The great commodities debate

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Murray Boyd
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The great commodities debate

Postby Murray Boyd » Wed Feb 25, 2009 2:20 pm

What ever happened to the great commodities debate? Where are we at now? Good diversifier or not? PCRIX yea or nay?

(If this has been hashed out recently just post the link)

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Re: The great commodities debate

Postby rich » Wed Feb 25, 2009 2:47 pm

Murray Boyd wrote:What ever happened to the great commodities debate? Where are we at now? Good diversifier or not? PCRIX yea or nay?

(If this has been hashed out recently just post the link)


yea
:D

IMO the Dow Jones-AIG Commodity Index has behaved EXACTLY as it should have during a deflationary period.

My big issue is I don't think there are any great vehicles to access the class. PCRIX, IMO, is as good as it gets and it is not thrilling.
Best regards, | Rich

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Re: The great commodities debate

Postby bob90245 » Wed Feb 25, 2009 2:58 pm

Murray Boyd wrote:What ever happened to the great commodities debate?

It has a new home forevermore. :D

http://seekingalpha.com/article/64411-t ... ate-part-i

http://seekingalpha.com/article/64656-t ... te-part-ii

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Murray Boyd
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Re: The great commodities debate

Postby Murray Boyd » Wed Feb 25, 2009 3:03 pm

bob90245 wrote:
Murray Boyd wrote:What ever happened to the great commodities debate?

It has a new home forevermore. :D

http://seekingalpha.com/article/64411-t ... ate-part-i

http://seekingalpha.com/article/64656-t ... te-part-ii


That's hilarious. Great minds, etc. I swear I hadn't seen that page.

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Postby RustyShackleford » Wed Apr 08, 2009 11:17 pm

I hated to start another commodities thread, so I'm hijacking this one ...

I don't want to debate whether or not commodities are a good idea
in one's portfolio (it's been done way too much already), and I don't
want to discuss my portfolio (it's been done elsewhere). I've read
and thought and I'd like to have 5% of my egg in commodities.

Right now I'm there, with approximately equal amounts of GLD and DJP.

DJP makes me nervous because of the credit risk. I think GLD is
probably near a local maximum - who really knows or cares, but
it's probably silly for me to have more than one commodities holding.

So I'm thinking of liquidating GLD and DJP into PCRDX (we're talking
$40K, so PCRIX is not an option). This would be in an IRA.

Thoughts (thanks) ?

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Postby stratton » Wed Apr 08, 2009 11:26 pm

RustyShackleford wrote:So I'm thinking of liquidating GLD and DJP into PCRDX (we're talking
$40K, so PCRIX is not an option). This would be in an IRA.

Thoughts (thanks) ?

PCRIX is $25K minimum at Vanguard. $100K at Fido.

Paul

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Postby RustyShackleford » Wed Apr 08, 2009 11:28 pm

Holy cow, just researching DJP and the whole credit risk issue
and came across this article in WSJ:

http://online.wsj.com/article/SB123525350509441083.html

... which mentions DJP, but calls it an ETF (not ETN) and makes
no mention of the credit risk issue. Isn't that kinda lame for a
publication with the supposed excellence (on financial matters)
of WSJ ?!?

Edit: just realized there was a comment "reaming them out"
(poster below points this out).
Last edited by RustyShackleford on Wed Apr 08, 2009 11:46 pm, edited 1 time in total.

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Postby RustyShackleford » Wed Apr 08, 2009 11:33 pm

stratton wrote:
RustyShackleford wrote:So I'm thinking of liquidating GLD and DJP into PCRDX (we're talking
$40K, so PCRIX is not an option). This would be in an IRA.

Thoughts (thanks) ?

PCRIX is $25K minimum at Vanguard. $100K at Fido.

Paul


Yeah, $100K at Chuck too. I had no idea it depended on the
brokerage, just figured it depended on the issuer.

Again (same issue with holding some Vanguard bond funds) I'm
faced with the unenviable choice of having to open a whole 'nother
investment account (IRA at Vgd) or holding tax-inefficient stuff in
taxable.

