OK, that makes more sense. But still, I find the reasoning a bit strange. You say that once real yields are high enough, people will move back into LTT. Well, the reverse logic should hold as well, right? Real yields are negative right now. Doesn't that mean people should be getting out of LTT right now? The way I see it, if LTT falls due to to higher inflation expectations, gold rises. I don't see why it needs to overshoot its fall unless you think there's some sort of momentum effect.Semantics wrote: ↑Fri Aug 14, 2020 2:07 amNo, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.langlands wrote: ↑Fri Aug 14, 2020 12:54 amYou really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.Semantics wrote: ↑Fri Aug 14, 2020 12:11 amGold has almost zero historical return and high volatility - meaning a fund with daily leveraged resets like UGLD has a high chance of dragging the portfolio down due to volatility decay. Additionally, if I want the volatility to work in my favor, it ought to have a significant negative correlation with equities. Gold has a neutral correlation. It also has a mild positive correlation with treasuries (makes sense - when yields get too low people move some money into gold). Going forward, if LTT fall due to higher inflation expectations, gold will then decline as people rebalance from gold into treasuries to reap the higher yield.langlands wrote: ↑Thu Aug 13, 2020 6:16 pmGiven your concerns, any reason you're not considering gold? Given the near zero yields, TMF is essentially a speculative bet for lower yields. Gold is essentially a bet for higher inflation. The difference is that gold of course has a lot more room to run.Semantics wrote: ↑Thu Aug 13, 2020 5:04 pm
I think it's about as risky as 165% equities, maybe a bit less because of the negative correlation (which I assume persists), but that could very well be offset and then some by volatility decay and/or rising rates. So I'm basically assuming there's a high likelihood TMF will perform no better than cash. There's a chance rates could go down more and TMF will look great, but I want something that looks good in the case that I think is more likely. At the end of the day I don't see a really compelling alternative and am hoping timing models will help to maintain strong returns even if TMF performs poorly.
Although I guess it's also the case that the spread in rates matters more than the absolute values. So even though LTT yields are down, borrowing is cheaper, so maybe TMF will do better than it did in 2015-2018 when the spread between long-term and short-term rates became quite small.
I am not opposed to holding gold, but only either as a minority component of a portfolio and not as a replacement for treasuries in HFEA, or in a timing model where it's possible to dial up exposure while treasuries are falling, and then dial it back down once they've stabilized. Given the volatility of UPRO/TQQQ, I think using ballast that doesn't have a strong negative correlation would be a bit too uncomfortable for me.
Perhaps I'm not being explicit enough. My case for gold is essentially stagflation/hyperinflation. If you think that those scenarios are just bogeyman/conspiracy theories that could never happen today, then of course the case for gold isn't strong. The case for gold is about as anti-Boglehead as you can get. At it's core, the entire idea is that eventually, this time will be different and you don't want to be ill-prepared when disaster finally strikes. When gold bugs pull the alarm constantly for 15 years, it's easy to tune them out. But I contend that negative real rates are not healthy, the current situation is unprecedented, and the central banks seem to have no alternative but to print money. Something has to give.