Ray Dalio on Bonds

[Hal]

Enjoy

https://www.youtube.com/watch?v=RViGGmxOk9A

[mathjak107]

i agree with ray .......which is why i own no long term treasuries anymore . just a very poor value with a lot of volatile downside risk .

as much as i don't like tips as a means of thinking they will keep up with ones cost of living i think something like a wellsley allocation with a nice inflation hedge using .

vtip
dbc
flot
gld

would be a good idea . only i would eliminate the long term bond component since wellesly does own long term bonds . i think long term bonds have now outlived their usefulness .

[Hal]

Any thoughts on the CBO's forecast/chart?
https://www.jsmineset.com

[ahhrunforthehills]

Any thoughts on the CBO's forecast/chart?
https://www.jsmineset.com

The CBO pretty much sums it up in their report:

https://www.cbo.gov/publication/56598

By the end of 2020, federal debt held by the public is projected to equal 98 percent of GDP. The projected budget deficits would boost federal debt to 104 percent of GDP in 2021, to 107 percent of GDP (the highest amount in the nation’s history) in 2023, and to 195 percent of GDP by 2050.
High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.

Seems they are pretty sure that Long Term Treasuries are f***ed going forward.

Of course, this assumes you don't have any other crashes along the way. At which point, I am sure the updated reports will show treasuries being super-f***ed going forward.

Silver lining? Sure...

Not all effects of higher debt and a higher projected path for debt would be negative. Short-term increases in deficits and debt can provide fiscal support to the economy during challenging times, such as the current pandemic. Also, over time a higher debt path would boost interest rates above what they otherwise would be, promoting private saving and giving the Federal Reserve more flexibility in implementing monetary policy.

That silver lining just doesn't help your existing Long Term Treasuries.

[mathjak107]

lately the crashes have been met with margin call selling in treasuries and gold and they fall too as investors sell to cover their equity margin calls .

it seems we have a whole different investing world with issues and events harry never imagined

[ahhrunforthehills]

lately the crashes have been met with margin call selling in treasuries and gold and they fall too as investors sell to cover their equity margin calls .

it seems we have a whole different investing world with issues and events harry never imagined

I know, right? The world seems just so leveraged up and backed into a corner. I guess that is why the Fed put that emergency program in place for foreign central banks to use their treasuries as collateral for a loan instead of directly selling them. Obviously, they will never throw gold the same lifeline. But who knows, maybe they would do it as an opportunity to top off the US gold vaults.

I have read that the actual value of the US gold (assuming all of it still exists) is suspect. Apparently, the official weight of bullion measured against the official value is sketchy and indicates low purity bars.

I also remember reading that there was a wikileaks between the US and China embassy where the US was having a temper-tantrum that China was stockpiling gold in their vaults because it threatened to undermine the US option of returning to a partial gold-standard in the future.

I did some historical calculations recently on the value of gold based on the alleged gold ounces held by the US against the M2 to very loosely simulate what it would take for the US to go back on a gold standard (which is obviously insanely wishful thinking).

1959 = $102.72/ounce
1980 = $6,085.66/ounce
2005 = $24,547.99/ounce
2019 = $55,287.19/ounce
4 days ago = $71,039.39/ounce

We certainly have seemed to take a turn for the worst.

[mathjak107]

That is a crazy number for gold ..love it ha ha ha.

Just look at Tlt action in the sell offs of equities lately ...my high yield fund has stood up better ...Tlt should have been soaring with the latest sell off ..we are down a lot of points in stocks

[Kevin K.]

It really has been ugly in the markets this week, with all the PP assets except cash tanking in unison.

The video is very good (though I wish it had just been Dalio speaking without the commentary). The CBO report is stunning.

As you said mathjak107 I think we're in territory unimagined by Harry Browne. LTT's look toxic, equities overvalued.

Ironically in the midst of this I was just reading this new post from Tyler:

https://portfoliocharts.com/2020/09/23/ ... -the-ride/

Like most here I have enormous respect for him and am beyond grateful for both his site and his innumerable excellent contributions to this forum and several others, but I couldn't help think as I was reading this that if there were ever a time to heed the boilerplate warning about past performance being no guarantee of future results it is now. We've never seen interest rates like this, or debt at this scale - for starters.

Personally I'm maxing out iBonds, keeping probably too much in short-term Treasury bond funds, buying a few CD's, keeping 20% in gold and including a slice of international in my equities. Oh - and lowering my expectations a la the old Will Rogers quip about banks ("I'm not so much concerned with return ON my capital as return OF my capital."). Wild times.

[mathjak107]

this could be the proverbial " fighting the last war " with long term bonds in my opinion ....

put the long term bond money in dbc ,flot and vtip to beef up the inflation hedge along with the gold .

the rest of the portfolio is cash , ultra short to intermediate term bonds , a bit of high yield and 25% equity

[Xan]

It really has been ugly in the markets this week, with all the PP assets except cash tanking in unison.

