Just one leg

[JHWY]

For the past 30 years, which covers HBPP, interest rates were declining.  That trend has clearly reversed.  What will happen to the four pillars of TPP as rates rise (due to debt and leverage) and prices fall (due to deflation)?

What I'm suggesting here is that three of the four pillars (Gold, Equities, and LTT) may turn against the TPP.  Can the TPP be sustained by just one leg (Cash)?  Not at current rates.  Might it be better to just sit on the sidelines in Cash and wait?  The past 30 years don't represent anything that I see coming.  And reading these forums, others are also questioning the validity of one leg or another.

[Kshartle]

For the past 30 years, which covers HBPP, interest rates were declining.  That trend has clearly reversed. 

I agree except that the trend of declining rates clearly reversed in '86, '93, '98 and '08.

Why do you think Gold will go down? It went up rapidly in the 70s and the early 2000s when rates were rising. 

I think the economy stinks and people will be scrambling for safety. They will no doubt try cash and bonds but that will just play into the hands of the government. They have control of the printing presses.

[Libertarian666]

For the past 30 years, which covers HBPP, interest rates were declining.  That trend has clearly reversed.  What will happen to the four pillars of TPP as rates rise (due to debt and leverage) and prices fall (due to deflation)?

What I'm suggesting here is that three of the four pillars (Gold, Equities, and LTT) may turn against the TPP.  Can the TPP be sustained by just one leg (Cash)?  Not at current rates.  Might it be better to just sit on the sidelines in Cash and wait?  The past 30 years don't represent anything that I see coming.  And reading these forums, others are also questioning the validity of one leg or another.

As Bernanke has explained (http://en.wikipedia.org/wiki/Bernanke_doctrine), the Fed can always prevent deflation:

"The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."[1]

Of course, it isn't the US government that can produce "dollars" (actually Federal Reserve Notes) at no cost, but the Fed. I guess we can't expect the head of the Fed to know that!

But that detail aside, unless the Fed/government cabal actually wants deflation, it isn't going to happen.

[JHWY]

Those were retracements on the way from 20% to 2%.  Deflation will drag down all commodities, not just gold.  The only counter I see is that the number of contracts and derivatives for gold far outstrip actual physical supply.  Read this article. Long but worth it for an alternative, if not complimentary, opinion.

http://www.mauldineconomics.com/ttmygh/ ... ked-part-3

[Kshartle]

But that detail aside, unless the Fed/government cabal actually wants deflation, it isn't going to happen.

This has been the crux of my argument for stocks/gold for years now. It is the entire basis, as well as the inability of the government to ever service it's debt even, without inflation.

I expect and hope for deflation and default on the national debt but I don't expect it....at least not until people are near revolt over inflation.

[Kshartle]

Those were retracements on the way from 20% to 2%. 

The only way to know the difference between a retracement and a trend change is to look a long ways back at one.

I do not own any bonds though. This is not because I expcet higher rates in the future. I don't even think the government can afford higher rates. If rates shot up I expect a high likliehood of an outright default of at least a portion of the principle.

I expect the money creation to pick up. If the banks won't cooperate then the Fed and Government will have to do the hard work of stealing themselves.

[JHWY]

Great posts.  But there will be deflation before inflation.  Here's another article (video) on gold.  Just released a few minutes ago.

http://www.elliottwave.com/grpcontent/S ... 014-C.aspx

[Ad Orientem]

Mass money printing does not guarantee a cure for deflation. The money has to circulate. Just look at Japan that has been printing money like mad for decades and remains stuck in a deflationary depression. According to the Austrian approach to economics the Yen should have long ago been vaporized by hyperinflation.

[Libertarian666]

Mass money printing does not guarantee a cure for deflation. The money has to circulate. Just look at Japan that has been printing money like mad for decades and remains stuck in a deflationary depression. According to the Austrian approach to economics the Yen should have long ago been vaporized by hyperinflation.

There is no deflation in Japan; that is a myth. And it is possible to have a depression without deflation.

[Kshartle]

Mass money printing does not guarantee a cure for deflation. The money has to circulate. Just look at Japan that has been printing money like mad for decades and remains stuck in a deflationary depression. According to the Austrian approach to economics the Yen should have long ago been vaporized by hyperinflation.

There is no deflation in Japan; that is a myth. And it is possible to have a depression without deflation.

