Gyroscopic Investing

What the...If Gross states this what does it mean for the rest of us....the largest bond buyer is totally out!

as Clive has stated...maybe this isn't the time to invest in US Government bonds...or something to this effect

What does this do to the PP in this 25% of the strategy? Could there be timing going into this as a new investor to PP....

http://www.cnbc.com/id/43378973US    Should I just sit and wait?

surensteady wrote: What does this do to the PP in this 25% of the strategy?

Nothing.  Gross's crystal ball isn't any clearer than anyone else's.  In fact, LT rates have been falling since Gross's announcement that he was no longer buying long dated treasuries.

Should I just sit and wait?

What do you mean "sit and wait"?  As opposed to what, standing and not waiting?  If you have determined that the PP is right for you, I would say just buy all four pieces and go think about something more productive than trying to read Bill Gross's mind.

The goofiness of the market and its ability to induce navel gazing is infinite.  Don't let it pull you into its orbit.

I think that one of the things investors struggle with a lot is the belief that the markets just got goofy recently (normally around the time the investor started following them).  There are always many narratives competing for market participants' attention.  Which ones are right?  No one ever knows until after the fact.

It's interesting that Gross thinks that German debt will become the safe haven of choice ahead of US debt.  Even though I'd certainly build a "European Permanent Portfolio" around German bonds (as I have high confidence that Germany can and will pay her bills), the fact remains that Germany can't directly print Euros.

What do you mean "sit and wait"? I am sitting on cash and bullion...my cost basis on the metals portion is quite low so the value has grown quite a bit and equals around 25% as is sits.

I've been told to just jump in but the NAV of the other 2 parts has changed over time and with the weakness of the bond market I would rather buy LOW so I WAIT of the correction...

I'm not saying I'll wait for years and I'll cost average in to get a better NAV....

It just came to me that NAV is only really important when you sell the asset....and if you are planning to keep the asset and only re-balance one to two times a year it really doesn't matter....dah

There is a lot of detail on these pages to digest. Thanks MediumTex
Clive...nice to get a view from across the pond.

Lone Wolf wrote: It's interesting that Gross thinks that German debt will become the safe haven of choice ahead of US debt.  Even though I'd certainly build a "European Permanent Portfolio" around German bonds (as I have high confidence that Germany can and will pay her bills), the fact remains that Germany can't directly print Euros.

Maybe this is a really good thing Lone Wolf...they can't destroy the currency. At least the Euro countries are taking care of their debt situations, though messy esp for bond holders in default...if Greece goes down. If they go down then they are out of the Euro I take it...

The Euro nations may have it all behind them before we begin to deal with our debt here in the US. German bonds would look pretty good then and US debt problems could be hitting the fan big time with much higher debt service load etc.

The reason we like fully-sovereign currencies is because then all we (theoretically) have to worry about is inflation risk... not default risk.

That makes the currency/treasury a borrower of last resort, where you KNOW they are able to pay you back... it's just a matter of whether there'll be more inflation as a result of monetizing the debt.  Since this currency also happens to be the world's reserve currency, any problems with it will make gold absolutely explode.

That's why I like US Treasury bonds.... they fit much better with the mechanics you want in the PP.  They WILL pay you your (possibly depreciated) money.

Also,

You might have said the same thing about Ireland before 2008... low taxes, low debt, low defecits... now look at them.

surensteady wrote: I've been told to just jump in but the NAV of the other 2 parts has changed over time and with the weakness of the bond market I would rather buy LOW so I WAIT of the correction...

What do you mean by "NAV"?  NAV of what?

Note that the bond market is not weak at all.  It has been very strong for the past couple of months, as it has for the past couple of decades.

Clive,

Are you suggesting that the big U.S. banks are not good risk managers?

Where would you get an idea like that?

But if you do a 10 for one reverse split as they have then it doesn't look nearly as bad.

