D1984 wrote: ↑Mon Apr 10, 2023 6:43 am
Xan wrote: ↑Sun Apr 09, 2023 9:01 pm
D1984 wrote: ↑Sun Apr 09, 2023 7:54 amThree quick questions: One, is there any reason almost all of their strategies--including this one--seem to only go back to 1970 (i.e. only be backtested back to that date), or 1972, or 1973?
I would be very suspicious of any backtest that went back past the early 1970s, as the nature of money was different before that time. A bond was a different thing, cash was a different thing.
I'm not so sure of that.
The "classical" gold standard at $20.67 an ounce was effectively killed (at the latest) in 1933; from that point on one could say we were on a quasi-gold standard but there was technically nothing stopping the government (had it wanted to) at valuing gold at some other figure than the $35 an ounce it chose (and tried to maintain) from 1934 to early 1971. At the very least it was clear by the early or mid-1960s that the link between gold and the dollar was not going to be forever sacrosanct; we had to form the "gold pool" to intervene and try and prevent prices from deviating too much for the $35 peg and by (IIRC) 1966 or 1967 Switzerland and France said screw this, refused to participate, and started to redeem more and more of their dollar holdings for actual gold.
Arguably the overall "deflationary" gold standard environment died even earlier i.e. in the ashes of WWI. If you look at inflation averages from 1914 or 1915 to the early 1930s (I used
https://www.measuringworth.com/calculators/inflation/ ) you will notice two things:
One, average overall inflation from 1914 to 1931 or 1932 came in at around around 2% or a bit under/over...this is actually roughly comparable to average inflation from 2005 to 2020.
Two, prices (whether at the 1920-21 recession bottom or the 1932-33 Depression bottom) never actually got anywhere close to as low as they were in 1914 or 1915. This was the first time this had ever happened in the U.S. Previously (at least back to the early 1790s when the U.S. first defined the dollar in terms of gold) the pattern had always been generally deflationary over the long term; prices would rise during wars, national crises, supply shocks, and economic bubbles/booms and then would fall afterwards to eventually end up about the same (and actually slightly lower when all was said and done). The post WWI environment was the first ever time this didn't happen; it again failed to happen after WWII (there was actually sharp--sometimes double-digit in fact--
inflation in 1946 and 1947, mid-single digit inflation over much of 1948, followed by barely any deflation at all over 1949).
Also, note that even from, say, 1900 to 1913 the overall pattern was not really deflation (whether of the gentle type of maybe half a percent a year on average as productivity growth caused prices to fall in real terms or the sharper type seen during falls that followed the rises during wars and the like) but rather low single digit inflation in the 1.3% range on average for the period as a whole (in contrast with average
deflation of around 0.40% a year from 1800 to 1899).
Finally, by the mid-1910s (and certainly at least by the early to mid-1920s) corporate bonds and safe-short term instruments (quasi-cash like money market debt, banker's acceptances, high-grade commercial paper, and short-term Treasury securities) were available that were similar to equivalent instruments today.
The bottom line? I can see the sense of not wanting to use data from the 1800s in any kind of backtest; once could even argue that not using data from the 1900s/1910/1920s or even 1930s was justifiable....but to treat bonds in , say, 1955 or 1962 or 1967 as not being a rough equivalent of bonds today is just IMO a stretch too far.
1750 - 1850 and the British Pound was a major international trade settlement currency as it was gold. A Pound was a gold Sovereign coin, a little under a quarter of ounce of gold. So the Pound and gold remained at around GBP 4.25/oz.
Inflation was near zero
Interest rates were typically around 4%, so if you had spare money (gold) and deposited (lent) that for a 4% interest rate - that was like a real rate of return.
https://www.measuringworth.com/calculat ... result.php
https://www.measuringworth.com/datasets ... result.php
https://www.measuringworth.com/datasets/gold/result.php
When stocks became more popular typically they were a means to spread/share the risk/reward. Pay for a fleet of ships to sail off and maybe return with a great bounty, or not return at all. Broadly stocks or bonds returned similar total returns, but where stocks were more volatile, seen as being more as what speculators invested in.
