"U.S. Treasuries not the safe bet they once were"

[welderwannabe]

I do agree with adjusting the ratios of the assets. I find it unlikely that 25/25/25/25 just happened to be the perfect ratio for everything. Its that way for simplicity. Thats why I do 60/20/20.

As for TIPS vs Gold, suggest people perform backtesting gold vs TIPS since TIPS have been available and see which one you'd have been better off with.

Does also make sense to have SOME asset in your portfolio that isn't 100% based on the solvency of the US Govt?

[glennds]

Inflation is the next biggest threat, but as we also know Browne was mistaken in claiming that gold is an effective inflation hedge.

I know this thread is primarily about LTT, but would you elaborate on why you are saying this?
I was worried about the same, but looking at how gold has responded in the past year or so, to what has been a clearly inflationary environment, I'm surprised at your statement.

[yankees60]

Inflation is the next biggest threat, but as we also know Browne was mistaken in claiming that gold is an effective inflation hedge.

I know this thread is primarily about LTT, but would you elaborate on why you are saying this?
I was worried about the same, but looking at how gold has responded in the past year or so, to what has been a clearly inflationary environment, I'm surprised at your statement.

William Bernstein is one among many who have shown that gold is not an effective inflation hedge. It is a severe circumstances hedge.

[welderwannabe]

William Bernstein is one among many who have shown that gold is not an effective inflation hedge. It is a severe circumstances hedge.

Well Bill Bernstein is a huge huge huge fan of TIPS. Ive heard him speak about it several times.

Regardless, look over the years since TIPS were out. Pick reasonable time periods. Do backtesting. See what you think.

Circumstances cause inflation. Pandemic anyone?

[Kevin K.]

Inflation is the next biggest threat, but as we also know Browne was mistaken in claiming that gold is an effective inflation hedge.

I know this thread is primarily about LTT, but would you elaborate on why you are saying this?
I was worried about the same, but looking at how gold has responded in the past year or so, to what has been a clearly inflationary environment, I'm surprised at your statement.

Tyler has a great article on gold:

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

A quote from it may be helpful:

"When real rates are sufficiently positive, gold does poorly because investors prefer assets that pay interest. But when real rates are very low or negative, gold does well because investors prefer not to lose purchasing power on a “safe” investment.

So personally, I would argue that the inflation-hedging properties of gold are often misunderstood by both gold bugs and gold haters. The gold price is driven by a myriad of macroeconomic factors including real interest rates. Because real interest rates are affected by inflation, gold does indirectly protect against very sharp inflation that craters real rates."

So among other things gold is a currency debasement/money printing hedge - in addition to being truly uncorrelated with equities and bonds.

[Jack Jones]

For every investor it means that when he limits his return to a small figure -- as formerly, at least, in a conventional bond or preferred stock -- he must demand convincing evidence that he is not risking a substantial part of his principal.

I think there's an argument to be made that principal is at considerable risk to inflation when investing in 30 year treasuries.

On the other hand, it would have been better to ditch long term treasuries when yields were less than 2%. Will be fun coming back to this thread if yields get down there again.

[Kevin K.]

As William Bernstein and others have pointed out, the four economic scenarios Browne was concerned about are not even close to being equally likely to occur,
…
I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise.
…

It’s an agnostic portfolio, and I think having an equal weighting is more about having proper protection than about predicting the future or calculating the likelihood of one event occuring.

Imaging wearing linen armor instead of kevlar because, well, the risk of getting shot is unlikely. I think that’s the protection that some long term bonds will bring instead of something closer to 25%.

Of course, that protection comes at a cost: underperforming something like a 100% equities portfolio. It’s not like buying inexpensive life insurance with a large payout. You get a smooth ride but are very likely to underperform, even though the pp has shown to perform decently over time if you stick with it.

I could be wrong, but that’s how I see it. I don’t think it’s only about simplicity.

P.S. I reread this, Kevin, and thought that it might look like I thought you were pushing for LTTs but as a smaller proportion. That is not the case. It’s simply why I think Harry didn’t link % of assets to probabilities of events.

Actually I think a smaller allocation to LTT's makes perfect sense. Monetary policy expert Cullen Roche (Discipline Funds) made this point when we were corresponding about the PP and GB:

"I've always liked "lazy portfolios", but the problem there is they don't always bucket allocations in a sensible manner which creates a lot of uncertainty. Specifically, I'd argue that 20% in long-term bonds is way too much. Long bonds and gold are like insurance in a portfolio. Your portfolio should never be comprised of 40% insurance." I find it helpful to look at where gold and LTT's fit in his Defined Duration chart:

https://disciplinefunds.com/defined-duration-investing/

You can see how both gold and LTT's are super long-duration assets that act as insurance when anomalous or "black swan" type events occur.

