4 or 5 years of volatility, being in a 2:1 or 3:1 stock/gold allocation would probably provide you with much better "safety" while maximizing yields in regards to risk over the long-term.

What is 2:1 allocation? 50% stock and 25% Gold? 25% cash or short duration bonds like SHY?

[ahhrunforthehills]

this is why i said above we need to stop with the mental masturbation by reading what was or used to be , or how things may have back tested and concentrate on how things are reacting going forward .

driving and looking in the rear view mirror may not be a great idea .

What do you guys think the worse case scenario is for the Long Term Treasury market?

I think negative rates are unlikely. If you do get them, I can't imagine them being more than -.25% or -.5%. Anything more than that would be way too much stress on the financial sector and would force too many people towards alternative stores of wealth.

Again, keep in mind that gold is effectively a 0% treasury with no counter-party risk. Not to mention the long-term inverse correlation between stocks/gold is stronger than stocks/bonds. The only real downside is the spread.

But also keep in mind that your Uncle Sam has other options as well. If he hits zero at the long-end of the yield curve, he could just as easily create a 50 year or 100 year treasury to squeeze more juice out of it (albeit with diminishing results).

You could be telling your great-grandkids "I remember when 1,000 year treasuries were yielding 0.35%... those were the days!"

Would that make the PP still viable with ultra-long duration bonds? It does in theory.

However, if you take a look at that latest report from the Congressional Budget Office for the next 30 years... I think it would be obvious to a 4 year old that based on current yields and future expenditures... holding Long-Term Treasuries over the long term is pretty crazy. Another industrial revolution wouldn't be enough to get America out of our hole. You are staring down the barrel of either default or hyperinflation.

I am only aware of one leader who was able to effectively bring his people out of a mountain of debt, made sure his people were well fed, provided lots of social programs, and boosting wages more than double that of other leading nations. His people loved him. The guy was a German named Adolf.

Even if this happened in america, I suspect rates will rise BEFORE we start brutally robbing people in other countries.

So obviously ultra-long duration bonds start really walking up that risk curve. How much risk is really dependent on how things play out over the rest of your life.

The PP has short-term volatility. I suspect it will be a dog performance-wise in the future. You can either go with the dog or extend the length of that short-term volatility. If you can stomach 4 or 5 years of volatility, being in a 2:1 or 3:1 stock/gold allocation would probably provide you with much better "safety" while maximizing yields in regards to risk over the long-term.

Obviously, if you are near retirement, you do not necessarily have that luxury of 4 to 5 years of volatility. At which point, you would want to look towards shorter duration bonds (like mathjak has done).

If you can stomach 4 or 5 years of volatility, being in a 2:1 or 3:1 stock/gold allocation would probably provide you with much better "safety" while maximizing yields in regards to risk over the long-term.

What is 2:1 allocation? 50% stock and 25% Gold? 25% cash or short duration bonds like SHY?

Sorry, I should have been more clear.... and I actually just realized I made a bad typo. I meant 1:2 or 2:3 allocation.

Cash isn't really that important if you can deal with 4 or 5 years of volatility. If you have income, you could be 40% gold and 60% stock for a 2:3 allocation. I would base the ratio based on historical data still. For example, you can adjust based on SWR and CAPE (and other factors) using this spreadsheet:

https://earlyretirementnow.com/2018/08/ ... s-part-28/

Belangp does some really good research on it as well: https://www.youtube.com/user/belangp/videos

Some of his views are backed up by research here: https://earlyretirementnow.com/2020/01/ ... s-part-34/

EarlyRetirementNow is a great resource because the guy is skeptical of gold... which is great because I don't want or need some gold-bug giving me data created to fill his narrative.

Belangp determined the best approach is to never rebalance (as it causes too much tax drag). You just draw from the highest performing asset.

Another variation could be 30% gold, 60% stock, 10% cash.

[mathjak107]

Drawing from the highest asset is rebalancing for the most part

[senecaaa]

Replacing LTT with REIT in portfoliocharts, seems like an interesting move: ZUSAXAA20AI20AN20AO20GB20Z (shortcode).