Btw, Bill Gross has been one of the worst performing money managers of the year:

http://blogs.wsj.com/marketbeat/2011/06 ... gging-too/

MediumTex wrote:

surensteady wrote: I've been told to just jump in but the NAV of the other 2 parts has changed over time and with the weakness of the bond market I would rather buy LOW so I WAIT of the correction...

What do you mean by "NAV"?  NAV of what?

Note that the bond market is not weak at all.  It has been very strong for the past couple of months, as it has for the past couple of decades.

Since for example TLT is a I Share FUND I assumed NAV but I now realize they trade like a stock. I'm bad.

As far as a strong or weak bond market; MT why is Gross staying away? I do not propose to want to know Grosses mind and divine the directions of this crazy market as you but it, but for him to be out speaks volumes imo.

You are so right MT. I am thinking this market craziness is new but as you say its always been there. Are there not just a few more caveats now that haven't existed before?

IE...Profligate US ways ending or reducing more toward a mean....900 plus US military bases t/o the world we probable will pull back from in future as GB did in a past era. We can't afford everything...

I look at really big pictures to understand the parts. I like PP for the discipline it would force me to maintain since no one can foretell the future...

surensteady wrote: As far as a strong or weak bond market; MT why is Gross staying away? I do not propose to want to know Grosses mind and divine the directions of this crazy market as you but it, but for him to be out speaks volumes imo.

Why does it speak volumes?  Who is Bill Gross except one more guy with an opinion?  So far in 2011, his opinions have been off the mark.

You are so right MT. I am thinking this market craziness is new but as you say its always been there. Are there not just a few more caveats now that haven't existed before?

Compared to when?  Things have probably been better at many points and worse at others.  It's the normal rhythm of human affairs.  The PP includes the whole range of possible outcomes in its design.

Profligate US ways ending or reducing more toward a mean....900 plus US military bases t/o the world we probable will pull back from in future as GB did in a past era. We can't afford everything...

Sure, the empire in decline narrative is very appealing, but does it happen over 5, 10 or 50 years?  Who knows?

I look at really big pictures to understand the parts. I like PP for the discipline it would force me to maintain since no one can foretell the future...

That's the key.  No one can foretell the future, including Bill Gross.

I think the odds are very heavily in favor of waiting to buy into LT Treasuries at the moment.

TLT's duration I believe is around 17 if I am not mistaken. The yield right now is in the neighborhood of 4%.

If interest rates rise from 4% to 5% the price of the bond will drop 17 percent. This means it will take nearly 6 years of interest payments to account for this loss.

Given the very shaky US fiscal situation,  lawmakers paralysis, and the end of the Fed's bond purchasing programs for the time being, it seems to me that rates will rise at some point over the next few years.

I think at the moment it is smart to wait it out and see.  You aren't losing much by sitting on the sideline in short term bonds.

Frankly if rates decline much more to say 3 percent...I frankly don't care that much between straight cash with no interest rate risk and a LT Bond with an incredibly low distribution.

I see short rates and long rates in two different lights... it's hard for me to decide if the fed raised short-rates (would indicate a strong recovery is in place) if long-rates would move much.

The yield curve is pretty crazy right now, but I don't really know what the full implications of that are.

doodle wrote: I think the odds are very heavily in favor of waiting to buy into to LT Treasuries at the moment.

TLT's duration I believe is around 17 if I am not mistaken. The yield right now is in the neighborhood of 4%.

If interest rates rise from 4% to 5% the price of the bond will drop 17 percent. This means it will take nearly 6 years of interest payments to account for this loss.

Given the very shaky US fiscal situation,  lawmakers paralysis, and the end of the Fed's bond purchasing programs for the time being, it seems to me that rates will rise at some point over the next few years.

I think at the moment it is smart to wait it out and see.  You aren't losing much by sitting on the sideline in short term bonds.

A few things to remember:

The argument above would have been exactly the same (sans the QE angle) for most of the last three decades.  It would have also been wrong.

LT rates fell at the end of QE1, they didn't rise, even though everyone said they would.

Japan shows us that a shaky fiscal situation has NOTHING to do with long term interest rates on a nation's debt.

