Gyroscopic Investing

Given that: the Fed is now embarking on unprecedented unsterilized quantitative easing, the majority of the U.S. debt is short term, $3 trillion will have to be dumped into the marketplace or rolled over starting in just 5-10 years, the monetary base now has to contract at least 66% just to get back to positive real interest rates without causing inflation, are you at all concerned that the PP will set a new maximum drawdown record of 50% or more in the ultimate "tight money recession"?

If that happens, it will be a very rough time for the people who dumped cash because it was yielding 0%.

I don't understand your scenario...Operation Twist & the latest QE...don't they buy LTT? Even shorter-dated bonds...they just hold to maturity...where is the dumping on market?

murphy_p_t wrote: I don't understand your scenario...Operation Twist & the latest QE...don't they buy LTT? Even shorter-dated bonds...they just hold to maturity...where is the dumping on market?

That's what I thought too. I thought they were running low on their short-term because they were selling them and buying LTT. Now they are buying LTTs more to push down the far-out end of the curve for mortgages, etc.

Voted "no" and actually feel very confident in this vote.  The point of the PP is we have assets that do good and bad, with the gains outpacing losses.  So my answer can be encapsulated with...

I looooooovvee gold

murphy_p_t wrote: I don't understand your scenario...Operation Twist & the latest QE...don't they buy LTT? Even shorter-dated bonds...they just hold to maturity...where is the dumping on market?

The Fed is only buying LT's now, but the existing debt is all relatively short-term (legacy of Clinton administration).  It will all have to be rolled over within 5-10 years.  And when that rollover hits the bond market as it did in the Eurozone, interest rates will shoot up in a "tight money recession" analogy.  Or in an economic recovery, to contract the monetary base by at 66% (current stats not in 5-10 years!) to avoid triggering inflation, the market has to buy all of that debt on the Fed's balance sheet so the Fed or the market will have to jack interest rates up to attract bids.  Both situations will cause a loss of investor confidence to purchase said debt because tight money is the outcome either way.  The only resolution to either would be higher inflation over an extended period to whittle down the value of the Fed's balance sheet.  All outcomes are morbidly painful, but only the third would benefit the PP.

To me, this all seems like The Perfect Storm which the PP has never experienced.  So I fully expect it to be at least twice as worse as 1980.

The "tight money" recession in the early 80s was purposely caused by the Fed to kill inflation so I don't think it is a good comparison to what you are talking about.

To me it really sounds like you are telling a story about bond vigilantes.

I think the idea of a bond vigilante in the US Treasury is a fantasy, a boogeyman that is scary but doesn't actually exist. It is an entirely closed system. Excess reserves need to find an interest bearing home at the end of the day and Treasuries mop them up. In the Eurozone those reserves can end up in a myriad of countries and in times of fear they flood into German bonds. The US is different. In the dollar financial system there is only one type of bond that mops up reserves and that is the Treasury bond.

This book from Frank Newman, a lifetime banker and former employee of the Treasury is a great introduction to the Treasury market:
http://www.amazon.com/Myths-that-Hold-B ... ank+newman

melveyr wrote: The "tight money" recession in the early 80s was purposely caused by the Fed to kill inflation so I don't think it is a good comparison to what you are talking about.

It seems to me there's no net difference in a liquidity crisis between whether the Fed causes it or there's a lack of bids at auction due to a loss of confidence.  Do you expect people who are panicing en masse to understand the finer merits of Monetary Realism?  Especially when we will have, what, probably 15-20 trillion of outstanding Treasury debt in 5-10 years with the Fed owning probably 95% of it?  At what point will enough people realize what a con game it all is?

If you doubt the existence of "bond vigilantes", you haven't lived through the 70's.  To expect people to react instantly and immediately to what is going on is silly.  Markets aren't that efficient, otherwise trends wouldn't exist.

All I can say for sure is that Japan will go through the grinder first  before it were to occur here.

MachineGhost wrote: All I can say for sure is that Japan will go through the grinder first  before it were to occur here.

Relatedly: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=1

The risk is not a 50% drawdown. That would take a 66% drawdown in the 3 assets with nominal loss potential. That means Dow below 4,500, gold below $600 and Long-term rates up what, 3 or 4 points?

The risk of 50% loss in purchasing power is possible however due to hyperinflation and destruction of the currency. Let's hope they're sensible enough to not cause that.

MachineGhost:

I'm likely going to run a 20% Stock, 20% Bonds 20% Gold, 40% Cash portfolio for 2013 or in otherwords, one could consider it as an 80% PP 20% VP full of cash as the PP Purists would like to believe. 

I think the next 6 months to 2 years is going to be really rough.

Triple B I think it's going to be rough too. I think the economic imbalances between the consumer/debter nations and the producer/saver nations is going to cause a big realignment in purchasing power and restructuring of the global economy. I think the dollar is going to suffer a lot of printing so I'm leaning towards gold and silver with about 40% and half of my equities in Global REITS.

I'm sure my ride will be bumpier but I hope it's to the upside mostly.

TripleB wrote: MachineGhost:

I'm likely going to run a 20% Stock, 20% Bonds 20% Gold, 40% Cash portfolio for 2013 or in otherwords, one could consider it as an 80% PP 20% VP full of cash as the PP Purists would like to believe. 

I think the next 6 months to 2 years is going to be really rough.

What are your thoughts on the Benanks ZIRP? He is effectively promising that cash is going to return 0%.