Regarding Browne's approach, it just doesn't make any sense IMHO to not take into account both the likelihood of various macroeconomic conditions happening and the costs of insuring against them when designing a portfolio.

Interestingly enough the original PP (PRPFX) holds bonds with an average duration of just over 4 years:

https://permanentportfoliofunds.com/per ... folio.html

[yankees60]

William Bernstein is one among many who have shown that gold is not an effective inflation hedge. It is a severe circumstances hedge.

Well Bill Bernstein is a huge huge huge fan of TIPS. Ive heard him speak about it several times.

Regardless, look over the years since TIPS were out. Pick reasonable time periods. Do backtesting. See what you think.

Circumstances cause inflation. Pandemic anyone?

Was there any time period when one held TIPS were held to maturity that you did not get what was promised? A rate of return plus the inflation during that period? That is all I want from them. I'm not comparing them to the return of any other investment because any other investment has no guarantee like that.

[yankees60]

As William Bernstein and others have pointed out, the four economic scenarios Browne was concerned about are not even close to being equally likely to occur,
…
I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise.
…

It’s an agnostic portfolio, and I think having an equal weighting is more about having proper protection than about predicting the future or calculating the likelihood of one event occuring.

Imaging wearing linen armor instead of kevlar because, well, the risk of getting shot is unlikely. I think that’s the protection that some long term bonds will bring instead of something closer to 25%.

Of course, that protection comes at a cost: underperforming something like a 100% equities portfolio. It’s not like buying inexpensive life insurance with a large payout. You get a smooth ride but are very likely to underperform, even though the pp has shown to perform decently over time if you stick with it.

I could be wrong, but that’s how I see it. I don’t think it’s only about simplicity.

P.S. I reread this, Kevin, and thought that it might look like I thought you were pushing for LTTs but as a smaller proportion. That is not the case. It’s simply why I think Harry didn’t link % of assets to probabilities of events.

Actually I think a smaller allocation to LTT's makes perfect sense. Monetary policy expert Cullen Roche (Discipline Funds) made this point when we were corresponding about the PP and GB:

"I've always liked "lazy portfolios", but the problem there is they don't always bucket allocations in a sensible manner which creates a lot of uncertainty. Specifically, I'd argue that 20% in long-term bonds is way too much. Long bonds and gold are like insurance in a portfolio. Your portfolio should never be comprised of 40% insurance." I find it helpful to look at where gold and LTT's fit in his Defined Duration chart:

https://disciplinefunds.com/defined-duration-investing/

You can see how both gold and LTT's are super long-duration assets that act as insurance when anomalous or "black swan" type events occur.

Regarding Browne's approach, it just doesn't make any sense IMHO to not take into account both the likelihood of various macroeconomic conditions happening and the costs of insuring against them when designing a portfolio.

Interestingly enough the original PP (PRPFX) holds bonds with an average duration of just over 4 years:

https://permanentportfoliofunds.com/per ... folio.html

Isn't Roche saying that same thing as Bernstein? Don't invest a large amount of your portfolio in investments which perform only during low probabilities investing environments?

[dualstow]

Actually I think a smaller allocation to LTT's makes perfect sense. Monetary policy expert Cullen Roche (Discipline Funds) made this point when we were corresponding about the PP and GB:

"I've always liked "lazy portfolios", but the problem there is they don't always bucket allocations in a sensible manner which creates a lot of uncertainty. Specifically, I'd argue that 20% in long-term bonds is way too much. Long bonds and gold are like insurance in a portfolio. Your portfolio should never be comprised of 40% insurance."
…
You can see how both gold and LTT's are super long-duration assets that act as insurance when anomalous or "black swan" type events occur.

Regarding Browne's approach, it just doesn't make any sense IMHO to not take into account both the likelihood of various macroeconomic conditions happening and the costs of insuring against them when designing a portfolio.

That’s food for thought, Kevin, thank you. You have me returning to PortfolioCharts and the Bogleheads wiki of Lazy Portfolios to see what the smallest share of LTTs is in portfolios that hold them at all. (Funny, looking at Swensen’s portolio, I see he has 30% in intermediate and zero in long-term. I could have sworn he held long term, but maybe that was a different portfolio by him, or an earlier version).

The low likelihood of deflation makes me not want to hold them at all and this is not a conclusion I came to only recently. There are two exceptions that I can think of:
(1) If the interest were 5% or higher, I would do the opposite of what I wrote earlier, feeling comfortable “sticking my wife with them.” CraigR had enough to live off the the interest. I don’t, but the wife could do worse than collecting 5% on a bunch of treasuries for years to come. (Alternatively, Jack Jones wrote above about abandoning the idea of purchasing them if the interest got too low and I’m sympathetic to that).
(2) Yes, timing is frowned upon, but if I ever felt like the equity market were really in a state of irrational exuberance, I could see rebalancing into LTTs.