Screenshot 2020-10-06 at 13.23.27.png (310.66 KiB) Viewed 9732 times

[Hal]

Interesting discovery Senecaaa,

Whats your theory on why REITs perform so well?

[senecaaa]

Interesting discovery Senecaaa,

Whats your theory on why REITs perform so well?

I was inspired by this tweet: https://twitter.com/alexisohanian/statu ... 7427155970. I interpreted "alternative" as "real estate" . No theory behind it.

[Hal]

Interesting discovery Senecaaa,

Whats your theory on why REITs perform so well?

I was inspired by this tweet: https://twitter.com/alexisohanian/statu ... 7427155970. I interpreted "alternative" as "real estate" . No theory behind it.

Food for thought....
Using the Pacific Peso, it works well.

Edit: Just remembered, this is similar to Marc Fabers portfolio https://mebfaber.com/wp-content/uploads ... Book-1.pdf
Had to sneak this in as well https://www.youtube.com/watch?v=EoAYKrfKB0c

[mathjak107]

Took a shot with Tlt . 625 shares 159.63.

got stopped out already ...

[ahhrunforthehills]

Interesting discovery Senecaaa,

Whats your theory on why REITs perform so well?

Hold the phone. Home loans get massively cheaper as yields drop, no? You simply get a lot more for your money.

18.45% Rate (Oct 1981) vs 3% (Now) on $300k 30 year fixed rate:

$4,632 vs $1,265 per month for the SAME EXACT HOUSE.

The average home has gotten much larger because people have more spending power to throw at houses (and because builders can now make your trim out of cardboard.

Here is the question:

Did real estate do just as well from 1941 to 1981 (rising rates) as it did from 1981 to 2021 (falling rates):

https://3.bp.blogspot.com/-ynrQyoAUzgM/ ... e+1900.jpg

Not even close.

It appears you are jumping from the Titanic into a lifeboat... but the lifeboat is welded to the deck of the titanic.

If (when) interest rates go up... the monthly price of an existing 5,000 sqft house goes up as well. Now you have fewer buyers. Since houses have gotten bigger (the bigger the house the more they cost to maintain) and they use less quality materials (increasing costs of repairs) the financial needs will be higher yet.

It reminds me of the best days of owning a boat.. the day you buy it and the day you sell it. When rates are falling everybody “has gotten a good deal on a new home”. But you are still talking about a pile of sticks sitting out in the rain. It doesn’t get better with age.

Also keep in mind other factors that have historically inflated real estate sales. Having a 20% down payment was the minimum many years ago. However, the time period you are backtesting is a period where people were able to put much much less down (which increases the risk like crazy).

Part of this is because banks have an incentive to push loans in a falling rate environment. If they need to repo your house, the falling rates help ensure they can resell the house easily.

Are there other factors at play outside of rates? Probably. But I am not seeing anything that makes me feel warm and fuzzy...

Today’s younger generation’s value system doesn’t seem to circle around nice houses like earlier generations. They would rather have expensive coffee and peletons.

Also, the largest population growth going forward is the hispanic population. They are much more likely as a group to have multiple families living in the same house.

You also have the downward pressure of the baby-boomers downsizing, selling, etc.

Housing is also arguably in a larger bubble than it was during the last collapse:

https://gordcollins.com/wp-content/uplo ... istory.png

Lastly, the chances of budget shortfalls in the future are enormous (again, refer to the CBO report). Higher property taxes seem inevitable.

The only plus I can think of is that you still get tax incentives through depreciation on the business side of it. However, if Trump ever has his tax returns exposed... those deductions could be a political unpopular issue going forward.

[ahhrunforthehills]

Sorry, one more... government has made it very clear lately that people don’t have to pay their rent if they lack emergency savings. Uncle Sam basically said real estate investors will be the first to be sacrificed during tough economic periods.

That definitely has to change the correlation dynamic between stocks and real-estate going forward.

