TIPS Fund vs Gold Fund

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nisiprius
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

bigskyguy wrote: Wed Aug 05, 2020 9:06 am... Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady...
The problem is that gold, like many investments, is so bursty. It's hard to know what time period to look at rationally. And there is a tendency for Permanent Portfolio advocates to use 20/20 hindsight and present hypothetical results for the current version, instead of the portfolio as it actually was presented and evolved. Since the Permanent Portfolio mutual fund was directly advised by Harry Browne I think it is fair to use it as a representative example of what was really achieved with real money in the real-world, by well-informed practitioner in actually-investible vehicles.

Comparing the Permanent Portfolio mutual fund (PRPFX, blue) with gold-free Wellesley (VWINX, red) it is hard to escape the impression that Wellesley was able to provide comparable safety with much higher return. In fact in my view Wellesley has been better in literally every way: higher return (CAGR), lower volatility (Stdev), better best year, not-as-bad worst year, slightly less "max drawdown," and three times better risk-adjusted return measured by Sharpe and Sortino ratios.

PRPFX currently has an 0.85% expense ratio. It used to be higher, don't know the whole history, but, to state the obvious, VWINX would still have outperformed PRPFX even if you add one or two percent to its average annual return, and even if you decide to be kind and chop off the first few years of PRPFX as teething pains.

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Re: TIPS Fund vs Gold Fund

Post by bigskyguy »

vineviz wrote: Wed Aug 05, 2020 2:27 pm
bigskyguy wrote: Wed Aug 05, 2020 2:02 pm I encourage all to go to Tyler Cowan's PortfolioCharts website, select the Charts tab, then on that page choose Portfolio Matrix. One will see that the Risk Parity portfolios (Permanent, Butterfly, Pinwheel, etc.) that hold 10%+ Gold show the most stable returns over time.
The challenge, though, is the one I mentioned: PortfolioCharts shows you what HAPPENED, not what you can EXPECT to happen. A 25% allocation to gold looks great during a period of history when it a return nearly as high as stocks.

But without a reasonable way to estimating the expected return from TODAY, how can an investor hope to make an intelligent allocation going forward? Unless you have some economic rationale which makes a +4% return more likely than a -4% return, you can't know whether you should allocate 0% of 30%. Even a "I don't know, so how about 15%?" is a speculative bet that gold will outperform both long-term Treasuries and ex-US stocks going forward. I wouldn't be comfortable making that bet, but YMMV.

Tools like PortfolioCharts are inherently period-dependent and, as such, they can lead investors to succumb to data snooping without necessarily realizing it.
True, but all data dependent inductive reasoning is based on prior observation. All scientific inquiry is based upon what has already transpired. Otherwise, decision making is simply opinion or guess. All we have is what we have. I am certainly willing to have the data/premises upon which I make my decisions challenged, and if you have a better methodology to utilize my mind is indeed open. To answer your question, I utilize past experience to guide my future expectations. No guarantees, just expectations.
So I admit that I am willing to utilize what has happened in the past to guide my decision making as to what is likely to happen in the future. What do you do?
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Re: TIPS Fund vs Gold Fund

Post by Angst »

Valuethinker wrote: Wed Aug 05, 2020 12:03 pmThere is a 3 month lag incorporated into the indexation of Real Return Bonds (it was longer than that, then the Canadians invented a way around that. Hurray Canada ;-)).

TIPS I believe are included. So if your TIPS were 10 years, and mature in July 2020, the inflation adjustment for the TIPS principal is from April 2010 to April 2020. This is because of the lag in compiling the CPI statistics. What I am not sure of is whether there is an adjustment, based on an estimate of that 3 month period?

So if inflation was 10% a month (well more than 120% pa - the effect of compounding) you would be repaid in money which was 3 months old? This would be 30% + compounding less in real terms.

That's what I am not completely sure of.
Thank you VT for correcting my misunderstanding of the lag period. I've relied on an incorrect assumption for a long time.
:oops:
And it's good it forced me to do a bit of basic research on the 3 month period. I see that in 2005 GB switched from 8 months to 3 months which at the time was already what Canada and the US were using: https://www.frbsf.org/economic-research ... xed-bonds/ I need to research more though - perhaps simply looking thru past BH threads - to get a better understanding on this "30% + compounding". I still assume the biggest problem with the lag would entail if and when the final 3 months of any maturing TIPS experience the highest levels of inflation of the instrument's entire term. It prompts another question, the reverse of that scenario: Wouldn't a TIPS purchased at a time which proved to be near the end of a higher period of inflation and leading into a full bond's term of relatively lower inflation, benefit from the lagging initial CPI data instead of losing at maturity due to rising inflation? All hypothetically speaking.
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Re: TIPS Fund vs Gold Fund

Post by Forester »

nisiprius wrote: Wed Aug 05, 2020 2:39 pm
bigskyguy wrote: Wed Aug 05, 2020 9:06 am... Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady...
The problem is that gold, like many investments, is so bursty. It's hard to know what time period to look at rationally. And there is a tendency for Permanent Portfolio advocates to use 20/20 hindsight and present hypothetical results for the current version, instead of the portfolio as it actually was presented and evolved. Since the Permanent Portfolio mutual fund was directly advised by Harry Browne I think it is fair to use it as a representative example of what was really achieved with real money in the real-world, by well-informed practitioner in actually-investible vehicles.

Comparing the Permanent Portfolio mutual fund (PRPFX, blue) with gold-free Wellesley (VWINX, red) it is hard to escape the impression that Wellesley was able to provide comparable safety with much higher return. In fact in my view Wellesley has been better in literally every way: higher return (CAGR), lower volatility (Stdev), better best year, not-as-bad worst year, slightly less "max drawdown," and three times better risk-adjusted return measured by Sharpe and Sortino ratios.

PRPFX currently has an 0.85% expense ratio. It used to be higher, don't know the whole history, but, to state the obvious, VWINX would still have outperformed PRPFX even if you add one or two percent to its average annual return, and even if you decide to be kind and chop off the first few years of PRPFX as teething pains.

