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Moderator: Global Moderator
Re: What happens if correlations change
If interest rates continue to fall it will be good for LT bonds. If not, then they get pummeled. I don't think this correlation has any chance of changing. Stocks are going to move for reasons linked to interest rates as well. IMO. I think asset class correlation is not the correct way to look at the problem.
Re: What happens if correlations change
Clive, that is what the cash is for isn't it? Other than cash what else could be used? Blackomen (I think) has said he holds UUP as "volatile cash". I thought that the idea of the PP was that strongly positive interest rates in a recession wasn't something that would last for long and so the pain would be limited (as in 1981 and perhaps as in Brazil this year).
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: What happens if correlations change
I think it's important to remember that with the PP we are not betting on continued asset correlations so much as we are betting on the finite number of possible underlying economic conditions.
The economy can only be contracting or expanding. There aren't any other options.
Prices and the money supply are going to be experiencing inflation or deflation. There aren't any other options.
Building an investment strategy around the inevitability of one or more of the economic conditions described above means that you will do okay no matter what happens in the underlying economy. It's like making a bet on a roulette wheel that has no green 0 and 00 pockets where you can place a bet on both black and red and still walk away with a profit.
The PP provides something like the house advantage that a casino enjoys, where the casino doesn't really care who plays what game, because they know that statistically the games are going to return a certain profit to them overall, simply because of the house advantage built into every game.
For an investor accustomed to sitting on the other side of the table, nervously imagining that his outcomes are determined by his own skill level, internalizing the concept I am describing above is hard. Often it's very hard. It would be like saying to a compulsive gambler "have you ever thought about opening up your own casino?" Normally, they would probably just look at you like you were crazy, though for someone who is really interested in gambling this is a pretty rational plan.
The economy can only be contracting or expanding. There aren't any other options.
Prices and the money supply are going to be experiencing inflation or deflation. There aren't any other options.
Building an investment strategy around the inevitability of one or more of the economic conditions described above means that you will do okay no matter what happens in the underlying economy. It's like making a bet on a roulette wheel that has no green 0 and 00 pockets where you can place a bet on both black and red and still walk away with a profit.
The PP provides something like the house advantage that a casino enjoys, where the casino doesn't really care who plays what game, because they know that statistically the games are going to return a certain profit to them overall, simply because of the house advantage built into every game.
For an investor accustomed to sitting on the other side of the table, nervously imagining that his outcomes are determined by his own skill level, internalizing the concept I am describing above is hard. Often it's very hard. It would be like saying to a compulsive gambler "have you ever thought about opening up your own casino?" Normally, they would probably just look at you like you were crazy, though for someone who is really interested in gambling this is a pretty rational plan.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”