Even so, I am most attracted to Warren Buffett’s 90/10 (stocks/cash) almost— with some gold savings — these days. That doesn’t leave a lot of room for LTTs.

Interestingly enough the original PP (PRPFX) holds bonds with an average duration of just over 4 years:
https://permanentportfoliofunds.com/per ... folio.html

This may be the original all-in-one fund that one could buy but if memory serves, it’s not the original formula and PRPFX was never run by Harry Browne. I realize this is a minor point even if I have it right.

[Kevin K.]

William Bernstein is one among many who have shown that gold is not an effective inflation hedge. It is a severe circumstances hedge.

Well Bill Bernstein is a huge huge huge fan of TIPS. Ive heard him speak about it several times.

Regardless, look over the years since TIPS were out. Pick reasonable time periods. Do backtesting. See what you think.

Circumstances cause inflation. Pandemic anyone?

Was there any time period when one held TIPS were held to maturity that you did not get what was promised? A rate of return plus the inflation during that period? That is all I want from them. I'm not comparing them to the return of any other investment because any other investment has no guarantee like that.

That's exactly right, and Bernstein and every other TIPS advocate I know of ONLY recommends them when held to maturity in a ladder to provide an income floor to take care of essential expenses (i.e. a Liability Matching Portfolio/LMP).

Tipsladder.com makes it super easy to see exactly what you're buying:

https://www.tipsladder.com/estimate

The reason for all of the excitement about TIPS recently is that this is the first time in many years when it's possible to lock in 2%+ real for 30 years - meaning well over 4% SWR from the portfolio, at a time when (given lofty equity valuations) few experts think a regular plain vanilla stock:bond portfolio is going likely to do better.

I still think the PP and (better still, IMHO) the GB are among the best "probabilistic" portfolios but for those in or near retirement especially I think going with something like 70% in a 30 year TIPS ladder and the rest in a diversified equity ETF such as VT is a pretty compelling option. John Reckenthaler at Morningstar wrote a great article on this approach:

https://www.morningstar.com/columns/rek ... est-friend

[Jack Jones]

(1) If the interest were 5% or higher, I would do the opposite of what I wrote earlier, feeling comfortable “sticking my wife with them.” CraigR had enough to live off the the interest. I don’t, but the wife could do worse than collecting 5% on a bunch of treasuries for years to come. (Alternatively, Jack Jones wrote above about abandoning the idea of purchasing them if the interest got too low and I’m sympathetic to that).

I think Craig said he would abandon them at 1%. However, w/ the Federal Reserve mandated to produce 2% inflation, I don't want to be betting that they will fail to create enough money or find recipients of it.

[welderwannabe]

Was there any time period when one held TIPS were held to maturity that you did not get what was promised? A rate of return plus the inflation during that period?

Yes, the entire time. The 'inflation' metric the government has invented and constantly changes, with some changes major, does not measure true inflation fully. Miraculously their changes always seem to lower the measured inflation. Thats why the large gap between gold and TIPS over the years.

Among some changes, the BLS changed from a pure Cost of goods method to a Cost of Living method, not to mention other tweaks.
This Cost of Living method factors in product features/product quality. As a very high level example, say you bought an iphone that has a 3megapixel camera for $500. When your phone dies and its time to replace it, the replacement phones are now $750 and come with a 5mp camera. The BLS would say well its got a better camera, so thats why it costs $250 more, so no inflation, so they don't count the price increase. Or you have to replace your car, it costs 50% more but came with a bunch of extra emissions features your previous car didnt have because of new EPA requirements...they consider this a 'new feature'. So, they dont count the whole price increase towards inflation. Im making these examples up, to give you an idea of how it works, but this is what they do.

This whole process tends to really understate the inflation in things like housing, automobiles, fixed goods etc. The exact type of things peope tend to 'bid up' the price on when they have a bunch of extra money in their pocket when the money supply is increased. Take a look at car prices and housing prices since 2019, and compare that to the performance of TIPS over the same time. Those TIPS have NOT kept up with actual inflation.

The whole thing is rigged because its in the governments best interest to show low inflation. Politically it helps them, then financially it also helps as a bunch of government expenses are indexed against CPI. TIPS, Social Security, Pensions etc. Why do you think they keep changing it, versus indexing it against something that more accurately measures inflation such as total money supply?

I am not anti-tips. I put my parents in tips and build a tips annuity ladder for them. Thats a decent approach to take out some of the risk of the variability of gold, and some of the risk with nominal bonds. However, I'm under NO illusion that it protects them against money supply increases or government defaults as well as gold does. it doesnt. tips do not replace gold.

