Gyroscopic Investing

I just can't stand to buy stuff when it's on a panic parabolic melt-up.

portart wrote: Today I looked at the chart of TLT, at all time highs...Soooo, I sold it all, took the cash and will sit and wait for a nice correction. For once I sold high.. any thoughts? I am out of balance now in my PP but, at all time highs in my acct. I won't feel too bad if it keeps raging.

Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

It's not like you're capitulating and selling at a loss, in which case I'd be highly critical.
I'd say enjoy your profits, don't rush back in while things are still high, obviously, and all is well.  Like Craig said, everyone has their number.

I am resigned to always hold all PP assets within 15/35 rebalance bands, but reserve the right to manage my positions around the edges.
For example, I sold 10% of my gold holdings today for a 17% gain.
I also manage fixed income duration to 5.6 years which has me holding more cash than most.

My only recommendation is to hold all assets at all times.
Deciding when to re-enter LTT's is a daunting task.
What rate makes sense to you and how can you ensure that yields won't rise once you re-enter?

dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk.

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.

I have a different take on this issue.

Currently (and at all times), the market price represents a perfect balance between buyers and sellers, which means that there is no more upward pressure on prices than there is downward pressure.

It's true that there is not anywhere near the potential upside in LT bonds at this point that there was when rates were at 4%-4.5%, which is about as high as LT rates have been since 2008, but there is still plenty of upside that can be captured from here, even though that seems crazy.  When there are more buyers than sellers, rates will fall, regardless of where they are right now.

Any PP investor should be perfectly comfortable holding all four PP assets, even if he is certain that one of the assets is going to fall in value.  If one asset falls, another asset is likely to rise and protect you from overall portfolio losses.

If you sell now, you have the daunting task of deciding when to get back in.  You are just as likely to be right as you are to be wrong, which means that selling now and buying back in later might mitigate some future losses in this part of the portfolio, but it might also put you in a position of being paralyzed and failing to buy back in at, say, 2.5%, only to see rates drop back to 1%, which would cause you to miss out on a lot of gains when rates fell again.

I'm just holding tight.  I'm okay if LT treasuries take some losses.  At any given time, some part of the portfolio is always taking losses.

That's my two cents.

Don't put too much stock in anything Craig or I have to say on this topic, though.  We don't know anything that the rest of you don't know.  LT treasuries have provided outstanding service in recent years, and people have been hating them almost the whole way.  It's very hard to think clearly about something like this when fear and uncertainty begin to creep into your mind.  It seems unlikely that simply sticking with the basic PP recipe will lead to excessive future regret, but selling one of the assets hoping you can catch it at a good future re-entry point could easily lead to a series of bad decisions than could pollute your whole portfolio.

Right now long bonds are not too far off my mortgage rate.  But if we go really low, sub 1%, and mortgage rates don't drop accordingly, I might have to join the "pay off you mortgage" camp

Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

How has a negative interest rate affected the bond price?

craigr wrote:

dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Makes sense. I don't think we should even copy what Harry Browne did, necessarily. For example, I don't do much geographical diversification of assets, in part because I don't have enough assets for it to really matter. And also partly because Swiss banks are succumbing to American pressure. I'll cross that bridge when I come to it.

Still, when you talk about selling at a certain point, that is something I certainly take into consideration. It's no different than when Harry Browne unloaded silver and talked about it in his newsletter. Of course, you're just mentioning your personal plan and not a recommendation in a newsletter, but in both cases, I take the new info under consideration.

buddtholomew wrote:

Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

How has a negative interest rate affected the bond price?

The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.

Lang wrote:

buddtholomew wrote:

Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.

Thanks Lang. What about shorter maturities with negative yields. How have they faired?
How has a negative interest rate affected the bond price?

Over the same period, the 30Y was up by approximately 33% and the 10Y was up by approximately 13%.

Anyway, I just wanted to point out how crazy things are in Switzerland, and how, potentially, they could be in other countries as well.

The stampede for the exit someday will be horrifying. When, we have no idea. Probably when people now age 17 earn their MBAs and start running things. They will have no context.

To them Nirp Zirp will be normal.

ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).

barrett wrote:

ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).

Brazil - risk/reward..
As a US PP investor, should I be concerned with negative interest rates on long-term treasuries?
The price will increase but I will pay interest for holding the investment. Is that accurate?
If that's the case, is the interest I pay deductible in California? Half joking, 95% serious 

barrett wrote:

ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

If a bunch of people freak out one day because the interest changes from -0.20% to -0.10%, and start to sell, in these bond markets with low liquidity, and you can't match up a buyer with a seller, then the price will crash!

There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.

Lang wrote: There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.

I believe that more or less coincided with the move here in the US on the long bond from 2.25% to 3.25%. Yeah, it didn't feel great but it wasn't a disaster either. My position is still that with rates this low, one can lower the percentage of long bonds in a PP-style portfolio because they become so sensitive to rate changes in that environment. We don't need as many of them if they move up in price because of convexity. And we don't want as many for the same reason.

Swiss bonds just aren't stopping. The 30 year yield fell today to 0.16% and the 50 year yield fell to 0.26%. Anyone wanna buy?

European bond yields (Germany, France, etc.) fell sharply as well.

The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...

Lang wrote: The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...

.2% is pretty much zero. :-)

craigr wrote:

dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk.

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.

I've lightened up on my long bonds too. They are looking very bearish to me these days. I know that it's counter to the PP philosophy but what the heck.

Reub wrote:

craigr wrote:

dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk.

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.

I've lightened up on my long bonds too. They are looking very bearish to me these days. I know that it's counter to the PP philosophy but what the heck.

I bought individual LT's when I first started the PP a few years ago. One batch is @ 3.75% and the other at 3.25%. Every time I check them on Fidelity they are well in the green.

Not sure what Craig and you are thinking here. Are you saying you just wouldn't buy more at these low rates (tend to agree) or dump what you have?

Fred wrote: I bought individual LT's when I first started the PP a few years ago. One batch is @ 3.75% and the other at 3.25%. Every time I check them on Fidelity they are well in the green.

Not sure what Craig and you are thinking here. Are you saying you just wouldn't buy more at these low rates (tend to agree) or dump what you have?

Craig, Reub - correct me if I'm wrong.

Craig is saying he'd sell if long term rates dropped below 1% (30 year bonds are at 2.7% as of today) - but didn't offer up a rate at which he'd buy back in (and does acknowledge that this is a problem).

Reub is saying he's sold some already.

If rates dropped to 1%, the bonds you bought at 3.75% and 3.25% would be a whole lot more green than they are now.  Then, from there, they'd drop if rates rose back to 2.5% (or 3.0%).  If you sell (at 1%) you lock in the gain from rates dropping that low - but you have to decide when you'd get back in.

I made a decision on Feb. 10th that the stock market was ready for a huge rise and so I sold about a third of my TLT as I went heavily into stocks. I don't anticipate a recession any time soon and think that rates may soon start to rise or remain flat. With equities and gold rocketing recently while bonds have been mostly unchanged I think that we're all laughing our way to the bank right now.