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Using your Dec 82 starting point but with a straightforward Permanent Portfolio, not the fund implementation;

https://www.portfoliovisualizer.com/bac ... tion4_1=25

IMHO the PP is more of a "stay rich" portfolio than a get rich one. Not a bad option for a multi-millionaire.
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

Forester wrote: Wed Aug 05, 2020 2:49 pm...Using your Dec 82 starting point but with a straightforward Permanent Portfolio, not the fund implementation...
Brown actually advised the fund. In fact, The fund company's website says "Harry Browne [was] one of the founders of the fund."

According to Craig Rowland, author of a book on the Permanent Portfolio,
[the] mutual fund called the Permanent Portfolio fund (PRPFX), which has been in existence since the early 1980s. It implements an earlier version of the strategy...
PRPFX could have used the 4x25 version if Browne had been advocating it at the time. Why didn't it? I believe it is because at the time nobody knew that it was going to outperform the version they were using.

PRPFX is a record of actual results obtained by actual investments of real money, by professionals with a deep understanding of the strategy. Do you have anything comparable for the "straightforward" portfolio?
Last edited by nisiprius on Wed Aug 05, 2020 3:28 pm, edited 4 times in total.
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

bigskyguy wrote: Wed Aug 05, 2020 2:42 pm So I admit that I am willing to utilize what has happened in the past to guide my decision making as to what is likely to happen in the future. What do you do?
I'm happy and willing to use the past to guide my expectations about what might happen in the future WHEN I have good reasons for doing so.

Some relationships tend to be relatively stable over time (correlations and variances, for instance) and other relationships have solid theoretical grounding (equity risk premium, upward sloping yield curves, and so on).

If I buy a 30-year TIPS I have a good model for generating an expected real return for that bond over the course of the next three decades. There's no model for the expected return of gold that gives me any confidence that I'd be doing anything more than picking a number out of thin air.
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Re: TIPS Fund vs Gold Fund

Post by willthrill81 »

Any time the topic of backtesting comes up, it seems that 'camps' emerge where one side argues that inductive, empirical data driven decision making (i.e. backtesting) is superior and another side argues that deductive, theory driven decision making is superior.

As a social scientist who probably studied this topic more than most, I can say with confidence that in both the 'hard' and 'soft' sciences, neither approach is held by anything close to a consensus to be inherently superior to the other. Both have their roles and can be useful for helping to accurately predict the future, which is very often taken to be the ultimate goal of understanding phenomena.

That said, while most scientists hold both approaches to be useful, each seems to personally lean more on one or the other as a matter of course. In my own case, I tend to favor the inductive approach, though I certainly use the deductive approach as well.

At the risk of it seeming like I hold the inductive approach to be inherently superior, which I do not, the quote below from Oliver Heaviside, who discovered the operator method for solving differential equations before a mathematical proof for why the method work was put forth, comes to mind.

“Shall I refuse my dinner because I do not fully understand the process of digestion ?”
-Oliver Heaviside

In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

willthrill81 wrote: Wed Aug 05, 2020 3:37 pm Any time the topic of backtesting comes up, it seems that 'camps' emerge where one side argues that inductive, empirical data driven decision making (i.e. backtesting) is superior and another side argues that deductive, theory driven decision making is superior.

As a social scientist who probably studied this topic more than most, I can say with confidence that in both the 'hard' and 'soft' sciences, neither approach is held by anything close to a consensus to be inherently superior to the other. Both have their roles and can be useful for helping to accurately predict the future, which is very often taken to be the ultimate goal of understanding phenomena.

That said, while most scientists hold both approaches to be useful, each seems to personally lean more on one or the other as a matter of course. In my own case, I tend to favor the inductive approach, though I certainly use the deductive approach as well.

At the risk of it seeming like I hold the inductive approach to be inherently superior, which I do not, the quote below from Oliver Heaviside, who discovered the operator method for solving differential equations before a mathematical proof for why the method work was put forth, comes to mind.

“Shall I refuse my dinner because I do not fully understand the process of digestion ?”
-Oliver Heaviside

In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
I think this may be the deepest, most thought provoking post I've seen on the forum! :P :sharebeer 8-) There's a lot of truth there (regarding the competing thought processes that tend to emerge around here).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: TIPS Fund vs Gold Fund

Post by bigskyguy »

nisiprius wrote: Wed Aug 05, 2020 2:39 pm
bigskyguy wrote: Wed Aug 05, 2020 9:06 am... Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady...
The problem is that gold, like many investments, is so bursty. It's hard to know what time period to look at rationally. And there is a tendency for Permanent Portfolio advocates to use 20/20 hindsight and present hypothetical results for the current version, instead of the portfolio as it actually was presented and evolved. Since the Permanent Portfolio mutual fund was directly advised by Harry Browne I think it is fair to use it as a representative example of what was really achieved with real money in the real-world, by well-informed practitioner in actually-investible vehicles.

Comparing the Permanent Portfolio mutual fund (PRPFX, blue) with gold-free Wellesley (VWINX, red) it is hard to escape the impression that Wellesley was able to provide comparable safety with much higher return. In fact in my view Wellesley has been better in literally every way: higher return (CAGR), lower volatility (Stdev), better best year, not-as-bad worst year, slightly less "max drawdown," and three times better risk-adjusted return measured by Sharpe and Sortino ratios.

PRPFX currently has an 0.85% expense ratio. It used to be higher, don't know the whole history, but, to state the obvious, VWINX would still have outperformed PRPFX even if you add one or two percent to its average annual return, and even if you decide to be kind and chop off the first few years of PRPFX as teething pains.

Source

Image
Thanks for the counterpoint. Wellesley is a hard risk/return comparison for virtually any worthy or non-worthy competitor.

My point was that "when gold is added to a diversified portfolio," it can and does provide a counterweight that can and does substantially decrease portfolio volatility, in return for sacrifice of return. Tyler Cowan demonstrates that well. That is what one sees with the Permanent Portfolio, that is what one sees with the Golden Butterfly. For me personally, I choose to limit by fixed income exposure to Treasuries, taking my risk with the equity portion of my portfolio. Adding gold does just as expected, with limited loss of return. If I were to choose to employ corporate bonds in my portfolio, then Wellesley would be a prime option.