For a real example, someone who stored their $350,000 house fund in TIPS in January of 2019 would have approximately $434,105 today. However, that $350,000 house now actually costs $500,500 based on non government data that tracks actual housing prices, versus the CPI hocus pocus Owners Equivalent Rent metric they invented.
Therefore CPI has only tracked the increase to $455,492. Notice how that close that is to the value of your TIPS but understates the actual housing cost increase?

Had you put your $350,000 house fund in gold, you'd have $708,925.

[yankees60]

Was there any time period when one held TIPS were held to maturity that you did not get what was promised? A rate of return plus the inflation during that period?

Yes, the entire time. The 'inflation' metric the government has invented and constantly changes, with some changes major, does not measure true inflation fully. Miraculously their changes always seem to lower the measured inflation. Thats why the large gap between gold and TIPS over the years.

Among some changes, the BLS changed from a pure Cost of goods method to a Cost of Living method, not to mention other tweaks.
This Cost of Living method factors in product features/product quality. As a very high level example, say you bought an iphone that has a 3megapixel camera for $500. When your phone dies and its time to replace it, the replacement phones are now $750 and come with a 5mp camera. The BLS would say well its got a better camera, so thats why it costs $250 more, so no inflation, so they don't count the price increase. Or you have to replace your car, it costs 50% more but came with a bunch of extra emissions features your previous car didnt have because of new EPA requirements...they consider this a 'new feature'. So, they dont count the whole price increase towards inflation. Im making these examples up, to give you an idea of how it works, but this is what they do.

This whole process tends to really understate the inflation in things like housing, automobiles, fixed goods etc. The exact type of things peope tend to 'bid up' the price on when they have a bunch of extra money in their pocket when the money supply is increased. Take a look at car prices and housing prices since 2019, and compare that to the performance of TIPS over the same time. Those TIPS have NOT kept up with actual inflation.

The whole thing is rigged because its in the governments best interest to show low inflation. Politically it helps them, then financially it also helps as a bunch of government expenses are indexed against CPI. TIPS, Social Security, Pensions etc. Why do you think they keep changing it, versus indexing it against something that more accurately measures inflation such as total money supply?

I am not anti-tips. I put my parents in tips and build a tips annuity ladder for them. Thats a decent approach to take out some of the risk of the variability of gold, and some of the risk with nominal bonds. However, I'm under NO illusion that it protects them against money supply increases or government defaults as well as gold does. it doesnt. tips do not replace gold.

For a real example, someone who stored their $350,000 house fund in TIPS in January of 2019 would have approximately $434,105 today. However, that $350,000 house now actually costs $500,500 based on non government data that tracks actual housing prices, versus the CPI hocus pocus Owners Equivalent Rent metric they invented.
Therefore CPI has only tracked the increase to $455,492. Notice how that close that is to the value of your TIPS but understates the actual housing cost increase?

Had you put your $350,000 house fund in gold, you'd have $708,925.

Bringing it down to personal inflation.

According to Zillow my house had the following values:

July 2018: $183,100
January 2022: $131,500

That is a 3 1/2 year time period.

What did gold and TIPS during that same time period?

If I was using my TIPS to provide money to buy a house and bought those TIPS on July 2018 ... I'd be quite happy having held those TIPS when I went to buy the house in January 2022.

Different time period produce different results.

All you describe regarding the changes in measuring CPI is not an attempt to manipulate the system but to get it more closely represent the realities of everyone's spending.

Each of us also has our own personal CPI.

TIPS regarding inflation / deflation are not going to perfectly align but they will both be in the same direction with a fairly high correlation.

Again, what other investment has anything even similar to their prime characteristic? Giving a guaranteed return according to a measure of inflation.

[Xan]

Your house dropped 30% of its value between 2018 and 2022? I would think that's a very rare situation.

[Kevin K.]

Was there any time period when one held TIPS were held to maturity that you did not get what was promised? A rate of return plus the inflation during that period?

Yes, the entire time. The 'inflation' metric the government has invented and constantly changes, with some changes major, does not measure true inflation fully. Miraculously their changes always seem to lower the measured inflation. Thats why the large gap between gold and TIPS over the years.

Among some changes, the BLS changed from a pure Cost of goods method to a Cost of Living method, not to mention other tweaks.
This Cost of Living method factors in product features/product quality. As a very high level example, say you bought an iphone that has a 3megapixel camera for $500. When your phone dies and its time to replace it, the replacement phones are now $750 and come with a 5mp camera. The BLS would say well its got a better camera, so thats why it costs $250 more, so no inflation, so they don't count the price increase. Or you have to replace your car, it costs 50% more but came with a bunch of extra emissions features your previous car didnt have because of new EPA requirements...they consider this a 'new feature'. So, they dont count the whole price increase towards inflation. Im making these examples up, to give you an idea of how it works, but this is what they do.