The decline of the Pound started from the latter 1800's and by the end of WW1 was pretty much bankrupted, as was Germany. Spent all on massive amounts of military expenditure (and lives). WW1 was half time, resumed again for WW2, after which the USD took over the lead role, but broke its promises about stability, transitioned to printing to spend (exporting inflation), sanctioning and then tariffs, so the rest of the world is transitioning over to alternatives that no one single country can dominate, such as holding reserves in trade weighted currency proportions along with gold and other assets. Absent being so easy to export inflation, print dollars to spend on military etc. such that other countries had to print more of their own currency in order to buy dollars/US debt (or otherwise seeing their existing debts devalued) puts the US on a trajectory where it wont be able to sustain former spending levels, wont be able to match China's rate of expansion of military capabilities for instance. Further hindered by trade barriers such as tariffs (that have yet to be matched/exceeded in the opposite directions i.e. applied against US imports into other countries).
The PP will still continue to work, but perhaps via a world stock index fund, alongside gold ... combined enough in non-domestic currency/assets. Together with 50% in domestic currency/assets (bonds). With the positive imbalance benefit of what halves needs to double to get back to break-even effect. Domestic currency relatively halves, stocks/gold double in price, the cash/bonds buy only half the amount of imports they did before. Domestic currency rebounds by doubling back to break-even, stock/gold halve in price, cash/bonds buy twice as much imports as they did when the currency was down. Two pairs of assets 50:50 weighted (25/25 stock/gold and 25/25 cash/bonds) when one halves, the other doubles = +25% gain.
Silver can serve as a alternative to gold if/when gold is restricted/fixed. Going back to the 1870's with that for of PP indicates similar characteristics as the modern day PP. Prior to that and investors more likely would have just held gold (money, deposited for real rates of return as above). A exception was a large high -20's decline in 1930 i.e. after very large/fast up run in asset prices at the peak of the Roaring 1920's, in nominal terms. In real terms the PP has endured several -20% to -30% real declines, WW1 years, 1980, 2022, which were short lived events, transitory high volatility (such as silvers very large up-run in 1979 (Hunt Brothers seeking to corner the silver market) and decline back down again subsequently) - that washes out if you average in and out over many years as most investors tend to, only really impacts those that might have lumped-in at the end of 1979 and lumped out a year later).
Pre 1870's and all gold as cash on deposit, or a PP type blend of assets would have yielded similar outcomes as gold/cash deposits were the same (excepting if you kept gold/money in-hand rather than deposited/lent it), as did stock/bonds broadly yield very similar rewards. At least back to the 1660's or possibly even 1550's. From the 1250's to 1550's ?? There were infrequent occasions when money was debased, such as Copper Nose Henry's "Great Debasement" - a currency debasement policy introduced in 1544 England under the order of Henry VIII which saw the amount of precious metal in gold and silver coins reduced and in some cases replaced entirely with cheaper base metals such as copper. Measuringworth indicates near zero inflation from 1250's up to 1544, but 3%/year inflation across 1540 to 1560. As such a PP style asset allocation may very well have served better than that of just gold/money and lending that i.e. 25% of foreign assets (whatever 'stock' alternative that might have been employed during those times).
The Pound dates back to the mid 700's, when it was a Saxon pound weight of silver. Again and key is that if you hold some assets outside of your own domestic country/currency then when that falters you're partially hedged, you're inclined to become relatively wealthier than peers around you who were solely concentrated into domestic currency/assets. But you'll lag if/when that currency relatively rebounds compared to those that were all-in on the domestic currency/assets alone. Generally the 50/50 choice/approach is better than being all-in (concentrated into a single asset/currency).
split off Moonshots thread \ DS 