Ahhh the myth of Japanese deflation.........

Look at any economy that has suffered hyperinflation....it doesn't get anymore depressed than that.

One of the problems with looking at economics is the confusion between correlation and causation. People look at a depression and see falling prices and then conclude that falling prices are the cause, not the result. So they think to avoid depression we need to make sure prices don't fall.

This is one reason why it's a bad idea to have some people exert too much control over the economy....they don't understand economics.

Prices can fall from decreased demand (as happens during a depression as people try to rebuild savings and underconsume) or from increased supply (due to a surge in production from a great economy). Prices are the effect, not the cause of the depression. How can they be bad in one instance and good in the other? Falling prices are the response to a bad economy and they are the only thing lessening the pain.

Setting prices doesn't work. the Soviet Union tried and failed. The US government doesn't have magical powers. It will fail also and we will all continue to suffer as they keep trying.

[Kshartle]

Great posts.  But there will be deflation before inflation.  Here's another article (video) on gold.  Just released a few minutes ago.

http://www.elliottwave.com/grpcontent/S ... 014-C.aspx

Why do you think so J?

I disagree, but I could be wrong. I hope I'm wrong even though I've bet the other way.

[JHWY]

Mentioned above.  Prices will decline (deflation) due to lower demand for goods and services.  Lower demand will be the result of massive loss of wealth and income when the wheels finally come off the US Stock Market and our economy.  The credit binge is over.  As people lose jobs and see their portfolios decline, they will stop spending.  This started in 2008 with the housing bubble.  Now we have a Fed-induced asset bubble.  Bulls are at an all-time high.  Why not?  30% gain in the stock market in 2013 translates into more gains in 2014.  Bandwagon effect.  Buffett said, "Be greedy when others are fearful and fearful when others are greedy."

Is this a bit of market timing?  Sure.  But it doesn't take much reading to draw conclusions.  Also mentioned above, if interest rates climb into just the 4-5% range, the U.S. will be challenged to service its debt.  And don't think for a moment that the Fed controls interest rates.  Rates are determined by the market, every time there is an AUCTION of T-bills, notes, and bonds.  All the Fed does is set the discount rate to match.

[Libertarian666]

Mentioned above.  Prices will decline (deflation) due to lower demand for goods and services.  Lower demand will be the result of massive loss of wealth and income when the wheels finally come off the US Stock Market and our economy.  The credit binge is over.  As people lose jobs and see their portfolios decline, they will stop spending.  This started in 2008 with the housing bubble.  Now we have a Fed-induced asset bubble.  Bulls are at an all-time high.  Why not?  30% gain in the stock market in 2013 translates into more gains in 2014.  Bandwagon effect.  Buffett said, "Be greedy when others are fearful and fearful when others are greedy."

Is this a bit of market timing?  Sure.  But it doesn't take much reading to draw conclusions.  Also mentioned above, if interest rates climb into just the 4-5% range, the U.S. will be challenged to service its debt.  And don't think for a moment that the Fed controls interest rates.  Rates are determined by the market, every time there is an AUCTION of T-bills, notes, and bonds.  All the Fed does is set the discount rate to match.

Surely it must be obvious that if there is a guaranteed buyer (the Fed), the intermediaries (the primary dealers) won't worry about the amount of debt they purchase, or its interest rate.

[JHWY]

How long do you think the Fed can keep that up before all confidence is lost?

[Tyler]

For the past 30 years, which covers HBPP, interest rates were declining.  That trend has clearly reversed.  What will happen to the four pillars of TPP as rates rise (due to debt and leverage) and prices fall (due to deflation)?

What I'm suggesting here is that three of the four pillars (Gold, Equities, and LTT) may turn against the TPP.  Can the TPP be sustained by just one leg (Cash)?  Not at current rates.  Might it be better to just sit on the sidelines in Cash and wait?  The past 30 years don't represent anything that I see coming.  And reading these forums, others are also questioning the validity of one leg or another.

Based on the relationship between gold and the dollar, the applicable PP timeframe is the past 40 years, not 30.  If you look at the 1970s the PP did extremely well even while interest rates skyrocketed.  Of course rampant inflation drove gold through the roof.  The past won't repeat itself, but "this time it's different" usually disappoints.  I prefer to be diversified than to try to predict things.