This whole process tends to really understate the inflation in things like housing, automobiles, fixed goods etc. The exact type of things peope tend to 'bid up' the price on when they have a bunch of extra money in their pocket when the money supply is increased. Take a look at car prices and housing prices since 2019, and compare that to the performance of TIPS over the same time. Those TIPS have NOT kept up with actual inflation.

The whole thing is rigged because its in the governments best interest to show low inflation. Politically it helps them, then financially it also helps as a bunch of government expenses are indexed against CPI. TIPS, Social Security, Pensions etc. Why do you think they keep changing it, versus indexing it against something that more accurately measures inflation such as total money supply?

I am not anti-tips. I put my parents in tips and build a tips annuity ladder for them. Thats a decent approach to take out some of the risk of the variability of gold, and some of the risk with nominal bonds. However, I'm under NO illusion that it protects them against money supply increases or government defaults as well as gold does. it doesnt. tips do not replace gold.

For a real example, someone who stored their $350,000 house fund in TIPS in January of 2019 would have approximately $434,105 today. However, that $350,000 house now actually costs $500,500 based on non government data that tracks actual housing prices, versus the CPI hocus pocus Owners Equivalent Rent metric they invented.
Therefore CPI has only tracked the increase to $455,492. Notice how that close that is to the value of your TIPS but understates the actual housing cost increase?

Had you put your $350,000 house fund in gold, you'd have $708,925.

While I don't entirely disagree with your sentiments the dates you chose to compare TIPS and gold are arbitrary and obviously chosen to favor your argument for gold and against TIPS. I mean if we're going to just choose arbitrary dates to base our arguments on, here's a comparison of short-TIPS (VTIP), gold and total stock market from 2012 (VTIP's inception date) to the present:

https://www.portfoliovisualizer.com/bac ... tl2GFJXB05

VTIP has the best risk-adjusted return but I don't think anyone would own anything but VTI if this backtest were the only basis for the decision. OTOH a portfolio with a judicious mix of equities, tips and gold can be pretty awesome.

I agree of course that the CPI-U is a highly imperfect inflation measurement tool but It's what we have. And it's not like it isn't subject to a ton of scrutiny by owners of TIPS bonds and managers of TIPS funds.

Gold is indeed a totally different asset, which as you say protects against currency debasement (what you call money supply increases). But it's not an inflation-fighting asset and is highly unpredictable in its returns. As Tyler at Portfolio Charts points out it's invaluable in modest percentages and lethal in large doses.

In case it's of interest to anyone, I posted about risk-parity portfolios like the PP and GB vs. TIPS ladders for a retiree living off of assets over on Bogleheads. The responses were more civil than I expected, and included some thoughtful comments by folks who've been using TIPS ladders for a long time:

https://www.bogleheads.org/forum/viewtopic.php?t=443244

[dualstow]

(1) If the interest were 5% or higher, I would do the opposite of what I wrote earlier, feeling comfortable “sticking my wife with them.” CraigR had enough to live off the the interest. I don’t, but the wife could do worse than collecting 5% on a bunch of treasuries for years to come. (Alternatively, Jack Jones wrote above about abandoning the idea of purchasing them if the interest got too low and I’m sympathetic to that).

I think Craig said he would abandon them at 1%. However, w/ the Federal Reserve mandated to produce 2% inflation, I don't want to be betting that they will fail to create enough money or find recipients of it.

Yeah I believe he said he’d seriously consider it at the 1% mark, but didn’t want anyone to “blindly follow” him. I was torn between that and MediumTex’s analogy of a game of tennis becoming a game of ping pong. The latter really helped me hold on for a long time, and it paid off. I ended up not replacing many of my LTTs, however. Paralysis.

[glennds]

The original post referenced an article which in turn referenced a recent academic paper. For anyone interested enough to go into the weeds and read the 72 page paper, here is a link to it:
https://tinyurl.com/bdfh5b9x
You may have to click the button to open the pdf in your browser window or download it, if you prefer.