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Postby stratton » Wed Apr 08, 2009 11:36 pm

RustyShackleford wrote:Holy cow, just researching DJP and the whole credit risk issue
and came across this article in WSJ:

http://online.wsj.com/article/SB123525350509441083.html

... which mentions DJP, but calls it an ETF (not ETN) and makes
no mention of the credit risk issue. Isn't that kinda lame for a
publication with the supposed excellence (on financial matters)
of WSJ ?!?

The one comment reamed them over the same thing. I'm totally ignoring ETNs as investments. As tracking representatives for indexes they are great.

If they could ever work out something with the features of an ETN, but the funds are segregated out like an ETF I'd like to see the following two:

a. NCREIF propety index

b. NCREIF timberland index

I'd also take advantage of the one that tracks MLPs.

Paul

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Postby RustyShackleford » Tue Apr 14, 2009 2:44 am

Maybe DBC is a good solution: an ETF (so no ETN credit risk),
no pesky minimums, ER comparable to PCRIX and DJP.

It's a somewhat different index but should still accomplish
the same risk stabilization. I see it issues a K-1, thus complicating
tax reporting, but that should not be an issue if I hold it in an IRA, right ?

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Postby stratton » Tue Apr 14, 2009 9:54 am

RustyShackleford wrote:Maybe DBC is a good solution: an ETF (so no ETN credit risk),
no pesky minimums, ER comparable to PCRIX and DJP.

It's a somewhat different index but should still accomplish
the same risk stabilization. I see it issues a K-1, thus complicating
tax reporting, but that should not be an issue if I hold it in an IRA, right ?

You need to watch out not to exceed Unrelated Business Income in excess of $1000 in an IRA.

This thread at Morningstar discusses the subject of MLPs in an IRA. http://socialize.morningstar.com/NewSoc ... 72548.aspx

Paul

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Postby RustyShackleford » Tue Apr 14, 2009 2:19 pm

stratton wrote:
RustyShackleford wrote:Maybe DBC is a good solution: an ETF (so no ETN credit risk),
no pesky minimums, ER comparable to PCRIX and DJP.

It's a somewhat different index but should still accomplish
the same risk stabilization. I see it issues a K-1, thus complicating
tax reporting, but that should not be an issue if I hold it in an IRA, right ?

You need to watch out not to exceed Unrelated Business Income in excess of $1000 in an IRA.

This thread at Morningstar discusses the subject of MLPs in an IRA. http://socialize.morningstar.com/NewSoc ... 72548.aspx

Paul


Yow-ouch !! Thanks for the heads-up. That link seems to be broken.
But it looks likely I WOULD likely be exceeding $1000 in the DBC
dividend payments (my position would be about $50K) based on past
history. So presumably DBC is an "MLP" and the income is in this
Unrelated Business Income category ?? Thanks !

I guess I'll just suck it up and buy PCRDX (1.24% OER) and then maybe
open an IRA at Vanguard and move it when I get around to it.
Last edited by RustyShackleford on Tue Apr 14, 2009 2:28 pm, edited 1 time in total.

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Postby stratton » Tue Apr 14, 2009 2:27 pm

RustyShackleford wrote:
stratton wrote:
RustyShackleford wrote:Maybe DBC is a good solution: an ETF (so no ETN credit risk),
no pesky minimums, ER comparable to PCRIX and DJP.

It's a somewhat different index but should still accomplish
the same risk stabilization. I see it issues a K-1, thus complicating
tax reporting, but that should not be an issue if I hold it in an IRA, right ?

You need to watch out not to exceed Unrelated Business Income in excess of $1000 in an IRA.

This thread at Morningstar discusses the subject of MLPs in an IRA. http://socialize.morningstar.com/NewSoc ... 72548.aspx

Paul


Yow-ouch !! Thanks for the heads-up. That link seems to be broken.
But it looks likely I WOULD likely be exceeding $1000 in the DBC
dividend payments (my position would be about $50K) based on past
history. So presumably DBC is an "MLP" and the income is in this
Unrelated Business Income category ??
Thanks !