[Hal]

Sorry, one more... government has made it very clear lately that people don’t have to pay their rent if they lack emergency savings. Uncle Sam basically said real estate investors will be the first to be sacrificed during tough economic periods.

That definitely has to change the correlation dynamic between stocks and real-estate going forward.

Seriously?? Can the landlord evict the tenant, or will the government pay the landlords bank loan if they have one
Are we living in "The Twilight Zone"?

evictions are suspended, and outside what ever small business assistance is left over after big business sucked most of it up, is all they have. Property management is a whipping boy for the left, all rent is evil capitalism and slumlord-ism to them ..

[mathjak107]

even without covid , here in ny under the new laws a judge can give a delinquent tenant up to a year on your back under the new laws .

we are so glad we have nothing to do with real estate here anymore

[Kbg]

Speaking of real estate and bonds...I have mostly rolled to short and IT bonds but I still have a smidgeon of LTTs in my leveraged PP. However, I digress. I think I have sufficient cash and bond savings I overall, so I decided to back off accumulating more cash and bonds and throw the extra at my mortgage. I refinanced this year down to a 15 (alas I should have waited longer) and paid a bunch of points to buy down to a 2.25% irate.

Rationally, this is what the math dictates. If ST to IT bonds go above 2.25 and factoring in tax impacts I'll reverse.

[Kriegsspiel]

Hold the phone. Home loans get massively cheaper as yields drop, no? You simply get a lot more for your money.

18.45% Rate (Oct 1981) vs 3% (Now) on $300k 30 year fixed rate:
$4,632 vs $1,265 per month for the SAME EXACT HOUSE.

The average home has gotten much larger because people have more spending power to throw at houses (and because builders can now make your trim out of cardboard.

Here is the question:

Did real estate do just as well from 1941 to 1981 (rising rates) as it did from 1981 to 2021 (falling rates):



Not even close.

It appears you are jumping from the Titanic into a lifeboat... but the lifeboat is welded to the deck of the titanic.

If (when) interest rates go up... the monthly price of an existing 5,000 sqft house goes up as well. Now you have fewer buyers. Since houses have gotten bigger (the bigger the house the more they cost to maintain) and they use less quality materials (increasing costs of repairs) the financial needs will be higher yet.

It reminds me of the best days of owning a boat.. the day you buy it and the day you sell it. When rates are falling everybody “has gotten a good deal on a new home”. But you are still talking about a pile of sticks sitting out in the rain. It doesn’t get better with age.

Also keep in mind other factors that have historically inflated real estate sales. Having a 20% down payment was the minimum many years ago. However, the time period you are backtesting is a period where people were able to put much much less down (which increases the risk like crazy).

Part of this is because banks have an incentive to push loans in a falling rate environment. If they need to repo your house, the falling rates help ensure they can resell the house easily.

Are there other factors at play outside of rates? Probably. But I am not seeing anything that makes me feel warm and fuzzy...

Today’s younger generation’s value system doesn’t seem to circle around nice houses like earlier generations. They would rather have expensive coffee and peletons.

Also, the largest population growth going forward is the hispanic population. They are much more likely as a group to have multiple families living in the same house.

You also have the downward pressure of the baby-boomers downsizing, selling, etc.

Housing is also arguably in a larger bubble than it was during the last collapse:

https://gordcollins.com/wp-content/uplo ... istory.png

Lastly, the chances of budget shortfalls in the future are enormous (again, refer to the CBO report). Higher property taxes seem inevitable.

The only plus I can think of is that you still get tax incentives through depreciation on the business side of it. However, if Trump ever has his tax returns exposed... those deductions could be a political unpopular issue going forward.

I think what you're talking about matters when discussing your own home's price, but not owning and operating real estate like a business like REITs do. REITs and other real estate investors can use low rates right now to secure the productive asset (the actual real estate), and can then respond to market conditions in whatever ways they need to. If inflation goes up and people start earning higher wages, they can raise the rent. If people don't want to live/work there, they can improve the property. If they can't get enough rent to be profitable, they can defer maintenance and let the property quality slide.