In fairness to risk parity, had you compared Wellesley to Golden Butterfly, both of which hold approximately 40% equities, the discrepancy in returns would have been substantively narrowed, with no sacrifice of risk. And that with Golden Butterfly holding short and long Treasuries and Gold instead of Corporates.
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Re: TIPS Fund vs Gold Fund

Post by bigskyguy »

FIREchief wrote: Wed Aug 05, 2020 3:52 pm
willthrill81 wrote: Wed Aug 05, 2020 3:37 pm Any time the topic of backtesting comes up, it seems that 'camps' emerge where one side argues that inductive, empirical data driven decision making (i.e. backtesting) is superior and another side argues that deductive, theory driven decision making is superior.

As a social scientist who probably studied this topic more than most, I can say with confidence that in both the 'hard' and 'soft' sciences, neither approach is held by anything close to a consensus to be inherently superior to the other. Both have their roles and can be useful for helping to accurately predict the future, which is very often taken to be the ultimate goal of understanding phenomena.

That said, while most scientists hold both approaches to be useful, each seems to personally lean more on one or the other as a matter of course. In my own case, I tend to favor the inductive approach, though I certainly use the deductive approach as well.

At the risk of it seeming like I hold the inductive approach to be inherently superior, which I do not, the quote below from Oliver Heaviside, who discovered the operator method for solving differential equations before a mathematical proof for why the method work was put forth, comes to mind.

“Shall I refuse my dinner because I do not fully understand the process of digestion ?”
-Oliver Heaviside

In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
I think this may be the deepest, most thought provoking post I've seen on the forum! :P :sharebeer 8-) There's a lot of truth there (regarding the competing thought processes that tend to emerge around here).
Well stated. Thank you.
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Re: TIPS Fund vs Gold Fund

Post by willthrill81 »

FIREchief wrote: Wed Aug 05, 2020 3:52 pm I think this may be the deepest, most thought provoking post I've seen on the forum! :P :sharebeer 8-) There's a lot of truth there (regarding the competing thought processes that tend to emerge around here).
You're too kind, but thank you. That means a lot.
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

anoop wrote: Wed Aug 05, 2020 12:50 pm Stocks would have negative expected return without fed support. At least gold can hold its own (and has held it through the demise of several fiat currencies), fed or no fed.
Sounds like you some fundamental misconceptions about how capital markets operate. Do you actually believe gold prices are somehow operating in a vacuum with no relation to fed policy or anything else that affects rest of the capital markets. They don't, in fact they are every bit affected by everything else that goes in the market, only with no real expected returns and heightened volatility, which makes it a very poor choice as an investment.
Last edited by Elysium on Wed Aug 05, 2020 10:26 pm, edited 3 times in total.
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

willthrill81 wrote: Wed Aug 05, 2020 3:37 pm In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
I agree with you.

I can say that I tend to share the confidence of a moderate, who is accused of relying too heavily on deductive reasoning by the inductive camp and accused of relying too heavily on inductive reasoning by the inductive camp. More often than not, as you say, in finance we find ourselves resting at various spots along the continuum at different times and in different situations.

My goal was to emphasize that using raw extrapolation from the past to set an expected return for an asset with no intrinsic source of returns seems to be veering dangerously close to the guardrail we call "data snooping".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: TIPS Fund vs Gold Fund

Post by 000 »

nisiprius wrote: Wed Aug 05, 2020 7:13 am I say "gold doubled in the absence of inflation."

000 says "in absence of US inflation," Yes, that's right and I should have been careful to say that.

000 says, in effect, "it doubled in the absence of US inflation, but you are ignoring asset and currency inflation everywhere else, that's what caused the gold price increase. It is behaving exactly as gold advocates say it should."

I say "if the explanation is 'inflation everywhere else'--if ex-US inflation cumulatively amounted 2X during that time period--we should see it show up in the ex-US TIPS fund. Like gold, it should have more than doubled, reflecting 2X asset and currency inflation (plus bond interest icing on the cake)."

[...]
Thanks for your reply! You make a very reasonable point: that Gold does not track (and cannot reasonably be expected to track) local inflation. I agree with this.

As far as the comparison with international inflation indexed bonds, I feel that that is not a great metric for total world inflation. My basic premise is that asset inflation does not show up and that (to my knowledge) most inflation indexed bonds are issued by a few "developed markets" governments.

Sadly, I'm not aware of a great way to measure world inflation. It is very hard to say why Gold does what it does. Although I'm willing to own some (I still think of it as a hedge for USD -- capital has to go somewhere), it is difficult -- maybe impossible -- to tease out how much of its price performance is due to inflation expectations, stability expectations, low interest rates, FOMO momentum traders, market manipulation, and whatever other factors there may be. Arguably, many of these same factors affect the pricing of stocks and probably every other asset out there.
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Re: TIPS Fund vs Gold Fund

Post by fredflinstone »

OP: Is this for a taxable account? If so, be aware of the tax implications of both.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
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Re: TIPS Fund vs Gold Fund

Post by azanon »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm TIPS and Gold are both considered protection from inflation (if I understand correctly), but which one is better? Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)? In that scenario it seems like TIPS would not really be much of an inflation hedge or be valuable....or would they still be?

Gold has been soaring lately. Is it good to buy some now as a safety measure against future fiscal woes, or is this a classic mistake of "buying high"?
Vanguard did a recent paper on it. St tips and commodities are both effective at dealing with unexpected inflation, but st tips doesn’t have the volatility. Gold - not so much. See: https://personal.vanguard.com/pdf/ISGCTIPS.pdf
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Re: TIPS Fund vs Gold Fund

Post by Scooter57 »

I find it interesting that the idea that gold tracks expectations of inflation is given as a reason to look down on it, while the idea that stocks track expectations of rising profits is given as a reason to invest in them.

I have no strong feelings about gold, but as long as huge numbers of people around the world still use it as their primary store of value I see no reason to dismiss it. It is Armageddon insurance, but as the descendant of people who were forced to flee their homelands with only what they could carry on their persons, I respect its utility.
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

Scooter57 wrote: Thu Aug 06, 2020 6:15 am I find it interesting that the idea that gold tracks expectations of inflation is given as a reason to look down on it, while the idea that stocks track expectations of rising profits is given as a reason to invest in them.
Maybe I'm not seeing it, but I don't think the problem is so much that "gold tracks expectations of inflation" is the REASON that some investors are reluctant to add gold to the portfolio. If it did that reliably, it'd be a lot more popular here.