No. Not all dividends are Unrelated Business Income. They should be broken out separately on the K-1. The problem is we're now at the limit of understanding here. Supposedly they are ~10% of the dividends when you look at something like MLPs in aggragate. The problem is you might pick one that dumps more than that.

There are also MLP CEFs, corporations and a couple of institutional MLPs that don't have K-1 issues.

Paul

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Postby Tramper Al » Tue Apr 14, 2009 2:50 pm

stratton wrote:
RustyShackleford wrote:
stratton wrote:
RustyShackleford wrote:Maybe DBC is a good solution: an ETF (so no ETN credit risk),
no pesky minimums, ER comparable to PCRIX and DJP.

It's a somewhat different index but should still accomplish
the same risk stabilization. I see it issues a K-1, thus complicating
tax reporting, but that should not be an issue if I hold it in an IRA, right ?

You need to watch out not to exceed Unrelated Business Income in excess of $1000 in an IRA.

This thread at Morningstar discusses the subject of MLPs in an IRA. http://socialize.morningstar.com/NewSoc ... 72548.aspx

Paul


Yow-ouch !! Thanks for the heads-up. That link seems to be broken.
But it looks likely I WOULD likely be exceeding $1000 in the DBC
dividend payments (my position would be about $50K) based on past
history. So presumably DBC is an "MLP" and the income is in this
Unrelated Business Income category ??
Thanks !

No. Not all dividends are Unrelated Business Income. They should be broken out separately on the K-1. The problem is we're now at the limit of understanding here. Supposedly they are ~10% of the dividends when you look at something like MLPs in aggragate. The problem is you might pick one that dumps more than that.

There are also MLP CEFs, corporations and a couple of institutional MLPs that don't have K-1 issues.

Paul

I have the DBC K-1's and can take a look at them tonight. I have somewhere in the ballpark of $50K in DBC (IRA) as well, and my recollection was that the UBIT thing looked unlikely to bother me very soon with DBC.

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Postby Tramper Al » Wed Apr 15, 2009 6:07 pm

OK,

I said I'd tell you guys what my DBC K-1 for 2008 looks like.

I currently own 3,508 shares of DBC in an IRA, and I think that was the case for most or all of 2008. That's like $72K worth today.

As I understand it, the issue of concern is for Unrelated Business (Taxable) Income? I seem to remember it called UBTI, and there is not a box on the K-1 for UBTI specifically. However, there is a huge code sheet on the back, and Box 20 "Other information" on the K-1 allows a code to list the amount of Unrelated Business Taxable Income. I do not have that code "V" in Box 20, but do have 1,653 of Code A Investment Income, and 675 of B Investment Expense. That's it for Box 20. There are other entries on the K-1 for Interest Income (1,635 again), Net STCG (-157), Net LTCG (-834), Other deductions (675 again) and Other income (loss, -21,964). And that's really about it.

So, I am no authority on this at all, but have not yet noticed an amount on the DBC K-1 that looks anything like UBTI.

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Postby alvinsch » Wed Apr 15, 2009 7:07 pm

According to this article, DBC doesn't generate UBTI.

http://finance.yahoo.com/news/Your-ETF- ... 75623.html

Even those investors that have purchased other 'shares' of publicly traded limited partnerships may be surprised to learn that DBC (and all other commodity trusts issued by PowerShares, excluding its ETN lineup) and USO (and all other commodity funds provided by its issuer) are structured as limited partnerships. Dealing with the issue in a taxable account may just seem like a bit more paperwork to these folks, but some have felt some unnecessary stress when the funds are held in a tax-deferred account, such as an IRA.

There is a special IRS clause regarding shares of publicly traded limited partnerships that can cause tax-deferred accounts to suddenly become taxable. The clause is known as Unrelated Business Taxable Income, and fear of being subject to this clause has lead many investors to avoid shares of limited partnerships in the past. The best examples of this case are pipeline companies, like Kinder Morgan (NYSE:KMP - News), which are often structured as Master Limited Partnerships rather than as corporations. The main difference between pipeline MLPs and funds like DBC and USO is that the pipeline MLPs engage in business activities to generate income. DBC and USO generate their income passively, or through investments in commodities. There are no 'business' operations in these funds currently. So long as these funds maintain their current practices, the IRS has determined that they are not subject to UBTI.