Long term bonds have notably NOT tanked this week.

[mathjak107]

They just didn’t respond much as one would expect with the sell off in equities ....

More fed action buying bonds to lower rates and create liquidity in the market is quite inflationary in the longer term and is being looked at as such.

You have a guaranteed loss with a 1.40% yield and the fed saying they will let inflation exceed 2%..return free risk as James grant calls it

[Xan]

They just didn’t respond much as one would expect with the sell off in equities ....

More fed action buying bonds to lower rates and create liquidity in the market is quite inflationary in the longer term and is being looked at as such.

You have a guaranteed loss with a 1.40% yield and the fed saying they will let inflation exceed 2%..return free risk as James grant calls it

But rates can still go down, driving the value up. And who knows what will actually happen to inflation?

[ahhrunforthehills]

They just didn’t respond much as one would expect with the sell off in equities ....

More fed action buying bonds to lower rates and create liquidity in the market is quite inflationary in the longer term and is being looked at as such.

You have a guaranteed loss with a 1.40% yield and the fed saying they will let inflation exceed 2%..return free risk as James grant calls it

But rates can still go down, driving the value up. And who knows what will actually happen to inflation?

It is a risk-adjusted bet. The odds of rates going up SIGNIFICANTLY outweigh the odds of them going down over the long-term. Would you pay the same amount of money for hurricane insurance in Florida as you would in Michigan?

[mathjak107]

Especially because the fed did everything but drop leaflets from helicopters saying if you buy our bonds you are guaranteed to loose money since those bonds are paying half of how much we will allow inflation to rise.

[Kevin K.]

It really has been ugly in the markets this week, with all the PP assets except cash tanking in unison.

Long term bonds have notably NOT tanked this week.

Yeah I misspoke. LTT's haven't tanked they've been flat rather than responding to the equity and gold sell-offs (as mathjak107 pointed out).

Since I still have a chunk of TLT that's in the red I'm hoping for one last flight-to-safety myself so I can get out. "Return-free risk" is indeed the perfect description of the PP's 25% in LTT's at this point, IMHO.

[Tyler]

"Return-free risk" is indeed the perfect description of the PP's 25% in LTT's at this point, IMHO.

Only if one ignores the 22% return YTD.

I hear what you're saying, though. Personally I think reading too much doom porn about individual assets tends to lead people astray way more often than choosing a consistent portfolio and letting it do its thing. So I'd recommend doing whatever helps you invest with confidence, but only after tuning out for a while and sleeping on it.

In any case, if I had one critique of the All Seasons Portfolio even before the events of the last few years, it's that I think Dalio/Robbins over-weighted long-term treasuries based on a not-so-arbitrary decision to only look at portfolio performance after rates severely spiked in the 1970s. I touch on that here. So it doesn't surprise me that he might want to back off now, although I disagree with the reflex to bail on them altogether. Investing in a measured percentage where you can afford to occasionally expect losses is part of how good asset allocation works.

[Kevin K.]

Thanks Tyler! I was just reading another critique of the All Seasons that pointed out that without inflation protection it isn't truly All Seasons/All Weather.

And of course you're right about the YTD return of LTT's But I don't see how 20-25% in LTT's makes sense going forward given both the current interest rate situation and the Fed's explicit statements about both its inflation targets and intentions of keeping interest rates at or near zero for at least three more years. I can see keeping maybe 10% as deflation insurance.

I'd also be curious to hear what you and anyone else here knowledgeable about bonds thinks of this bond duration glide path approach:

https://www.bogleheads.org/forum/viewtopic.php?t=318412

I'm especially intrigued with the 3-pronged approach shown towards the end of the first page in which a LTT, a STT and an inflation-protected fund are all used but with percentages changing over the investor's life expectancy.

[ahhrunforthehills]

Since I still have a chunk of TLT that's in the red I'm hoping for one last flight-to-safety myself so I can get out.

I’m on the other side... I have a chuck of TLT in a taxable account that I hate to pay the built up gains unless I am 1000% sure. Rates could go up, they could go down, but that check to the IRS is DEFINITELY going to be cashed.

Luckily, I think time is on our side here. I really can’t imagine rates going up anytime soon. Banks are simply not lending and there are a ton of delinquencies on the horizon that will play out in 2021.

My remaining 12.5% LTTs I plan on reducing by 25% each time the 30 year yield goes down by 0.25. I plan on dumping whatever is left after Dec 31, 2021.

[mathjak107]

"Return-free risk" is indeed the perfect description of the PP's 25% in LTT's at this point, IMHO.

Only if one ignores the 22% return YTD.