I queried GPT for a shortened summary and here is what was provided:

The paper, Government Debt in Mature Economies: Safe or Risky?, explores the dynamics of government debt in advanced economies, particularly in response to shocks like the COVID-19 pandemic. It contrasts two debt regimes—safe debt (low risk, borne by taxpayers) and risky debt (higher risk, borne by bondholders). Key findings and themes include:

Risky Debt Regime Fit for Current Economies:

The paper argues that recent fiscal and monetary policies in the U.S. and other mature economies align more closely with a risky debt framework.
Large-scale asset purchases and rising government debt led to increased bondholder risk premiums.
COVID-19 Case Study:

During the pandemic, U.S. Treasury yields rose as bondholders absorbed risks from increased government spending unaccompanied by tax increases.
From March 2020 to October 2023, real losses on U.S. Treasuries reached 26%, reflecting the revaluation of government debt amidst fiscal expansions.
Historical Comparisons:

The fiscal response during COVID mirrored wartime policies, where bondholders often absorbed a significant fiscal burden, unlike the financial crisis of 2008.
U.S. Treasury valuations fell due to shifts in inflation expectations, convenience yields, and real rates.
Policy Implications:

Governments face a trade-off: shielding taxpayers (risky debt) versus ensuring stable debt valuations (safe debt).
Central bank interventions, while stabilizing markets in the short term, may shift fiscal burdens to taxpayers or delay necessary repricing of debt.
Fiscal Dominance and Monetary Interactions:

The analysis links fiscal dominance (governments driving fiscal policies without constraints) to risky debt. Such regimes expose bondholders to volatility as fiscal surpluses fail to back debt adequately.

[glennds]

This is a timely thread for me. I have been invested in a Permanent Portfolio since 2012. The only bucket in the portfolio that has accumulated consistent (unrealized capital) losses is the Treasury Bond component, especially stark since the stunning gains in gold over the past year.

I have been wondering for a while whether or not long Treasuries will continue to function in the way they were intended to function in this portfolio. If central bank behavior or investor/market behavior has changed from Harry's time, and thus the bond component does not respond to shocks or changing economic conditions as it did before, it is a concern as to whether long Treasuries might lose their historical diversification role. I was particularly disappointed to see little evidence of a flight to safety T bond gain during the Covid pandemic. So the paper's contention that maturity aversion may be negating perceived safety is a valid question.

In light of the above referenced academic paper, I continued my conversation with GPT about it and received some interesting feedback that I thought might be worth sharing. Whether it is right or wrong is for you to judge, but suffice to say, I am not an enthusiastic long bond holder at this time.

The paper raises important considerations about the evolving role of U.S. Treasury bonds, particularly within investment strategies like the Harry Browne Permanent Portfolio, which relies on Treasuries to provide safety and stability during economic downturns. Some key takeaways that relate to this question include:

1. Increased Risk of Treasury Bonds:
The shift toward a risky debt regime, as described in the paper, suggests that Treasuries are no longer the universally "safe" assets they were in the past.
Rising yields and significant markdowns in Treasury values during the COVID-19 pandemic (-26% real return) indicate that Treasuries can experience volatility and losses, undermining their traditional role as a hedge in times of crisis.

2. Correlation Dynamics:
Historically, Treasuries have been negatively correlated with stocks, making them a natural diversifier. However, the paper notes that the stock-Treasury correlation turned positive during COVID-19. This suggests that Treasuries may not provide the same diversification benefits in future crises, especially in fiscal dominance regimes.

3. Erosion of Convenience Yields:
The paper highlights declining "convenience yields" on Treasuries, meaning investors now view them as less attractive relative to other assets. This could reduce their ability to act as a refuge during market turbulence.

4. Impact of Inflation Expectations:
In the Harry Browne framework, Treasuries serve as protection against deflation. However, the paper notes a significant rise in long-term inflation expectations during COVID, which contributed to the devaluation of Treasuries. Persistent fiscal expansions without matching revenues could expose Treasuries to inflationary risks, weakening their deflation hedge.

5. Monetary and Fiscal Policy Interactions:
The Harry Browne portfolio assumes that Treasuries will benefit from central bank support during crises. However, the paper suggests that such interventions increasingly transfer risk to taxpayers or delay necessary market corrections, which could alter Treasuries' behavior in future crises.

Conclusion for the Permanent Portfolio:
The evolving risk profile of Treasuries raises valid questions about their reliability in a Permanent Portfolio strategy. While they may still serve as a hedge in certain conditions, their traditional role as the "safe" asset may be less dependable due to:

Higher volatility and risk premiums.
Eroding diversification benefits.
Sensitivity to fiscal policy dynamics.
Investors using the Permanent Portfolio may need to reassess whether Treasuries still provide the intended stability and protection, or if alternative low-risk assets or modified allocations are necessary in the current economic environment.

[welderwannabe]

While I don't entirely disagree with your sentiments the dates you chose to compare TIPS and gold are arbitrary and obviously chosen to favor your argument for gold and against TIPS. I mean if we're going to just choose arbitrary dates to base our arguments on, here's a comparison of short-TIPS (VTIP), gold and total stock market from 2012 (VTIP's inception date) to the present:

I chose a period of right before high inflation to now. Not sure when else we are supposed to be testing TIPS for...they are insurance against inflation. It has been the biggest period of inflation since TIPS were created. When else would you suggest?