The problem is that gold does NOT track expectations of inflation: the correlation of gold with inflation expectations is basically zero.

I think the best theoretical and empirical rationale for holding gold in a portfolio is that it is a hedge against a weak US dollar, and many investors don't see the need (correctly or incorrectly) for additional exposure on that front.
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Re: TIPS Fund vs Gold Fund

Post by qwertyjazz »

willthrill81 wrote: Wed Aug 05, 2020 3:37 pm Any time the topic of backtesting comes up, it seems that 'camps' emerge where one side argues that inductive, empirical data driven decision making (i.e. backtesting) is superior and another side argues that deductive, theory driven decision making is superior.

As a social scientist who probably studied this topic more than most, I can say with confidence that in both the 'hard' and 'soft' sciences, neither approach is held by anything close to a consensus to be inherently superior to the other. Both have their roles and can be useful for helping to accurately predict the future, which is very often taken to be the ultimate goal of understanding phenomena.

That said, while most scientists hold both approaches to be useful, each seems to personally lean more on one or the other as a matter of course. In my own case, I tend to favor the inductive approach, though I certainly use the deductive approach as well.

At the risk of it seeming like I hold the inductive approach to be inherently superior, which I do not, the quote below from Oliver Heaviside, who discovered the operator method for solving differential equations before a mathematical proof for why the method work was put forth, comes to mind.

“Shall I refuse my dinner because I do not fully understand the process of digestion ?”
-Oliver Heaviside

In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
Domain matters. Potential convergence of arguments matter (triangulation depending on definition of evidence). The problem in my limited understanding of markets (not my field) is truly limited data for prediction to test mathematical models compared to results over decades. That would make me prefer theory and more qualitative data than potentially over-fitted models. Am I tracking the field correctly? Or is modeling markets different somehow?

Thank you
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Re: TIPS Fund vs Gold Fund

Post by Scooter57 »

vineviz wrote: Thu Aug 06, 2020 7:22 am
Maybe I'm not seeing it, but I don't think the problem is so much that "gold tracks expectations of inflation" is the REASON that some investors are reluctant to add gold to the portfolio. If it did that reliably, it'd be a lot more popular here.

The problem is that gold does NOT track expectations of inflation: the correlation of gold with inflation expectations is basically zero.
Looking at the graph of gold prices since it was demonitized, I can't see where you get the idea it doesn't reflect expectations of inflation. It surged along with the strong inflation of the 1970s and then gradually came down as rates did and people became more confident that inflation was being controlled. It surged again after the Financial Crisis when many people believed that QE would cause a surge in inflation, calmed down when that proved untrue and is surging again now that the Fed's current efforts are greatly exceeding anything they did in the post-Financial Crisis period.

That explanation for gold's behavior has made more sense to me than anything else I've seen written about gold. You may personally not have shared that fear of inflation, but since gold was demonitized it seems to have prevailed in the population at large all the periods when we see gold rising.
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

Personally, I'm quite interested in protecting against inflation, but not at all interested in profiting from others' fear of inflation. Why do I want an asset that is tied to emotion? I understand that I have to accept it in all investments--but it's a bug, not a feature.

If I believed peoples' predictions/fears of inflation were reliable, I wouldn't need either TIPS or gold. I could just buy nominal bonds, knowing that inflation estimates were already accurately baked into the bonds' coupon interest rates... or, ditto, bank CDs.
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Re: TIPS Fund vs Gold Fund

Post by garlandwhizzer »

Gold and TIPS are entirely different in the roles they play. TIPS preserves value in the face of unexpected inflation. TIPS are not volatile in price, certainly relative to volatile gold, but they appreciate only modestly in the face of inflation. Gold's price is highly volatile and it is derived purely from investor sentiment. So when panic or the current market/economy situation gets extreme, gold's volatility goes in the right direction. Gold's price is totally independent of the economy--it does not require a robust economy/robust profit growth to appreciate massively. Gold also is prized when there is concern for the future stability of currency. When people worry about the future strength of the dollar with all the money being created at present, all the debt taken on, and near zero rates, the dollar gets weaker. As the dollar weakens and confidence in it as a storehouse of wealth in the future, gold prices go up dramatically because gold's price is denominated in dollars.

Gold's current bull market is driven by two things IMO. First most investors expect even after Covid is under control a continuation of the sluggish economic growth, low inflation, incredibly low interest rates. Therefore both bonds and equities are not expected to produce robust future returns given current generous valuations and much lower long term expected returns than in the historical past. Yet there is an incredible amount of investment dollars out there looking desperately for places to go. When stocks, bonds, and real estate are all expecting lower future returns, gold is in a separate category. It can still appreciate massively without confidence in the currency or the economic future, just like it has because its value is purely sentiment driven. Its value merely appreciates as investors lose confidence that stocks, bonds, real estate and currencies themselves are effective storehouses of wealth in the future. When investors are worried about all the trillions the FED and congress are pouring into an economy needing it for life support, massively increasing debt, something unattached to the economy and to its currency like gold has appeal. TIPS lack gold's potential for massive appreciation in rare market events. TIPS protect only from one risk, inflation. On the other hand, TIPS are stable in value, not volatile. Gold's volatility works both ways which is why it's long term expected return in about zero real.

Garland Whizzer
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Re: TIPS Fund vs Gold Fund

Post by BJJ_GUY »

Elysium wrote: Wed Aug 05, 2020 5:02 pm
anoop wrote: Wed Aug 05, 2020 12:50 pm Stocks would have negative expected return without fed support. At least gold can hold its own (and has held it through the demise of several fiat currencies), fed or no fed.
Sounds like you some fundamental misconceptions about how capital markets operate. Do you actually believe gold prices are somehow operating in a vacuum with no relation to fed policy or anything else that affects rest of the capital markets. They don't, in fact they are every bit affected by everything else that goes in the market, only with no real expected returns and heightened volatility, which makes it a very poor choice as an investment.
I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.

1.) Expected return for equities statement checks out
2.) Gold has a very long history of being a store of value when there is value of currency is destroyed. This doesn't mean there won't be price volatility intermittently, but the point stands, it's got a timeless history as a store of value.

