Bogleheads

[macclary]

[Lbill]

mac - It's not just a matter of a strengthening US dollar, but the unwinding of leveraged investments in risky assets that are facilitated by the dollar carry-trade. I don't know if anyone has been noticing that the dollar as been joined at the hip with stock, commodity, and gold prices (when the dollar goes down, the other "risky" assets go up and vice versa), showing an almost perfect inverse correlation. This is extremely unusual, and can only be explained by the dollar carry-trade. This happens because speculators and hedge funds sell the dollar (go short) and use the proceeds to go long on risky assets. As long as the Fed signals it isn't going to raise interest rates, the carry trade continues to accelerate. When there is the slightest suspicion that the Fed is going to raise rates, the unwind will begin.

Here's the likely outcome that Roubini describes:

[macclary]

I don't agree with the analysis that three of four asset classes are going to sell off together in the next 6-12 months. However, I do think that the current dollar policy will lead to increased volatility that will affect the PP. Running our monetary policy like a fool in the shower is of no benefit to anyone.

Consider US Stocks: In a carry trade do you buy stocks of the funding country or a different country? During an un-wind US stocks will probably fall but not by as much as the rest of the world.

Consider US Bonds: If the US raises rates and stops the carry-trade from a position of strength then US bonds will benefit from a flight to quality. If the US stops the carry-trade from a position of weakness, then gold will take off. Carry trade means low interest rates which means inflation which means bond holders are getting poorer. The stopping a carry trade helps US bond holders.

Consider gold: If the US raises rates from a position of strength then gold will fall, but the fall will be from a blow-off top to land somewhere higher than it is today. This is because currency instability is good for gold. Investors need to see a sustained period of stable currency policy before they will start to part with their gold holdings (see the 1990s). Raising rates from a position of strength will mean that US stocks are likely to be doing quite well.

If the US raises rates from a position of weakness then this will just add to gold's momentum.

[freeman]

I'm curious which ticker to use on sites such as finance.yahoo.com or finance.google.com to compare/track Gold ETFs against the real spot price for Gold Bullion. Any idea?

Thank you,
Freeman

[dryfly]

[Roy]

[Lbill]

I'm linking you to another thread on the bogleheads started by quincya. It is highly relevant to one's bond allocation in the PP, because David Swensen is one of the few prominent mainstream investment gurus who recommends holding long-term treasuries.

http://www.bogleheads.org/foru....highlight=

Here's the relevant quote from the thread, which contains Swensen's response to quincya's query sent to him:

[facmit]

Frankly, I didn't read all the repilies. so many
(it would nice if someone can post a summary )

I have two simple questions
1) what are the disadvantages for the this permanent profolio?
2) why don't the retirement accounts 2020, 2035, etc, follow this stragetry?

[macclary]

[MediumTex]

[MediumTex]

[Roy]

[MCSquared]

[freeman]

[MCSquared]

[snowman9000]

[snowman9000]

[MediumTex]

[craigr]

[craigr]

[craigr]

[Lbill]

craigr - I generally agree with your view about the barbell approach to treasuries and that's the way I'm doing it. I'd be even happier if there was any difference between the returns of 50/50 short-long vs. 100% 5-year treasuries. But there just isn't from 1972-2008 (using Simba's spreadsheet). I guess you can view that as evidence that the 50/50 barbell does as well as the 100% 5-year, so nothing is sacrificed. And maybe, just maybe the future will be different from the past 37 years and returns will confirm the superiority of the barbell. There is also the possibility that the barbell does better when re-balancing bands are used. Simba's spreadsheet assumes annual re-balancing.

_______50/50____100%
CAGR......8.17%.....8.18%
SD..........6.96%.....6.65%
Sharpe....0.37........0.38
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[facmit]

[MediumTex]

[facmit]

[MCSquared]

[Lbill]

craigr - I agree about the advantages of allocating the bond portion between cash (or short term treasuries) and long term treasuries. That doesn't dictate a 50/50 split necessarily: you could tilt either toward or away from short-term to vary the average duration of your bond holdings. Swensen seems to advise holding a 30/70 long-short mix to match the average duration of the bond market (about 5 years). Those who are nervous about long bonds might consider the "Swensen allocation" as an alternative to 50/50.

1972 - 2008*
_______50/50____30/70
CAGR.......9.63%.......9.48%
SD...........8.37%.......8.24%
Sharpe.....0.49.........0.48
2008.......(-0.7)%......(-2.3)%

* this analysis uses TSM, Gold, LTT, and STT (no cash or T-bills) with annual rebalancing
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]

[Lbill]

FWIW, another article about "asset bubbles" and the dollar carry-trade has appeared in the Wall Street Journal:

http://articles.moneycentral.m....burst.aspx

[MediumTex]

Speaking of asset bubbles, here is something to consider about the Swiss franc as a hedge in PRPFX against dollar devaluation:

According to the CNBC story linked below, the external debt to GDP ratio of the U.S. is 94.3%, while the external debt to GDP of Switzerland is 422.7%.

Link: http://www.cnbc.com/id/30308959

Thus, as between the U.S. dollar and the Swiss franc, the U.S. dollar theoretically should be a MUCH stronger currency.