Kshartle wrote: I think the dollar is going to suffer a lot of printing so I'm leaning towards gold and silver with about 40% and half of my equities in Global REITS.

Watch out for the Global REIT funds. Not only do you have a significant amount of foreign taxes withheld (probably about 1% cost per year in additional expenses due to 15% to 30% foreign withholding tax on the 5% to 10% dividends). However, the bigger problem is diversification. There's not that many foreign REITs that are publicly traded so you might wind up with a "Global REIT" that is 40% Japanese REITs, 30% Australian REITs, 20% British REITs and 10% other... which obviously isn't very balanced or diversified).

melveyr wrote:

TripleB wrote: MachineGhost:

I'm likely going to run a 20% Stock, 20% Bonds 20% Gold, 40% Cash portfolio for 2013 or in otherwords, one could consider it as an 80% PP 20% VP full of cash as the PP Purists would like to believe. 

I think the next 6 months to 2 years is going to be really rough.

What are your thoughts on the Benanks ZIRP? He is effectively promising that cash is going to return 0%.

I'm sure cash will return 0% but the value in holding cash isn't the yield. It's the opportunity value. I personally think stocks, gold and bonds all simultaneously will lose 10% to 30% each in 2013. With my cash, I swoop in and "rebalance" back to 4x25 so when things normalize, I can make a profit.

TripleB wrote:

melveyr wrote:

TripleB wrote: MachineGhost:

I'm likely going to run a 20% Stock, 20% Bonds 20% Gold, 40% Cash portfolio for 2013 or in otherwords, one could consider it as an 80% PP 20% VP full of cash as the PP Purists would like to believe. 

I think the next 6 months to 2 years is going to be really rough.

What are your thoughts on the Benanks ZIRP? He is effectively promising that cash is going to return 0%.

I'm sure cash will return 0% but the value in holding cash isn't the yield. It's the opportunity value. I personally think stocks, gold and bonds all simultaneously will lose 10% to 30% each in 2013. With my cash, I swoop in and "rebalance" back to 4x25 so when things normalize, I can make a profit.

It certainly is a crazy environment that is for sure. I have absolutely no clue what is in store for 2013!

TripleB wrote:

melveyr wrote:

TripleB wrote: MachineGhost:

I'm likely going to run a 20% Stock, 20% Bonds 20% Gold, 40% Cash portfolio for 2013 or in otherwords, one could consider it as an 80% PP 20% VP full of cash as the PP Purists would like to believe. 

I think the next 6 months to 2 years is going to be really rough.

What are your thoughts on the Benanks ZIRP? He is effectively promising that cash is going to return 0%.

I'm sure cash will return 0% but the value in holding cash isn't the yield. It's the opportunity value. I personally think stocks, gold and bonds all simultaneously will lose 10% to 30% each in 2013. With my cash, I swoop in and "rebalance" back to 4x25 so when things normalize, I can make a profit.

tough to hold a HBPP thinking that will happen


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"ETFs With American Campus Communities, Inc. (ACC) Exposure"

some ETFs in europe are (ACC). Is this good or bad ?

Please advice.

Regards

frugal wrote:

TripleB wrote:

melveyr wrote: What are your thoughts on the Benanks ZIRP? He is effectively promising that cash is going to return 0%.

I'm sure cash will return 0% but the value in holding cash isn't the yield. It's the opportunity value. I personally think stocks, gold and bonds all simultaneously will lose 10% to 30% each in 2013. With my cash, I swoop in and "rebalance" back to 4x25 so when things normalize, I can make a profit.

tough to hold a HBPP thinking that will happen

I dunno… if gold, bonds, and stocks all fall, what are you left with? REITs? They're usually heavily correlated with stocks. Silver? It will probably be felling even lower than gold, unless one of the companies that is doing well develops a huge industrial demand for it. Timber? Palladium? Pork bellies? Water rights?

Pointedstick wrote:

frugal wrote:

TripleB wrote: I'm sure cash will return 0% but the value in holding cash isn't the yield. It's the opportunity value. I personally think stocks, gold and bonds all simultaneously will lose 10% to 30% each in 2013. With my cash, I swoop in and "rebalance" back to 4x25 so when things normalize, I can make a profit.

tough to hold a HBPP thinking that will happen

I dunno… if gold, bonds, and stocks all fall, what are you left with? REITs? They're usually heavily correlated with stocks. Silver? It will probably be felling even lower than gold, unless one of the companies that is doing well develops a huge industrial demand for it. Timber? Palladium? Pork bellies? Water rights?

Feeling that recession, 1 or 2 years out in CASH is not the right choice?

Wait out and enter again later.

Regards

frugal wrote: Feeling that recession, 1 or 2 years out in CASH is not the right choice?

Wait out and enter again later.

Regards

How do you know when it's over? If you discover the end because all the assets have rocketed up again, you've lost the opportunity to participate in that rally. What if you move everything into cash too early and miss out on some serious gains, or make the move too late and lock in your losses? My father did that in 2008 near the bottom of the crash and locked in a massive loss.

The problem with timing the market is always, well, the timing of your entry and exit points. If you don't choose them perfectly, you can lose a lot, or fail to gain a lot. I think it's a lot riskier than just staying in the PP.

PS,

Max. DD of PP was still a bit high...

comparing with the VP that I published, which turned about 12% per year is about the same Max DD in 40 years

~20% Max DD

DD's scares investors


Regards