Ray Dalio on Bonds

Discussion of the Bond portion of the Permanent Portfolio

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mathjak107
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Re: Ray Dalio on Bonds

Post by mathjak107 » Sat Oct 10, 2020 7:47 am

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 "
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Re: Ray Dalio on Bonds

Post by pmward » Tue Oct 13, 2020 1:09 pm

ahhrunforthehills wrote:
Thu Sep 24, 2020 12:10 pm

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.
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Re: Ray Dalio on Bonds

Post by mathjak107 » Tue Oct 13, 2020 1:15 pm

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
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Re: Ray Dalio on Bonds

Post by AdamA » Tue Oct 13, 2020 2:43 pm

pmward wrote:
Tue Oct 13, 2020 1:09 pm
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
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Re: Ray Dalio on Bonds

Post by ahhrunforthehills » Tue Oct 13, 2020 5:45 pm

pmward wrote:
Tue Oct 13, 2020 1:09 pm
ahhrunforthehills wrote:
Thu Sep 24, 2020 12:10 pm

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.
pmward wrote:
Tue Oct 13, 2020 1:09 pm

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?"
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Re: Ray Dalio on Bonds

Post by ahhrunforthehills » Tue Oct 13, 2020 5:51 pm

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.
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Re: Ray Dalio on Bonds

Post by doodle » Wed Oct 14, 2020 11:32 pm

People like schiff or Jim rogers have been talking about hyperinflation for almost a decade and a half now though with nothing like that even on the horizon. Will it arrive someday? Maybe. Japan has been trying to get inflation going for nearly 30 years now. There are a lot of disinflationary forces on horizon as well...large swaths of retiring people with minimum amounts of money and low interest rates further robbing them of income. A relatively stagnant labor market. Potentially altered spending habits among younger generation. Increase technological advances driving down demand for labor and further increasing productivity. Rates might flatline for a looonnnggg time.
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Re: Ray Dalio on Bonds

Post by AdamA » Thu Oct 15, 2020 7:12 am

doodle wrote:
Wed Oct 14, 2020 11:32 pm
People like schiff or Jim rogers have been talking about hyperinflation for almost a decade and a half now though with nothing like that even on the horizon. Will it arrive someday? Maybe. Japan has been trying to get inflation going for nearly 30 years now. There are a lot of disinflationary forces on horizon as well...large swaths of retiring people with minimum amounts of money and low interest rates further robbing them of income. A relatively stagnant labor market. Potentially altered spending habits among younger generation. Increase technological advances driving down demand for labor and further increasing productivity. Rates might flatline for a looonnnggg time.
So true.

It's a duller narrative than hyperinflation so people don't discuss it as much.
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Re: Ray Dalio on Bonds

Post by boglerdude » Thu Oct 15, 2020 7:27 am

How is wealth inequality (ie asset price high inflation) in Japan?
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Re: Ray Dalio on Bonds

Post by Hal » Thu Oct 15, 2020 7:55 am

boglerdude wrote:
Thu Oct 15, 2020 7:27 am
How is wealth inequality (ie asset price high inflation) in Japan?
https://tradingeconomics.com/japan/indicators ;)
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Re: Ray Dalio on Bonds

Post by ahhrunforthehills » Thu Oct 15, 2020 1:57 pm

AdamA wrote:
Thu Oct 15, 2020 7:12 am
doodle wrote:
Wed Oct 14, 2020 11:32 pm
People like schiff or Jim rogers have been talking about hyperinflation for almost a decade and a half now though with nothing like that even on the horizon. Will it arrive someday? Maybe. Japan has been trying to get inflation going for nearly 30 years now. There are a lot of disinflationary forces on horizon as well...large swaths of retiring people with minimum amounts of money and low interest rates further robbing them of income. A relatively stagnant labor market. Potentially altered spending habits among younger generation. Increase technological advances driving down demand for labor and further increasing productivity. Rates might flatline for a looonnnggg time.
So true.

It's a duller narrative than hyperinflation so people don't discuss it as much.
Sorry for the length in advance :o

I agree. Peter Schiff is selling a product. Selling requires sensationalizing.