It is the Swiss franc holdings in PRPFX that is most puzzling to me (though it no doubt made sense back in the early 1980s). I can understand allocating a portion of the fund to a basket of foreign currencies, but the Swiss franc of today is, to me, just another ugly dog in a pack of ugly dogs.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[Clive]

[MediumTex]

[lodrigj]

[MediumTex]

[Lbill]

Of course, nobody knows what could happen this time around and history - as well as fundamental analysis - seems to say the the PP will survive because at least one of the assets (long treasuries, stocks, or gold) will go the other way and save the day as long treasuries did in 2008. But never say never. The PP has worked well because of the almost fixed negative correlation of gold to stocks and the fact that 50% is allocated to treasury bonds with an average intermediate term duration. But no correlations are carved in stone - witness the surprising breakdown of the historical negative correlation between commodities and stocks in 2008. I'm somewhat concerned that gold and stocks have been ramping up together in recent weeks, exhibiting a significant positive correlation. Quite unusual it seems to me, but craigr might have more detailed information on this. If they can go up together - perhaps because of the dollar carry-trade leveraging up risky assets - then I figure they can go down together too when the carry-trade comes off. If stocks crash and gold isn't there to save your bacon, then we have to hope that long bonds come to the rescue. But the problem is that the likely cause of the whole thing unwinding will be because interest rates have started to ramp up. In this case then long bonds will get killed too. The only haven in this kind of storm will be cash, T-bills, or short treasuries. So - if the alarm bells are going off for you - it seems to me it would make sense to trim your allocation to the PP and go heavily into T-bills, Treasury money market funds, or the like. That's the recommendation of Bob Prechter at this time. He also believes that everything will go down together and that investors should now be mostly in cash. It might be early to load up on cash, but if you try to get too cute in timing this you'll probably get caught in the swinging door when everyone is rushing for the exits. Now, I know all this "doom and gloom" chicken-little stuff sounds a little wacky, but it sounded wacky to most people back in 1999 before the stock market tanked and it sounded wacky in 2007 before the whole financial world tanked. So - I'm not so sure this time around if it pays to ignore the thunder in the distance.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[MediumTex]

Prechter is an astrologer (though I always watch his interviews).

I wouldn't worry too much about this dollar carry trade business. The worst case scenario is PROBABLY just a couple of decades of nothing but falling long term rates--in many ways the Japan example is quite instructive.

The Fed's Christmas list this year is only going to have one item listed, and that item will be INFLATION. If the Fed can't figure out a way to get some inflation going we are going to be in a lot of trouble.

I would say we are in a lot of trouble either way. I believe that the Austrian economists are correct when they say that the damage in a credit bubble is done in the expansion phase. Once the bubble begins to deflate there is no meaningful policy response--it is far too late to take any meaningful action at that point. Again, Japan is an instructive example.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Clive]

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[Clive]

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[MediumTex]

[facmit]

[MediumTex]

[Clive]

[Roy]

[MediumTex]

Roy, your thoughts on the PP in the post above are some of the most valuable I have seen in this entire thread. Thanks for sharing your own experience.

The experience you describe is exactly what the prospective PP investor would want to know, and I think you nailed precisely the reason that I believe dollar cost averaging makes sense when getting started with the PP.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[brick-house]

Roy,

Great post. I started using the PP and PRPFX in 2004. As Tex has mentioned, the hardest challenge was actually doing it. Since my focus has always been on improving my own human capital and protecting what I have earned, the PP philosophy really matched mine. The toughest things for me to deal with were the allocations to Long Term Bonds and Gold. However, I had done my research, read Harry Browne’s books, and was committed to the strategy.

The side benefit of the PP is that it really changes your vision. It is like the sunglasses from the 1980s B movie They Live starring Rowdy Roddy Piper.

First, your focus is on steady returns that outpace inflation not mythical long term stock returns.

Second, you learn to embrace volatility not ignore it. The PP is straight up about volatility. It picks four distinct asset classes, three of which can swing wildly at any time. By using disciplined re-balancing, volatility turns into an advantage of the portfolio. The mental challenge is that one or two portions of the portfolio will be down or seem completely overvalued.

Third, the financial industrial complex is laid bare as a bunch of jive turkeys. Sales, commissions, and fees is the bottom line. To get sales, salesman pitch stock heavy allocations arrived at by risk quizzes or online calculators. These allocation tools are justified by models that show future expected returns based on past long term average returns. The average returns fail to convey the volatility of stock heavy allocations, the role that order of return plays, and the effect (both mentally and on the portfolio) of large magnitude stock losses. In addition, they do not consider your human capital, need to take risk, and liquidity needs in future emergencies.

I have stayed with the Permanent Portfolio since 2004. Yet, I cannot completely fight the urge to tinker and over-engineer. Thus, I have a small variable portfolio for sh*** and giggles.
_________________
Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac? George Carlin

[MediumTex]

[SquawkIdent]

Great post. This is one of the reasons I just use PRPFX. I'm not sure I could handle all of the moving parts of the portfolio and its volatility. I don't see the day to day movements of the gold, stocks, etc. I just see the overall outcome. Maybe something to consider??