Out of curiosity, you say gold has no real expected return, and I get the point you're making. But if you are going to make the point based on the inability to value a piece of medal with traditional discounted cash flows+terminal value... don't you then have to co-sign on his point about equities with a negative expected real return if rates weren't being suppressed to nearly zero?

Honest follow up, I'm curious why you say gold has heightened volatility expectations?
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

Scooter57 wrote: Thu Aug 06, 2020 12:08 pm Looking at the graph of gold prices since it was demonitized, I can't see where you get the idea it doesn't reflect expectations of inflation. It surged along with the strong inflation of the 1970s and then gradually came down as rates did and people became more confident that inflation was being controlled. It surged again after the Financial Crisis when many people believed that QE would cause a surge in inflation, calmed down when that proved untrue and is surging again now that the Fed's current efforts are greatly exceeding anything they did in the post-Financial Crisis period.
I'm sure you're not alone in looking at those graphs and seeing a story emerge, but that only gets you as far as hypothesis. Once you start TESTING the hypothesis either that "gold tracks inflation" or "gold tracks expected inflation" you find that the data just don't support either hypothesis. The relationships are economically weak and statistically insignificant.

The only statistically significant relationship I can find is between gold and the strength of the US dollar: a weakening USD has typically been a boon for gold, regardless of what's going on with inflation.

By way of anecdote, the two best periods by far for SPDR Gold Shares ETF (GLD) have been 5/2005 to 08/2011 and 12/2015 to present. The rate of expected inflation FELL during both periods.

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Elysium
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 1.) Expected return for equities statement checks out
Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 2.) Gold has a very long history of being a store of value when there is value of currency is destroyed. This doesn't mean there won't be price volatility intermittently, but the point stands, it's got a timeless history as a store of value.
That's all it does. An inefficient store of value, which basically could track inflation at best. I said it myself. There are times when rampant speculation takes it beyond that level, now may be one of those times. It's a question of who wants to play greater fool with gold prices.
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm Out of curiosity, you say gold has no real expected return, and I get the point you're making. But if you are going to make the point based on the inability to value a piece of medal with traditional discounted cash flows+terminal value... don't you then have to co-sign on his point about equities with a negative expected real return if rates weren't being suppressed to nearly zero?
As I said earlier, a company stock can be valued based on it's future earnings. A bond can be valued based on its yield and term. A bank note can be valued based on the rate on offer. Gold does not have earnings, dividends, or interest. All it does is roughly track inflation, not even a promise to track inflation which is what TIPS does. TIPS offer an explicit contract to track CPI. Gold promises nothing. It can only be valued based on what another person is willing to buy it from you. Therefore, it has no expected returns.
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm Honest follow up, I'm curious why you say gold has heightened volatility expectations?
Because by the very nature of Gold it is subject to rampant speculation and manias. The reason for this is that it cannot be valued properly, so then the price becomes a guess.
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Re: TIPS Fund vs Gold Fund

Post by BJJ_GUY »

Elysium wrote: Thu Aug 06, 2020 5:28 pm
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 1.) Expected return for equities statement checks out
Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
The Fed is doing a whole lot more than setting overnight rates. They've purchased massive amounts of Treasuries (not insignificant, but at the peak in March/April $75bn a day, and are now continuing at $85bn monthly). So they have artificially suppressed yields. Also, importantly, they initiated new programs that are beyond the scope of anything historically, which corporate debt, municipal debt, and middle market loans.

When the Fed steps in and begins buying up debt, they are - among a host of others - helping keep zombie companies operational, and they are also telling the market that they are supporting debt markets which has a direct impact on investors cost of capital. In other words, bond prices were bid up, but in addition to this because demand was artificially brought back into the market it allowed companies to raise new debt which they could then use to service their current debt (kind of like getting a new credit card to make payments on an old one). So, it's not surprising that with the Fed buying bonds the fist half of 2020 had more bond new issuance than all of 2019?

So yes, when the Fed is buying assets there is direct intention there -- they are suppressing investors cost of capital. So when investors are scrambling to find assets that can pay them more than what bonds are offering they go out the risk curve... and buy equity.

So while equity, at current valuations, already has a negative expected return, the point is that the Fed has been able to successfully push investors further out the risk curve and substantially reducing their required returns for risk assets.

From current valuations, the future earnings will need to break historical records (in terms of growth and margin expansion) just to make the valuations make sense now (which would imply price not changing, thus a 0% return). Oh, but earnings growth is likely to be negative for the coming quarters, so I see that as a challenge.

The Fed is without question the reason the market is priced the way it is. And it's not about the overnight rates.
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

BJJ_GUY wrote: Thu Aug 06, 2020 7:32 pm
Elysium wrote: Thu Aug 06, 2020 5:28 pm
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 1.) Expected return for equities statement checks out
Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
The Fed is doing a whole lot more than setting overnight rates. They've purchased massive amounts of Treasuries (not insignificant, but at the peak in March/April $75bn a day, and are now continuing at $85bn monthly). So they have artificially suppressed yields. Also, importantly, they initiated new programs that are beyond the scope of anything historically, which corporate debt, municipal debt, and middle market loans.

When the Fed steps in and begins buying up debt, they are - among a host of others - helping keep zombie companies operational, and they are also telling the market that they are supporting debt markets which has a direct impact on investors cost of capital. In other words, bond prices were bid up, but in addition to this because demand was artificially brought back into the market it allowed companies to raise new debt which they could then use to service their current debt (kind of like getting a new credit card to make payments on an old one). So, it's not surprising that with the Fed buying bonds the fist half of 2020 had more bond new issuance than all of 2019?

So yes, when the Fed is buying assets there is direct intention there -- they are suppressing investors cost of capital. So when investors are scrambling to find assets that can pay them more than what bonds are offering they go out the risk curve... and buy equity.

So while equity, at current valuations, already has a negative expected return, the point is that the Fed has been able to successfully push investors further out the risk curve and substantially reducing their required returns for risk assets.

From current valuations, the future earnings will need to break historical records (in terms of growth and margin expansion) just to make the valuations make sense now (which would imply price not changing, thus a 0% return). Oh, but earnings growth is likely to be negative for the coming quarters, so I see that as a challenge.