Also your link for me is limited to 2015, not 2012 because I dont have the paid version of portfolio visualizer. Do you? If not yours was from 2015 too. Because all I see in your link is gold kicking VTIPs ass exactly proving my point.

Regardless, here is a portfolio visualizer link comparing asset classes instead of specific tip fund so we arent limited to the funds inception date and get around the 10 year limit for the free version of visualizer. I challenge you to find a period between tips founding and now, of any significant duration, where tips don't lose to gold.

https://www.portfoliovisualizer.com/bac ... HiwNgbbjc7

[welderwannabe]

And it's not like it isn't subject to a ton of scrutiny by owners of TIPS bonds and managers of TIPS funds.

Nothing has more scrutiny than the monthly jobs reports, and the revisions in that thing are mind blowing. CPI is brought to you by the guys that do that.

[welderwannabe]

July 2018: $183,100
January 2022: $131,500

Ouch, I dont know what to tell you there. Even according to FRED govt statistics:

Q2 of 2018 median home selling price was $315,000
Q3 of 2024 median home selling price was $420,400

That is a 33% increase in home prices.

Porfolio visualizer.
Q3 of 2018 $315,000 of TIPS purchased
Q3 of 2024 worth $391,100. Short $30K of how much home prices increased.

Q3 of 2018 $315,000 of gold purchased
Q3 of 2024 worth $628,439

Just using your time periods lest I be accused of cherrypicking

https://www.portfoliovisualizer.com/bac ... Q7EQ0KGZyH

[Kevin K.]

While I don't entirely disagree with your sentiments the dates you chose to compare TIPS and gold are arbitrary and obviously chosen to favor your argument for gold and against TIPS. I mean if we're going to just choose arbitrary dates to base our arguments on, here's a comparison of short-TIPS (VTIP), gold and total stock market from 2012 (VTIP's inception date) to the present:

I chose a period of right before high inflation to now. Not sure when else we are supposed to be testing TIPS for...they are insurance against inflation. It has been the biggest period of inflation since TIPS were created. When else would you suggest?

Also your link for me is limited to 2015, not 2012 because I dont have the paid version of portfolio visualizer. Do you? If not yours was from 2015 too. Because all I see in your link is gold kicking VTIPs ass exactly proving my point.

Regardless, here is a portfolio visualizer link comparing asset classes instead of specific tip fund so we arent limited to the funds inception date and get around the 10 year limit for the free version of visualizer. I challenge you to find a period between tips founding and now, of any significant duration, where tips don't lose to gold.

https://www.portfoliovisualizer.com/bac ... HiwNgbbjc7

I used the paid version of Portfolio Visualizer and as I clearly stated I also used VTIP, not the intermediate-to-long duration TIPS fund used for the generic TIPS category in the asset class backtest part of the site. In any case, a 10 year comparison of assets that have nothing to do with each other in terms of their role in a portfolio is pointless. If you're claiming on the basis of those 10 years that gold is an inflation hedge and TIPS aren't you need to go back and read the data in the article on gold in Portfolio Charts I posted upthread which shows that gold, despite it's many virtues (which are not in dispute here) is not an inflation hedge. Individual TIPS bonds bought when the real yields are 2% or more and held to maturity certainly are. That said, I don't own any, and like you prefer to take my chances with equities, gold and nominal Treasuries but I do use a slice of VTIP for the reasons I mentioned.

[Kevin K.]

This is a timely thread for me. I have been invested in a Permanent Portfolio since 2012. The only bucket in the portfolio that has accumulated consistent (unrealized capital) losses is the Treasury Bond component, especially stark since the stunning gains in gold over the past year.

I have been wondering for a while whether or not long Treasuries will continue to function in the way they were intended to function in this portfolio. If central bank behavior or investor/market behavior has changed from Harry's time, and thus the bond component does not respond to shocks or changing economic conditions as it did before, it is a concern as to whether long Treasuries might lose their historical diversification role. I was particularly disappointed to see little evidence of a flight to safety T bond gain during the Covid pandemic. So the paper's contention that maturity aversion may be negating perceived safety is a valid question.

In light of the above referenced academic paper, I continued my conversation with GPT about it and received some interesting feedback that I thought might be worth sharing. Whether it is right or wrong is for you to judge, but suffice to say, I am not an enthusiastic long bond holder at this time.

The paper raises important considerations about the evolving role of U.S. Treasury bonds, particularly within investment strategies like the Harry Browne Permanent Portfolio, which relies on Treasuries to provide safety and stability during economic downturns. Some key takeaways that relate to this question include:

1. Increased Risk of Treasury Bonds:
The shift toward a risky debt regime, as described in the paper, suggests that Treasuries are no longer the universally "safe" assets they were in the past.
Rising yields and significant markdowns in Treasury values during the COVID-19 pandemic (-26% real return) indicate that Treasuries can experience volatility and losses, undermining their traditional role as a hedge in times of crisis.