I hear what you're saying, though. Personally I think reading too much doom porn about individual assets tends to lead people astray way more often than choosing a consistent portfolio and letting it do its thing. So I'd recommend doing whatever helps you invest with confidence, but only after tuning out for a while and sleeping on it.

In any case, if I had one critique of the All Seasons Portfolio even before the events of the last few years, it's that I think Dalio/Robbins over-weighted long-term treasuries based on a not-so-arbitrary decision to only look at portfolio performance after rates severely spiked in the 1970s. I touch on that here. So it doesn't surprise me that he might want to back off now, although I disagree with the reflex to bail on them altogether. Investing in a measured percentage where you can afford to occasionally expect losses is part of how good asset allocation works.

i think you said it best when you said while we cant predict going forward not all portfolios are equally unpredictable .

i think in this case we are seeing the fact long term treasuries may be more predictable then not predictable as to the outcome .

for 40 years the saying dont fight the fed held true
.
that is why one could hold treasuries as rates slid down and inflation fell ...now the fed is saying they want inflation to rise higher.

we are looking at the opposite of the feds mandate the last 40 years ....

at some point history tells us inflation and bond yields in real return have to get back to about zero , that does not sit well with a bond that pays 1.40% and a target for inflation of 2-3%.

that i believe is why with gold and stocks falling daily , tlt responds with a whimper or falls too as investors don't want to be compensated any less on long term bonds for taking the risk on inflation .

[Kevin K.]

Everything you're saying makes sense to me. What I'm having trouble figuring out is what to replace the PP/GB bond barbell with.

[Kbg]

I think the answer to your question depends on what your objectives are and if you plan on adhering to the PP framework.

If safety is your concern, then I think it is what it is and you dial down on LTTs and reallocate to cash primarily and then stocks/gold.

If return is your concern, then I think you dial down on LTTs and reallocate to stocks and gold primarily and then cash.

Unless one believes they can predict the future then decisions on bonds should be beyond easy.

Look at the interest rate...that will be your return if held to maturity.

Look at the duration rate...that will be your loss/gain based on 1% interest rate moves...run some scenarios, what can you live with? Chose and be happy you made an informed decision based on your own risk preferences.

[Kevin K.]

Thanks Kbg - I needed that!

I guess many if not most who post here would say if you're not all-in on the 4 x 25% PP you're not "adhering to the PP framework" but I'm trying to respect Browne's insights while dealing (as we all are) with an interest rate environment he probably couldn't have imagined.

I'm in a situation where I have to put safety first while also still caring about return. I've pretty much done what you suggest, but piecemeal. The biggest part of my cash/bond pile is in short-term Treasury funds, along with CDs paying .80% at a local credit union, 20K in iBonds and a chunk of LTT's. Otherwise I'm pretty much in the GB camp. Guess it comes down to learning to live with something a bit messier than the "authorized" Treasury barbell or going all ITT's.

[mathjak107]

I still own lots of diversified bond funds instead. They are all less interest rates sensitive though

[ahhrunforthehills]

I think the answer to your question depends on what your objectives are and if you plan on adhering to the PP framework.

If safety is your concern, then I think it is what it is and you dial down on LTTs and reallocate to cash primarily and then stocks/gold.

If return is your concern, then I think you dial down on LTTs and reallocate to C.

Unless one believes they can predict the future then decisions on bonds should be beyond easy.

Look at the interest rate...that will be your return if held to maturity.

Look at the duration rate...that will be your loss/gain based on 1% interest rate moves...run some scenarios, what can you live with? Chose and be happy you made an informed decision based on your own risk preferences.

+1

If your plan is to adhere to the PP framework, you will also want a mechanism to readjust back into a 4x25 allocation.

I think a systematic approach is key to this. I view the PP as a safe harbor. I view near zero interest rates as a series of earthquakes. Is a tsunami coming? I don't know... but earthquakes cause tsunamis. Being in a harbor during a tsunami is usually bad. So, to balance this new risk, it might be a good idea to take your boat out to sea so you are closer to deep ocean where your boat will be safer. How far out you would want to drive should probably be based on how big the tsunami risk is (the current rate). As that tsunami risk starts going down (rates go up), you would want to start driving back into the harbor.

Reallocating to cash primarily and then stocks/gold is great advice for safety.

Obviously, if the tsunami never comes everybody that stayed in the harbor gets to say "I told you so". Heck, some tsunamis are only a foot high.
All those people also didn't waste money on gas and have some sleepless nights. That's life I also just paid my medical insurance that I never use.

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.

The PP can handle really $hi**y weather. In fact, it can probably handle a tsunami with minimal damage. Getting back into the harbor as soon as possible is probably a really good idea. To Tyler's point, it is also prudent to not go ALL THE WAY out to deep ocean.

After-all, the weather tomorrow is calling for fog

[mathjak107]

Everything boils done to risk vs reward. Different assets take on different risks at different times

we can debate lt all we like . only time will tell