FWIW: All 12 of my energy mlp K-1's have a 20V UBTI number. It's the E&P mlps (vs pipelines), that may give you the most UBTI problems because they split out depreciation / depletion / IDC from the K-1 box 1 income so are more likely to show a big positive 20V number even tho it might be negative after including the other factors. Likewise there have been many threads on mlp forums suggesting many brokers mishandle the UBTI by adding the 20V's from all mlp's together before determining if the net is greater than $1000 (i.e. negative UBTI mlps shouldn't offset positive UBTI mlps). Evidently a messy tax area.

- Al

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Postby Speedy » Wed Apr 15, 2009 10:26 pm

I recall that the prospectus for DBC indicates that no UBTI is expected. My K-1 for last year had none. Don't trust my recollection, read the prospectus to make sure for yourself.

Regards,
Bill

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Postby Adrian Nenu » Wed Apr 15, 2009 10:51 pm

Very simple - If you want to diversify exposure to risky asset classes, use the safest/least risky asset classes available. Correlations of the risky stuff go up during bear markets and there is no better evidence than what has happened recently.

Adrian
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Postby yobria » Wed Apr 15, 2009 11:09 pm

Hi Murray, as I recall, this argument has been taken to its logical conclusions what, 100 times on this an the other board? But you knew that :).

Nick

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Postby RustyShackleford » Thu Apr 16, 2009 12:12 pm

So the upshot of the K-1 UBTI thing is that a person can hold DBC in
their IRA, at least in the $50K range, without doing any tax reporting ?
Thanks, everyone !

P.S. Thanks, Adrian and nobria, but I think I prefaced my remarks saying
I'd decided to have a 5% commodity position and am simply trying to
figure out how best to do it.

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Postby larryswedroe » Thu Apr 16, 2009 5:34 pm

Adrian's statement
Correlations of the risky stuff go up during bear markets and there is no better evidence than what has happened recently. is incorrect.

What he should have said is that correlations of equity assets have a STRONG tendency to rise during crisis as they are impacted in similar fashion. However with commodities the TENDENCY is the opposite. The tendency is for commodities to produce ABOVE average returns during crisis--that is demonstrated by the negative correlation.

Now unfortunately so many people don't understand what negative correlation means. Unless the correlation is negative 1, it will only be a tendency. That means there are other times when the stocks get hit but commodities produce exceptional returns. The tables in my books show this. It is only in DEFLATIONARY recessions that the correlation of stocks and commodities turns positive. When we have inflationary recessions or supply shocks then you get the reverse situation.

We saw this in the bear markets of 81 and 01 and of course last year. However, in every other negative return year for stocks (since 1970) CCF produced strong returns.

But the risk that you have a DEFLATIONARY recession is why you should take the CCF allocation from equities and not from bonds as has been suggested by others.



However in the
Last edited by larryswedroe on Fri Apr 17, 2009 7:53 am, edited 1 time in total.

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Postby Adrian Nenu » Thu Apr 16, 2009 5:46 pm

However with commodities the TENDENCY is the opposite. The tendency is for commodities to produce ABOVE average returns during crisis--that is demonstrated by the negative correlation.


Larry,

During recessions people buy less stuff. That lowers demand for commodities and the prices decline. Like it happened recently. So the correlation with equity increases - they all go down together.

Only very low risk asset classes provide diversification and lower the overall portfolio risk. Equity risk rises during recessions. Those who go the commodities route not only don't get the diversification they want but also increase portfolio risk.

Adrian
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Postby Adrian Nenu » Thu Apr 16, 2009 6:09 pm

What about INFLATIONARY recessions?!

If the price of stuff goes up during a recession, people will buy less of it, causing the price to go down. Not a good equity diversifier if it does that. So the least risky asset classes are the best diversifiers of the risky asset classes during recessions.