I also agree that rates might flat-line for a long time. But what does that get someone with LT Treasuries? You need increasing deflation in order to make money with those bonds. Just having things stay in a near-zero yield environment isn't going to provide a big boost to those LT Treasuries.

Also, Japan vs America is apples and oranges. 70% of Japanese government bonds are purchased by the Bank of Japan, and the other 30% is mostly comprised of Japanese banks and trust funds. This basically prevents, to a very large extent, global markets and rating agencies from impacting their price or yield. I believe this is completely different than the United States.

Furthermore, US Dollars are used for approximately 70% of all global translations. If the US debases their currency, they have the ability to export their debt. Japan does not have that option.

I agree that there are large swaths of retiring people with minimum amounts of money... but it is also true that the money they are counting on hasn't been allocated (Social Security and Medicare).

The national debt is $27 trillion. But the Unfunded Liabilities that we are facing in the coming years (that include Social Security and Medicare) are $155 trillion. That is $470,000 per US Citizen!

So where will that money come from?

Well, lets go back to pretending that the United States is like Japan. Over the past decade Japan has pushed forward policies like their 10% consumption tax that is meant to slow down their debt (after-all, they too have a pension problem).

I guess the United States could do something similar... except that Japan also has a WAAAAYYYYY higher savings rate than the United States does.

I suppose you could always tax the richest... but there is a law of diminishing returns that start to effect economic output and reduce future tax revenues. We could let people starve to death? Nah, too politically unpopular. Rent control? Ugh, that could effect real-estate values, which could then lower property tax assessments.

I think it is pretty obvious that at some point you will inevitably need to #1 raise taxes, #2 reduce spending, AND #3 export the debt via inflation. You could avoid #1 OR you can avoid #2, but you CANNOT avoid #3. There is no other way outside of default. Exporting the inflation is the one tool that the United States possess that Japan does not.

I am not sure you can boost productivity enough without it. That argument might be justifiable in previous decades... but the debt is simply WAAAAYYYYY too high for that now and those unfunded liabilities are WAAAAYYYYY too close now. Besides, there is a law of diminishing returns for productivity. At a certain point it is like trying to squeeze juice out of a raisin.

Technological advancements are great. Most are extraordinarily over-hyped. Besides, R&D for technology is so expensive and so easily stolen by other countries.

This assumes you even want a tech business in this country. Over the past decade tropical tax havens around the world have embraced tech startups. It wouldn't be hard to simply go to do most IP R&D in a foreign country severing US ties if/when it became clear you have a very viable and lucrative business model. The profits of tech are typically in the IP. Moving IP offshore is a lot easier than moving factories, employees, etc.

What about all that US talent? Remote work was a real thing before Covid. I know many people in tech that will only hire Americans as an absolute last resort. The sense of entitlement and the legal liability they pose doesn't even remotely justify their compensation. Besides, many of the best coders are in Russia anyways. What else do you need? Customer Service? You can setup multi-agent customer service from the Philippines practically overnight.

Sure, the US will still have some big companies. However, you may never know the ones that you lost. Meanwhile, the US companies that you do have will STILL be offshoring their IP to get lower tax rates.

People keep asking... "Where will rates end up?" But that question doesn't exist. They always keep moving. Even after you are dead. The REAL QUESTION everyone here is really asking is:

"Where will rates go from NOW until the DAY I DIE."

Obviously, this is very different if you are in your 30's vs 80's. Accepting less yield or more risk for a less significant drawdown is a very real factor.
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Re: Ray Dalio on Bonds

Post by Kevin K. » Thu Oct 15, 2020 2:42 pm

Thanks for another great post ahrunforthehills!

I'm not buying everything this guy is selling, but in support of your points:

https://seekingalpha.com/article/437915 ... m=referral

So yeah, I agree that spending cuts, tax increases and some level of inflation are all but inevitable. The bigger worry, at least for me, is that the U.S. dollar has been the world's reserve currency for so long that I don't think anyone at the Fed let alone in congress has a plan for what happens when foreign holders of Treasury debt start heading for the exits.

I'm okay with foregoing LTT's in favor of T-bills and CDs but I'm sure as hell not going to let gold get below 25%.
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