The Fed is without question the reason the market is priced the way it is. And it's not about the overnight rates.
You are entitled to your opinions and grievances about the fed, but that doesn't make any of it true. This is slipping into policy discussion, which are against forum rules for this exact same reason.
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

Here is a timely article quoting research that refutes the idea Fed actions in March makes Gold prices justified:

The investment implication is that gold in coming years is likely to be lower than where it is currently. The gold bulls will object that this new research doesn’t take into account the extraordinary money creation that the Federal Reserve undertook in March, which they say has no historical parallel.

In their paper, the researchers refute this, recalling the similar arguments that were made in 1980 and 2011 — the prior two occasions in which gold’s inflation-adjusted price was as high as it is now: “In 1980, some were concerned about… high inflation… From January 1980 to January 1985, the real price of gold fell 65%. In 2011, some were concerned that the U.S. Federal Reserve’s policy of quantitative easing would lead to a high rate of inflation. From August 2011 to August 2016, …the real price of gold fell about 33%. Currently, some are concerned that the fiscal and monetary policies implemented in the U.S. to counter the economic impact of the COVID-19 pandemic will be inflationary. If gold did not reward inflation fear in 1980 and 2011, why should it reward inflation fear now?”


It also refers to the creation of ETFs with billions in AUM as one of the potential reasons for the rise in price, which aligns with some of my own thinking.

Link to paper
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Re: TIPS Fund vs Gold Fund

Post by BJJ_GUY »

Elysium wrote: Thu Aug 06, 2020 9:25 pm
BJJ_GUY wrote: Thu Aug 06, 2020 7:32 pm
Elysium wrote: Thu Aug 06, 2020 5:28 pm
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 1.) Expected return for equities statement checks out
Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
The Fed is doing a whole lot more than setting overnight rates. They've purchased massive amounts of Treasuries (not insignificant, but at the peak in March/April $75bn a day, and are now continuing at $85bn monthly). So they have artificially suppressed yields. Also, importantly, they initiated new programs that are beyond the scope of anything historically, which corporate debt, municipal debt, and middle market loans.

When the Fed steps in and begins buying up debt, they are - among a host of others - helping keep zombie companies operational, and they are also telling the market that they are supporting debt markets which has a direct impact on investors cost of capital. In other words, bond prices were bid up, but in addition to this because demand was artificially brought back into the market it allowed companies to raise new debt which they could then use to service their current debt (kind of like getting a new credit card to make payments on an old one). So, it's not surprising that with the Fed buying bonds the fist half of 2020 had more bond new issuance than all of 2019?

So yes, when the Fed is buying assets there is direct intention there -- they are suppressing investors cost of capital. So when investors are scrambling to find assets that can pay them more than what bonds are offering they go out the risk curve... and buy equity.

So while equity, at current valuations, already has a negative expected return, the point is that the Fed has been able to successfully push investors further out the risk curve and substantially reducing their required returns for risk assets.

From current valuations, the future earnings will need to break historical records (in terms of growth and margin expansion) just to make the valuations make sense now (which would imply price not changing, thus a 0% return). Oh, but earnings growth is likely to be negative for the coming quarters, so I see that as a challenge.

The Fed is without question the reason the market is priced the way it is. And it's not about the overnight rates.
You are entitled to your opinions and grievances about the fed, but that doesn't make any of it true. This is slipping into policy discussion, which are against forum rules for this exact same reason.
I don't understand how it's an opinion to say the fed buys assets. This is public information, and factual
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

BJJ_GUY wrote: Tue Aug 25, 2020 11:27 am
Elysium wrote: Thu Aug 06, 2020 9:25 pm
BJJ_GUY wrote: Thu Aug 06, 2020 7:32 pm
Elysium wrote: Thu Aug 06, 2020 5:28 pm
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm I'm not sure where Anoop is wrong, or where there is a fundamental misconception about capital markets.
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?
BJJ_GUY wrote: Thu Aug 06, 2020 1:24 pm 1.) Expected return for equities statement checks out
Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
The Fed is doing a whole lot more than setting overnight rates. They've purchased massive amounts of Treasuries (not insignificant, but at the peak in March/April $75bn a day, and are now continuing at $85bn monthly). So they have artificially suppressed yields. Also, importantly, they initiated new programs that are beyond the scope of anything historically, which corporate debt, municipal debt, and middle market loans.

When the Fed steps in and begins buying up debt, they are - among a host of others - helping keep zombie companies operational, and they are also telling the market that they are supporting debt markets which has a direct impact on investors cost of capital. In other words, bond prices were bid up, but in addition to this because demand was artificially brought back into the market it allowed companies to raise new debt which they could then use to service their current debt (kind of like getting a new credit card to make payments on an old one). So, it's not surprising that with the Fed buying bonds the fist half of 2020 had more bond new issuance than all of 2019?

So yes, when the Fed is buying assets there is direct intention there -- they are suppressing investors cost of capital. So when investors are scrambling to find assets that can pay them more than what bonds are offering they go out the risk curve... and buy equity.

So while equity, at current valuations, already has a negative expected return, the point is that the Fed has been able to successfully push investors further out the risk curve and substantially reducing their required returns for risk assets.

From current valuations, the future earnings will need to break historical records (in terms of growth and margin expansion) just to make the valuations make sense now (which would imply price not changing, thus a 0% return). Oh, but earnings growth is likely to be negative for the coming quarters, so I see that as a challenge.

The Fed is without question the reason the market is priced the way it is. And it's not about the overnight rates.
You are entitled to your opinions and grievances about the fed, but that doesn't make any of it true. This is slipping into policy discussion, which are against forum rules for this exact same reason.
I don't understand how it's an opinion to say the fed buys assets. This is public information, and factual
You didn't just say fed buys assets, but went on with your opinions and speculations on the effects. Entire passages on asset valuations, zombie companies, future earnings, so on.. just speculation, to put it mildly. See here from the link I posted above:
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Re: TIPS Fund vs Gold Fund

Post by JBTX »

From 1980 to 2000 consumer prices a little more than doubled.

From 1980 to 2000 Gold lost about 2/3 of its value.