If you don't buy LT treasuries now, when do you buy them?  When Bill Gross says it's okay?  How will you know the signal you are using is correct?

In the context of a PP, holding off on the purchase of LT treasuries increases the portfolio risk, it doesn't reduce it.

My gut feeling.....although I don't have data to back this up...is that the gov't is going to try to extend the length of its outstanding debt. In other words, as shorter term debt comes due it will roll it into longer term debt. Once a large portion of our govt debt is financed at low interest rates locked in for 30 years then they have a lot more leeway to raise rates.

moda0306 wrote: The yield curve is pretty crazy right now, but I don't really know what the full implications of that are.

Really?  It looks like a more or less straight line, with a little steepness farther out on the curve.

That reminds me of the guy who went into a store and asked the old man behind the counter if he had any funny shaped baloons.  The old man thought about it and replied: "not unless round is funny."

doodle wrote: My gut feeling.....although I don't have data to back this up...is that the gov't is going to try to extend the length of its outstanding debt. In other words, as shorter term debt comes due it will roll it into longer term debt. Once a large portion of our govt debt is financed at low interest rates locked in for 30 years then they have a lot more leeway to raise rates.

Why would the Fed want to raise rates?

Wouldn't that kill the recovery and destroy the housing market?

If history is any guide, once you reach the zero bound mark, it's VERY hard to get out of it.  It's like when a sick person goes on a ventilator--it's very hard to get them off.

To me, LTT's will be my VP (read: insurance) play for the following reasons:

1) Tucked in my roth IRA, these are yielding more, tax adjusted, than my mortgage costs me.
2) These bad boys are NON-callable, while my mortgage IS callable.
3) I'm 90% LTV on my home, or "overly leveraged" into my home... making me particularly "leveragedly" sensitive to deflationary recession, IMO.
4) Deflationary recessions are LTT's forte.
5) Tucked in my roth IRA, they still remain liquid, unlike paying down my mortgage.

So in the end I have a liquid, noncallable bond yielding more than the mortgage of my overleveraged house during a period of huge risk of housing deflation.

Boom.

MT,

I mean that short-rates are essentially zero, and long rates were recently 4.7%.  This curve has been pretty flat throughout most of the last couple decades.

I think it might be a mistake to draw too many comparisons between the US and Japan. We are two completely different cultures and societies.

With regards to the Japanese debt the overwhelming majority is bought by Japanese investors as opposed to US debt which is predominantly held by foreign governments.

In previous posts you stated that you think that Americans might come in a fill the hole where the Fed and foreign govts have been buying, though this is possible I am going to say that there is a lot of skepticism regarding our govt right now and I dont think they will have an easy time convincing people to lend them money for 30 years at less than 4 percent.

I sold out of my EDV this afternoon...i bought in when it was yielding around 4.7% but with a duration of 25 years I cannot take that kind of risk if interest rates were to rise.

I am just saying that from a cost / benefit analysis the risks of holding LT treasuries at these low rates outweigh the benefits.

If TLT dropped 17% and was yielding 5%, how would it take it 6 years to come back to even?

Why would the Fed want to raise rates?

Wouldn't that kill the recovery and destroy the housing market?

If history is any guide, once you reach the zero bound mark, it's VERY hard to get out of it.  It's like when a sick person goes on a ventilator--it's very hard to get them off.

The govt still has to attract capital by paying more than the rate of inflation. I keep reading that Chinese workers are demanding  high pay increases to keep up with inflation in their country which is driving costs up. This inflation along with rising energy prices will eventually hit the US.

This might be two years out but I think there are decent odds that rates could jump up to 5 percent of the next few years.

If TLT dropped 17% and was yielding 5%, how would it take it 6 years to come back to even?

I meant if TLT were yielding 4% it would take like 4 years to get back to even.

At 5% I would probably consider buying in again....if the US govt had some plans to cut spending.

With regards to the spending..I still see no plan to put our fiscal house in order. Sooner or later people will begin to lose confidence.