[JHWY]

That's my problem with TPP.  It tells you to ignore everything and invest 4-ways, even in the face of known headwinds, based on the premise that everything will balance out in the end and (hopefully) leave you with a positive gain.  That didn't work out well for 2013.

I'm enticed by its simplicity and the idea of set it and forget it.  But for me not to worry or wonder if the outcome could be better if I simply tweaked the mix is going to be difficult if not impossible.  It's counterintuitive to ignore what, IMO, seems reasonable and logical.

Gold's decline from 2012 was easy to predict.  Did anyone change their mix?  LT interest rates have no where to go but up.  Why not cut that leg off the stool now?

And when LT interest rates return to normal -- let's use 8% -- why wouldn't a prudent, risk-averse investor shift their entire portfolio to laddered LTTs?

[Pointedstick]

That's my problem with TPP.  It tells you to ignore everything and invest 4-ways, even in the face of known headwinds, based on the premise that everything will balance out in the end and (hopefully) leave you with a positive gain.  That didn't work out well for 2013.

"Known headwinds" makes it seem like the future is so obvious only a dope would ignore it. But how many people predicted that interest rates would fall as far as 2.5% on a 30-year bond? And last year when they rose, how did anyone know they were going to continue the rise this year? In fact, 30-year treasury rates have already fallen more about 30 basis points from last year's high.

I'm enticed by its simplicity and the idea of set it and forget it.  But for me not to worry or wonder if the outcome could be better if I simply tweaked the mix is going to be difficult if not impossible.  It's counterintuitive to ignore what, IMO, seems reasonable and logical.

Don't outsmart yourself. If this kind of stuff was obvious, reasonable, or logical, there would be a lot more rich investors out there.

If you were to go with a concentrated bet based on what seems reasonable and logical right now, what would you put 100% of your money into?

Gold's decline from 2012 was easy to predict.  Did anyone change their mix?  LT interest rates have no where to go but up.  Why not cut that leg off the stool now?

And when LT interest rates return to normal -- let's use 8% -- why wouldn't a prudent, risk-averse investor shift their entire portfolio to laddered LTTs?

Because their portfolios would be decimated if rates continued to rise from that point, and inflation would slowly eat away at the value of those fat payments. And if the U.S. government totally mismanaged the currency and messed up the bond market to the point where there was an outright default or a dramatic decline in LTT values, they'd be left holding an empty bag.

[D1984]

And when LT interest rates return to normal -- let's use 8% -- why wouldn't a prudent, risk-averse investor shift their entire portfolio to laddered LTTs?

LTTs have historically yielded about 2% to 3% over inflation on average; are you saying you expect inflation to be 5% to 6% per year over most of the forseeable future? Is that what you would consider "normal"? I'm not trying to be critical/rude/snarky here...I'm genuinely curious...I just wonder why rates would go that high for long absent significant inflation.

What was the average LTT yield averaged weekly or daily from the 1950 or so to 2013 (that way we both get a full bond bear market and a full bond bull market in for the average)? I'm not sure (I only have data for 1977 to 2013--if you include 1950 to 1976 it would probably lower the average even more--for the 30-year T bond it comes in at an average of just over 7.1% but that's considering inflation from 1973 to 1982 was pretty bad so that distorts the average a little IMO unless one expects double digit inflation again) but 8% seems awfully high.

Still, if we ever get actual inflation-adjusted bonds (TIPS, not nominal bonds) yielding 8% I expect some of the members here (myself included) might be backing up the truck...

[JHWY]

Wow.  Don't read too far into my 8% figure.  I pulled that from personal experience.  When I bought my first house in 2000, my 30-year mortgage was at 8%.  In 2008, I recall smirking at a local bank's digital billboard advertising a 5% CD.  What we would all give for that RoR today....

My point was to suggest that, historically, a citizen of the U.S. didn't have to risk their life savings reaching for yield.  Today, that's the name of the game.  And over the past several years, we've become ignorant to the risk because everything has worked out.  Until it doesn't anymore.

[Pointedstick]

And over the past several years, we've become ignorant to the risk because everything has worked out.  Until it doesn't anymore.

Right, and that's why we think the PP is the bees' knees. It's more widely diversified and hedged against the risks of any one thing not working out than pretty much any other simple, passive portfolio.