Sure, it is a cherry picked scenario, but illustrates the point that gold is far from a perfect inflation hedge.
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Re: TIPS Fund vs Gold Fund

Post by 000 »

Over in the Gold continues to soar! thread, I posted an interesting backtest comparing Gold with leveraged TIPS:
000 wrote: Fri Aug 14, 2020 6:55 pm I've been doing a little "mining" of my own and found:

Lump Sum 2.5x TIPS vs Gold

Image

DCA 2.5x TIPS vs Gold

Image
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Re: TIPS Fund vs Gold Fund

Post by jason2459 »

JBTX wrote: Tue Aug 25, 2020 9:57 pm From 1980 to 2000 consumer prices a little more than doubled.

From 1980 to 2000 Gold lost about 2/3 of its value.

Sure, it is a cherry picked scenario, but illustrates the point that gold is far from a perfect inflation hedge.
Adjusted for inflation gold is still down from its peak 1980.
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Re: TIPS Fund vs Gold Fund

Post by jason2459 »

000 wrote: Tue Aug 25, 2020 9:59 pm Over in the Gold continues to soar! thread, I posted an interesting backtest comparing Gold with leveraged TIPS:
000 wrote: Fri Aug 14, 2020 6:55 pm I've been doing a little "mining" of my own and found:

Lump Sum 2.5x TIPS vs Gold

Image

DCA 2.5x TIPS vs Gold

Image

Its fun playing around with portfolio visualizer. Here's some fun cherry picking. Lump summing into gold just before the peak in 1980 is like investing into the Japan market 1990.

So, lump sum $10k invested January 1980
About a month later hit a peak of
$12,574

Took until August 2012 to get back to
$11,677

As of last month it hit
$10,662


Compare that to short term treasuries
Same $10k invested has had a stead increase and as of last month $30,840 with the same inflation adjusted.

Make sure to check the check box for Inflation adjusted under the graph.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: TIPS Fund vs Gold Fund

Post by 000 »

jason2459 wrote: Tue Aug 25, 2020 10:24 pm Its fun playing around with portfolio visualizer. Here's some fun cherry picking. Lump summing into gold just before the peak in 1980 is like investing into the Japan market 1990.

So, lump sum $10k invested January 1980
About a month later hit a peak of
$12,574

Took until August 2012 to get back to
$11,677

As of last month it hit
$10,662


Compare that to short term treasuries
Same $10k invested has had a stead increase and as of last month $30,840 with the same inflation adjusted.

Make sure to check the check box for Inflation adjusted under the graph.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't doubt it. However investors today are staring down the double barrel of low interest rates, high stock valuations fueled by FOMO, and general instability. Wait, I think I need a new metaphor...
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Re: TIPS Fund vs Gold Fund

Post by jason2459 »

000 wrote: Tue Aug 25, 2020 11:00 pm
jason2459 wrote: Tue Aug 25, 2020 10:24 pm Its fun playing around with portfolio visualizer. Here's some fun cherry picking. Lump summing into gold just before the peak in 1980 is like investing into the Japan market 1990.

So, lump sum $10k invested January 1980
About a month later hit a peak of
$12,574

Took until August 2012 to get back to
$11,677

As of last month it hit
$10,662


Compare that to short term treasuries
Same $10k invested has had a stead increase and as of last month $30,840 with the same inflation adjusted.

Make sure to check the check box for Inflation adjusted under the graph.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't doubt it. However investors today are staring down the double barrel of low interest rates, high stock valuations fueled by FOMO, and general instability. Wait, I think I need a new metaphor...
So.... It's different this time? :oops: :mrgreen:
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Re: TIPS Fund vs Gold Fund

Post by 000 »

jason2459 wrote: Tue Aug 25, 2020 11:14 pm So.... It's different this time? :oops: :mrgreen:
It's always different this time. We just don't know how until after it happens :P
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Re: TIPS Fund vs Gold Fund

Post by Robot Monster »

000 wrote: Tue Aug 25, 2020 11:21 pm
jason2459 wrote: Tue Aug 25, 2020 11:14 pm So.... It's different this time? :oops: :mrgreen:
It's always different this time. We just don't know how until after it happens :P
Indeed. There's a subtle distinction here. It's incorrect to state, "it's never different!" Yes, I have seen that claim made in this forum. It could be different this time, we simply do not know, and we accordingly should not base investment decisions on the idea we do. It's not actionable. That's the key distinction.
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Re: TIPS Fund vs Gold Fund

Post by jason2459 »

Robot Monster wrote: Wed Aug 26, 2020 8:43 am
000 wrote: Tue Aug 25, 2020 11:21 pm
jason2459 wrote: Tue Aug 25, 2020 11:14 pm So.... It's different this time? :oops: :mrgreen:
It's always different this time. We just don't know how until after it happens :P
Indeed. There's a subtle distinction here. It's incorrect to state, "it's never different!" Yes, I have seen that claim made in this forum. It could be different this time, we simply do not know, and we accordingly should not base investment decisions on the idea we do. It's not actionable. That's the key distinction.
I'm of the mind that it's always different in some way. I'm also of the mind that the short term differences should not alter the long term investment plan.
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Re: TIPS Fund vs Gold Fund

Post by BJJ_GUY »

Elysium wrote: Tue Aug 25, 2020 1:38 pm
BJJ_GUY wrote: Tue Aug 25, 2020 11:27 am
Elysium wrote: Thu Aug 06, 2020 9:25 pm
BJJ_GUY wrote: Thu Aug 06, 2020 7:32 pm
Elysium wrote: Thu Aug 06, 2020 5:28 pm
Well, he is wrong in saying fed policy as the reason for expected returns for stocks. This is just a sound bite thrown around by media sometimes. Fed policy can set a favorable economic environment for business. That is their job, what else should we expect the Fed to do? let the businesses fail?


Not sure you are agreeing with me or not. Expected return for a company stock is based on its future earnings, not based on fed setting overnight rates which can provide a favorable economic environment. The fed cannot go and sell products for the company or generate revenue for them, they need to do it themselves, so the argument is false.
The Fed is doing a whole lot more than setting overnight rates. They've purchased massive amounts of Treasuries (not insignificant, but at the peak in March/April $75bn a day, and are now continuing at $85bn monthly). So they have artificially suppressed yields. Also, importantly, they initiated new programs that are beyond the scope of anything historically, which corporate debt, municipal debt, and middle market loans.