2. Correlation Dynamics:
Historically, Treasuries have been negatively correlated with stocks, making them a natural diversifier. However, the paper notes that the stock-Treasury correlation turned positive during COVID-19. This suggests that Treasuries may not provide the same diversification benefits in future crises, especially in fiscal dominance regimes.

3. Erosion of Convenience Yields:
The paper highlights declining "convenience yields" on Treasuries, meaning investors now view them as less attractive relative to other assets. This could reduce their ability to act as a refuge during market turbulence.

4. Impact of Inflation Expectations:
In the Harry Browne framework, Treasuries serve as protection against deflation. However, the paper notes a significant rise in long-term inflation expectations during COVID, which contributed to the devaluation of Treasuries. Persistent fiscal expansions without matching revenues could expose Treasuries to inflationary risks, weakening their deflation hedge.

5. Monetary and Fiscal Policy Interactions:
The Harry Browne portfolio assumes that Treasuries will benefit from central bank support during crises. However, the paper suggests that such interventions increasingly transfer risk to taxpayers or delay necessary market corrections, which could alter Treasuries' behavior in future crises.

Conclusion for the Permanent Portfolio:
The evolving risk profile of Treasuries raises valid questions about their reliability in a Permanent Portfolio strategy. While they may still serve as a hedge in certain conditions, their traditional role as the "safe" asset may be less dependable due to:

Higher volatility and risk premiums.
Eroding diversification benefits.
Sensitivity to fiscal policy dynamics.
Investors using the Permanent Portfolio may need to reassess whether Treasuries still provide the intended stability and protection, or if alternative low-risk assets or modified allocations are necessary in the current economic environment.

It's a great paper; thanks for posting it. I note that it was published in 2020 so it would seem that the trends and concerns they identify have gotten exponentially worse since then.

I do think that the PP as Browne originally conceived of it relied on central bank support during flights to safety. I mean the very existence of this forum, and of the long threads by Craig Rowland and J.R. Lawson on Bogleheads that preceded it, are a direct result of newfound interest in the PP sparked by its resilience during the 2008 GFC. And those results were due to the 33%+ (33.92% for TLT specifically) erasing the epic equity losses (though I should point out that TLT gave most of those gains back the next year (-21.80%) and gold had to do the heavy lifting.

Anyway I have long believed that while Treasuries make sense, in the PP and in general, duration should be kept to short-to-intermediate until and unless one is being rewarded for taking on duration risk. The rule of thumb suggested by bond expert Larry Swedroe - 20 basis points of additional interest for each additional year - strikes me as being a reasonable starting point in thinking about allocations. I've been using the short-duration barbell Jonathan Clements uses in his own otherwise equity-heavy portfolio (half VGSH and half VTIP) for the last 5-6 years and I sleep a lot better at night with it than I did when I had the "classic" 30 year Treasury/Treasury MM barbell with its ~11.5 year duration.
But I think going with 100% intermediate Treasuries, or something like 90:10 intermediates to T Bills for cash, is also good and a better choice by far than the traditional barbell in terms of exposure to the kind of protracted losses the LTT's can and have caused.

[stpeter]

Like Hal, I've been meaning to start a thread on this topic, so thanks to all for your contributions.

Deflation is the least likely scenario: it has happened just twice in U.S. history (1930-33 during the Great Depression and briefly from 2007-2009 during the GFC). It makes the least send of all to allocate a full quarter of the portfolio, at great expense, to combat this least likely scenario.

I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise. I think the GB is a significant improvement on the original PP but historically it has worked even better if you switch out the bond barbell with a true intermediate term (i.e. 5 year not 10) Treasury fund like VFITX. But the biggest improvement comes from not just upping the stocks but including SCV and in so doing creating a stock allocation that is going to be successful without relying on the outsized returns from a few big tech firms as TSM is.

While I don't necessarily disagree with what Kevin says here (and I'm thinking seriously about switching from HBPP to GB for the reasons he lays out), I wonder if HB's justifications are truly relevant. From a practical perspective, what matters is your trading bands. As an example, in March and April of 2020 the stock market crashed (down 20-30% if I recall correctly) and bond prices spiked because interest rates went from 2% in February to as low as 1% in March/April. Watching my trading bands, I happened to rebalance in early April. As a result, I sold some of my suddenly more expensive bonds and bought some of the suddenly less expensive stocks. Bingo, the gyroscope functioned just as designed! It's immaterial to me whether in hindsight someone defined the short-lived pandemic crash as a period of deflation - all I care about is that following the PP process instead of my own emotions led me to rebalance when it counted.