Adrian
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Postby bob90245 » Thu Apr 16, 2009 6:50 pm

larryswedroe wrote:Adrian's statement
[url]Correlations of the risky stuff go up during bear markets and there is no better evidence than what has happened recently.[/url]
is incorrect.

What he should have said is that correlations of equity assets have a STRONG tendency to rise during crisis as they are impacted in similar fashion. However with commodities the TENDENCY is the opposite. The tendency is for commodities to produce ABOVE average returns during crisis--that is demonstrated by the negative correlation.

It depends on the crisis. Yeah, during the 1970's and last year or two oil spiked and that's when commodity prices get a boost.

Otherwise, when demand is strong, corporate earnings rise, stock and commodity prices rise -- positive correlation. Conversely when demand is weak, corporate earnings stall or fall, stock and commodity prices fall -- again positive correlation.

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Re: The great commodities debate

Postby Murray Boyd » Fri Apr 14, 2017 1:06 am

Heya gang, checking in eight years later. Are commodities back in fashion yet?

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Re: The great commodities debate

Postby unclescrooge » Fri Apr 14, 2017 4:09 am

bob90245 wrote:
Murray Boyd wrote:What ever happened to the great commodities debate?

It has a new home forevermore. :D

http://seekingalpha.com/article/64411-t ... ate-part-i

http://seekingalpha.com/article/64656-t ... te-part-ii


Thanks for sharing!

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Re: The great commodities debate

Postby unclescrooge » Fri Apr 14, 2017 4:10 am

Murray Boyd wrote:Heya gang, checking in eight years later. Are commodities back in fashion yet?


No, but the returns are improving :mrgreen:

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Re: The great commodities debate

Postby NiceUnparticularMan » Fri Apr 14, 2017 6:13 am

I've got 1.4% CCFs! Whoo-hoo, here they come! (This is basically only because it is a component of a Real Return fund in a 401K, which I ended up using because I liked its overall mix of TIPS, Global RE, and CCFs, but I wouldn't have otherwise bothered.)

Last I knew, very few people were still recommending them. Overall, I'd say that was basically because they thought the reasons to expect CCFs might have real returns had apparently disappeared, and the costs of investment were too high to justify them.

I have a suspicion they might come back into favor if there is a period of unexpected inflation. When might that happen? I have no idea.

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Re: The great commodities debate

Postby Murray Boyd » Fri Apr 14, 2017 1:44 pm

I just looked up the long-term performance of PCRIX. Aha! That's hilarious.

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Re: The great commodities debate

Postby Theoretical » Fri Apr 14, 2017 2:10 pm

The great irony is that they're actually now somewhat appealing, because they've been so bad. Indeed, as a post up top suggested, they've done exactly what they should in a time of deflation.

I think their value is lower to most Bogleheads because we tend to invest in short to intermediate term bonds and carry fairly heavy stock allocations, even into retirement. In addition, many of us tilt to somewhat inflation-sensitive assets like small value, emerging markets, and REITs. Where they come most into value is when unexpected inflationary pressure strikes, like an energy crisis, war, or other supply shock, and even then, I agree with Larry Swedroe's reasoning that they should be used in conjunction with taking more durational risk in the bond portfolio.

If we had more tax-advantaged space, I'd consider a small slug commodities to offset long-term treasuries. However, I'd not bother with just intermediates or municipal-heavy accounts.

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Re: The great commodities debate

Postby nisiprius » Fri Apr 14, 2017 3:16 pm

Theoretical wrote:The great irony is that they're actually now somewhat appealing, because they've been so bad. Indeed, as a post up top suggested, they've done exactly what they should in a time of deflation.
What deflation? This hasn't been "a time of deflation." Perhaps the CPI-U went down slightly once, one year?

Image

Yes, it declined very, very slightly, 2008 to 2009. In the last 33 years, CPI-U has gone down once and up 32 times.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The great commodities debate

Postby NiceUnparticularMan » Fri Apr 14, 2017 8:24 pm

Theoretical wrote:If we had more tax-advantaged space, I'd consider a small slug commodities to offset long-term treasuries. However, I'd not bother with just intermediates or municipal-heavy accounts.