When the Fed steps in and begins buying up debt, they are - among a host of others - helping keep zombie companies operational, and they are also telling the market that they are supporting debt markets which has a direct impact on investors cost of capital. In other words, bond prices were bid up, but in addition to this because demand was artificially brought back into the market it allowed companies to raise new debt which they could then use to service their current debt (kind of like getting a new credit card to make payments on an old one). So, it's not surprising that with the Fed buying bonds the fist half of 2020 had more bond new issuance than all of 2019?

So yes, when the Fed is buying assets there is direct intention there -- they are suppressing investors cost of capital. So when investors are scrambling to find assets that can pay them more than what bonds are offering they go out the risk curve... and buy equity.

So while equity, at current valuations, already has a negative expected return, the point is that the Fed has been able to successfully push investors further out the risk curve and substantially reducing their required returns for risk assets.

From current valuations, the future earnings will need to break historical records (in terms of growth and margin expansion) just to make the valuations make sense now (which would imply price not changing, thus a 0% return). Oh, but earnings growth is likely to be negative for the coming quarters, so I see that as a challenge.

The Fed is without question the reason the market is priced the way it is. And it's not about the overnight rates.
You are entitled to your opinions and grievances about the fed, but that doesn't make any of it true. This is slipping into policy discussion, which are against forum rules for this exact same reason.
I don't understand how it's an opinion to say the fed buys assets. This is public information, and factual
You didn't just say fed buys assets, but went on with your opinions and speculations on the effects. Entire passages on asset valuations, zombie companies, future earnings, so on.. just speculation, to put it mildly. See here from the link I posted above:
whines and rants about the crimes, shortcomings or stupidity of other people, whether they be politicians, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, federal "bailout" recipients, poor people, rich people, etc.
I'll end this now since it doesn't appear there is too much use arguing. However, I'd like to clarify a few things:
1.) I was not whining, ranting ABOUT crimes, shortcomings or stupidity of the Fed Chairman. I was speaking factually about what the Fed has done, and what the intentions were. These are on record. Point is, I was not opining on the good or bad of their actions, only what the stated intended consequences of the actions were/are.

2.) The Fed's stated intention of asset purchases (particularly in the corporate space) was to drive up market confidence. That they changed the rules to buy bonds of companies that recently got downgraded below the initial program was detailed is strong evidence that they were, in fact supporting some previously IG credits. This was what the goal was, and it gave companies access to capital markets, again a fact. The record bond issuance is pretty strong evidence of this... which was my point about zombie companies, where -- again supported by facts -- several companies that were downgraded were actually insolvent, and would not have been able to service debt much longer, until they suddenly had access to capital markets (where the Fed was a big help in capital raising). And yes, you can make a direct link to these companies and what the Fed purchased.

3.) Since this forum has apparently banned us from being able to make relational links, comment on consequences, and debate anything about valuations (only the most important variable when beginning to estimate future performance) then I apologize for making statements that were definitely too absolute. I shouldn't have been so certain that:
"The Fed is without question the reason the market is priced the way it is." and "earnings growth is likely to be negative for the coming quarters"
Elysium
Posts: 3208
Joined: Mon Apr 02, 2007 6:22 pm

Re: TIPS Fund vs Gold Fund

Post by Elysium »

BJJ_GUY wrote: Wed Aug 26, 2020 9:47 am I'll end this now since it doesn't appear there is too much use arguing. However, I'd like to clarify a few things:
1.) I was not whining, ranting ABOUT crimes, shortcomings or stupidity of the Fed Chairman. I was speaking factually about what the Fed has done, and what the intentions were. These are on record.
Fair enough. We can discuss and perhaps agree on what the Fed has done.
BJJ_GUY wrote: Wed Aug 26, 2020 9:47 am Point is, I was not opining on the good or bad of their actions, only what the stated intended consequences of the actions were/are.
This where you lose me. The stated intended consequences of the actions are an opinion, one among many. If we simply stopped at what the Fed has done there is no argument, but when we go on to make intended consequences that becomes an opinion, it cannot be factually proven that these are indeed the consequences, for instance speculating Gold prices will hit $5000 because of Fed policy. I am not saying you said it, but someone else might say it.
BJJ_GUY wrote: Wed Aug 26, 2020 9:47 am 2.) The Fed's stated intention of asset purchases (particularly in the corporate space) was to drive up market confidence. That they changed the rules to buy bonds of companies that recently got downgraded below the initial program was detailed is strong evidence that they were, in fact supporting some previously IG credits. This was what the goal was, and it gave companies access to capital markets, again a fact.
Again, that's a fair point. We can agree on it. That is exactly the job of the Fed, to create access to capital and infuse confidence. Given the unprecedented events, Fed wants to avoid a Great Depression and they did that job expected of them.
BJJ_GUY wrote: Wed Aug 26, 2020 9:47 am The record bond issuance is pretty strong evidence of this... which was my point about zombie companies, where -- again supported by facts -- several companies that were downgraded were actually insolvent, and would not have been able to service debt much longer, until they suddenly had access to capital markets (where the Fed was a big help in capital raising). And yes, you can make a direct link to these companies and what the Fed purchased.
Here again the problem is the terminology zombie companies somehow make it sound like they have right to existence otherwise. Perhaps they needed an access to capital to continue operating and that was facilitated. Now, 5 years down the line these companies are still supported by Fed infused capital then you have a point. But not in the near term. In the GFC of 2008 several companies were granted emergency capital, and many of them survived, even paid back with interest. You may not like it as a policy. There are people who demanded Fed let all those companies fail in the 2008 GFC. They were wrong. Many of these companies had employees whose livelihood depended on these companies from having access to capital. Many of them did good work in the housing recovery because they had access to emergency capital, and they paid back with interest. This is policy, again, you can disagree with it, but that doesn't make it right or wrong.
BJJ_GUY wrote: Wed Aug 26, 2020 9:47 am "The Fed is without question the reason the market is priced the way it is.and earnings growth is likely to be negative for the coming quarters"
This is a meaningless statement to make. What if the Fed never existed, then will the market prices be correct. What if Fed did nothing but set interest rate directions, what if they never cut rates, we can go on, this is where discussing Fed policy and it's effects become speculation. That is the pushback, because you made all of those speculations about future earnings, you don't know that, no one does.
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