I guess what I'm getting at is that home buyers are more apt to use cheaper money to over-consume, but investors/business (maybe I should say good investors/business, since bad ones might operate more like an emotional homebuyer) would be looking at an investment rationally.

[mathjak107]

there is little link between home prices and mortgage rates until rates get way higher ...

my first mortgage in 1987 was 8-1/4% and real estate was booming .. i was happy to get 8-1/4 too . the boom leading up to the crash in 2007 was at 6%.

real estate is more local economy driven and quality of supply driven then anything else .

there can be 100 homes for sale . but if only one meets my wifes criteria he is getting top dollar .....the others might just as well not be for sale when it comes to " WIFE FACTOR "

[pmward]

What I am getting at is have a documented mechanism in place to allocate out of LTT as yields decline, and back in as LTT yields go up... otherwise your emotions can easily get you lost at sea going forward.

I know Im a little late to the party here. But from a systematic perspective, wouldn't it make more sense to look at indicators that actually signal a bond reversal instead of just selling because rates are low and buying because they are high? What defines the subjective terms "low" and "high"? I mean selling into falling rates has been a widow maker trade for decades now. Why would that suddenly change today of all days? Why not look for indicators like rising inflation, growth, volatility, or yields as a means to sell, instead of selling because rates are falling and they are making you too much money? This is what I would look at if I were trying to create a systematic bond allocation. Those are the actual stats worth looking at for a leading indicator of what bonds will do going forward. Right now inflation and growth are non existent, bond volatility is super low, and rates are staying surprisingly stable considering the massive stock rally we have had over the last few months. It's kind of hard to argue for the death of the bond bull market and truly justify systematically selling bonds with all 4 of those stats saying the opposite.

[mathjak107]

TLT can move very fast and hard ... the damage done when rates finally do reverse can be severe .....

it can move like stocks did where in a week it lost thousands of points before anyone even could react to the actual news .

so the idea is take those gains and find something less volatile before those gains evaporate in the blink of an eye

[AdamA]

I know Im a little late to the party here. But from a systematic perspective, wouldn't it make more sense to look at indicators that actually signal a bond reversal instead of just selling because rates are low and buying because they are high? What defines the subjective terms "low" and "high"? I mean selling into falling rates has been a widow maker trade for decades now. Why would that suddenly change today of all days? Why not look for indicators like rising inflation, growth, volatility, or yields as a means to sell, instead of selling because rates are falling and they are making you too much money? This is what I would look at if I were trying to create a systematic bond allocation. Those are the actual stats worth looking at for a leading indicator of what bonds will do going forward. Right now inflation and growth are non existent, bond volatility is super low, and rates are staying surprisingly stable considering the massive stock rally we have had over the last few months. It's kind of hard to argue for the death of the bond bull market and truly justify systematically selling bonds with all 4 of those stats saying the opposite.

+1

[ahhrunforthehills]

What I am getting at is have a documented mechanism in place to allocate out of LTT as yields decline, and back in as LTT yields go up... otherwise your emotions can easily get you lost at sea going forward.

I know Im a little late to the party here. But from a systematic perspective, wouldn't it make more sense to look at indicators that actually signal a bond reversal instead of just selling because rates are low and buying because they are high? What defines the subjective terms "low" and "high"? I mean selling into falling rates has been a widow maker trade for decades now. Why would that suddenly change today of all days?

I think we are talking about apples and oranges here.

What I meant was in regards to a PP "safety" philosophy. If we were to assume that we have no idea what the future will bring than we should split that risk accordingly. The lower rates go, the stronger opposing factors start coming into play. Therefore upside vs downside is not an even risk anymore and should be adjusted accordingly. I was not trying to predict the future with my analogy... I was simply recognizing (and adjusting for) a floor that does seem to appear in bond yields.

You said it yourself, rates have been declining for decades. Or put another way, we are much closer to the floor than we were decades ago.