Just to give a few more details--back when it was a hot topic, I told myself in retirement I would look again at a small but meaningful CCF allocation. But it didn't make sense to me to seek it out in accumulation.

Then my wife's 401K program added a Real Return fund, which is 45% TIPS, 35% Global RE, and 20% CCFs. And it has an ER of 0.15%! That was a really interesting addition because it made perfect sense from an academic finance perspective. plus it was cheap. So, I modified our investment plan to include a small allocation to it.

Has that been a good decision so far? Heck, no. I agree deflation has technically been avoided, but inflation has been unexpectedly low, and that is bound to be bad news for such a fund. But I don't mind having it, because I recognize it is there to provide insurance for something that hasn't happened yet.

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Re: The great commodities debate

Postby Theoretical » Sat Apr 15, 2017 5:28 pm

nisiprius wrote:
Theoretical wrote:The great irony is that they're actually now somewhat appealing, because they've been so bad. Indeed, as a post up top suggested, they've done exactly what they should in a time of deflation.
What deflation? This hasn't been "a time of deflation." Perhaps the CPI-U went down slightly once, one year?

Image

Yes, it declined very, very slightly, 2008 to 2009. In the last 33 years, CPI-U has gone down once and up 32 times.


Blech, this was totally my bad, and thanks for calling me out on the bad info.

What I meant to say was that in the wake of 2008, what disturbs me more than anything about the global quantitative easing is that despite minimal interest rates and trillions of dollars of cash injections into the system, inflation (except for health care and educational costs, which have their own drivers) has been stable and low. The more accurate description would be extreme deleveraging and printing money to offset it. The words funny money come to mind both with the derivatives and QE.

In light of those things, I'm not surprised that commodities funds (and TIPS) have suffered in the wake of lower than expected inflation given the bank policies of the last 9 years.

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Re: The great commodities debate

Postby stlutz » Sat Apr 15, 2017 6:12 pm

despite minimal interest rates and trillions of dollars of cash injections into the system, inflation (except for health care and educational costs, which have their own drivers) has been stable and low.


That's because there was in fact not trillions of dollars of cash injections into the system. That's not what QE is. QE is swapping government bonds for deposits at the Fed in an effort to force long-term rates lower. The direct impact of QE is actually deflationary as you're removing an interest-bearing asset from the private sector (government bonds) and replacing it with a non-interest bearing one (deposits at the central bank), meaning that the amount of money in the private sector goes down, not up.

Regardless, I otherwise agree that forecasting inflation and commodities prices is much harder than it looks!

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Re: The great commodities debate

Postby Rick Ferri » Sat Apr 15, 2017 6:37 pm

Here's a link to the 2008 debate that doesn't require a login:

The Great Commodities Debate
Rick Ferri and Larry Swedroe battle it out with their opposing views on using commodities in a well diversified portfolio

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

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Re: The great commodities debate

Postby Dale_G » Sat Apr 15, 2017 8:28 pm

Welcome back Rick
Volatility is my friend

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Re: The great commodities debate

Postby bobcat2 » Sat Apr 15, 2017 9:49 pm

Murray Boyd wrote:I just looked up the long-term performance of PCRIX. Aha! That's hilarious.

Hi Murray,
A very warm welcome back. Please don't wait two years to make your next post. :D

Best,
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: The great commodities debate

Postby Murray Boyd » Wed Apr 19, 2017 5:27 pm

bobcat2 wrote:
Murray Boyd wrote:I just looked up the long-term performance of PCRIX. Aha! That's hilarious.

Hi Murray,
A very warm welcome back. Please don't wait two years to make your next post. :D

Best,
BobK

Hi BobK! I don't have much to say any more that wouldn't get deleted by moderators, but I still lurk!

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Re: The great commodities debate

Postby azanon » Thu Apr 20, 2017 1:10 pm

Hey Rick, welcome back!

........

Re: commodities, you can get them much cheaper now; BCI goes for just 0.29% ER (Bloomberg commodities Index)


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