Why not look for indicators like rising inflation, growth, volatility, or yields as a means to sell, instead of selling because rates are falling and they are making you too much money? This is what I would look at if I were trying to create a systematic bond allocation. Those are the actual stats worth looking at for a leading indicator of what bonds will do going forward. Right now inflation and growth are non existent, bond volatility is super low, and rates are staying surprisingly stable considering the massive stock rally we have had over the last few months. It's kind of hard to argue for the death of the bond bull market and truly justify systematically selling bonds with all 4 of those stats saying the opposite.

I would have to answer your question with a question:

Are we speculating or are we trying to preserve the PP philosophy?

You very well might be right, the systematic approach might not be best decided by the yield, but by other factors. However, I would be concerned that those other indicators might have a lot more gray-area... and thus, would have us walking further down the road of speculation. There are real and seemingly non-manipulable reasons why the US cannot have a negative 10% yield rate. I am just not sure that you get that with other indicators and their ever-changing definitions.

With all that said, I completely agree that all indicators do not appear to reflect yields growing anytime soon. If I was a short-term speculator, I would heavily consider holding LT Treasuries a little while longer hoping for more drops. However, I am not an "anytime soon" kind of speculator.

For instance, if I was to put on my long-term speculator hat, I don't think I would have to look too far for some pretty jaw-dropping indicators against long-term bonds. A couple highlights from the CBO last month:

Federal debt held by the public is projected to increase to 98 percent of gross domestic product (GDP) at the end of this year, up from 79 percent of GDP in 2019 and 35 percent in 2007, before the start of the previous recession.

In our projections, debt continues to rise, reaching 195 percent of GDP by 2050, far exceeding the previous high of 106 percent recorded just after World War II.

How soon is action required?

There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percentage of GDP become unsustainable. But as the debt grows, the risks become greater.

The net interest to service the debt is pretty crazy when you look at their projections. Some people will argue that those are just "projections" and not reality. True. They do not calculate in anything else going wrong over the next 30 years or any other Covid-related relief packages.

So what are we talking about here when you have debt levels so high that another industrial revolution could not even save you?

Either default or massive inflation. Both of those suck for long-term bonds in the long-term.

So in a nutshell, from a speculators standpoint...

Short-Term indicators suggest LT rates staying stable. Mid-Term indicators by the Fed point towards aggressive inflation goals that they may or may-not be able to achieve. Long-Term indicators suggest that the future is not bright (to say the least) for LT Treasuries.

So what is someone supposed to do?

Again, are we talking about a typical speculating retail investor? Or are we talking about someone who wants to continue to adhere to some easy-to-follow systematic approach that provides the illusion of safety in all economic environments (i.e. a HB PP)?

HB said that nobody knows what will happen in the markets... so you got to spread that bet evenly. He then came up with a bunch of overly-simplified systematic steps that anyone could relate to. That simplicity obviously comes at a cost.

How simple someone needs their investing approach will boil down to that individual.

Or in other words, there is no "right" answer. Those who want a "simple" solution that is an allocation that will work across all economic environments are at a disadvantage. It will not optimize for your age or tax bracket.

So again, it is not a question of what you or I would do. It would be "What is the best relatively simple advice for someone that needs their teddy-bear (PP) to get them through the scary dark night?"

[ahhrunforthehills]

FWIW,

I don't put a lot of stock into investing based on short-term indicators. I think the current indicators are baked into the price.

Even if they weren't... I am of the belief that those with insider knowledge, those with super-computers, and those with massive sums of trading power can beat a retail investor to the punch 100% of the time. Even if you pretend that you are not betting against them, but are instead betting against other retail investors, when those big firms sell their positions to profit against those other retail investors.... you will still see your values take a hit.

Long-Term is a completely different game. Nobody ever says "look at those those damn greedy traders going after those long-term gains!".

Over the short term will we see rates decline? Maybe.

Over the long term, will we see rates decline like we have over the past 40 years? Umm.... wait, wtf? In what parallel world is that? Impossible.