Portfolio Construction in Stagflation Economy

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Fat-Tailed Contagion
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Portfolio Construction in Stagflation Economy

Post by Fat-Tailed Contagion »

Ray Dalio discusses his outlook = Stagflation. (linked interview below)

QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?

Yahoo! Reporter fails to ask about proper "balanced" portfolio construction after Ray Dalio lays it up for him around the 10 min to 10:30 min mark in interview linked below.

https://youtu.be/WP7Z1MKNZSM
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Re: Portfolio Construction in Stagflation Economy

Post by Booogle »

Here is some advice from someone else at his firm:

https://www.bridgewater.com/in-the-news ... -landscape
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Re: Portfolio Construction in Stagflation Economy

Post by Fat-Tailed Contagion »

Booogle wrote: Tue Jun 21, 2022 11:16 am Here is some advice from someone else at his firm:

https://www.bridgewater.com/in-the-news ... -landscape
Sounds to me like TIPS Bonds + Commodities (equal weight not market weight due to oil dominance in index) + China equities & bonds.

Then some talk about "sustainable" investing due to changing investor preferences from returns to other goals.

Did I miss anything you picked up?
Last edited by Fat-Tailed Contagion on Tue Jun 21, 2022 3:15 pm, edited 1 time in total.
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
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Re: Portfolio Construction in Stagflation Economy

Post by rockstar »

delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
No one knows how long this will persist.
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Re: Portfolio Construction in Stagflation Economy

Post by Fat-Tailed Contagion »

delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
Depends on how you define "temporary"?

10 years? 15? 20?
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Re: Portfolio Construction in Stagflation Economy

Post by Robot Monster »

I posted this twice on this forum, but here it is again...

Last month, Rebecca Patterson, Bridgewater's chief investment strategist, was asked what inflation related assets they invest in. Her answer: commodities, inflation-linked bonds, geographic diversification: economies benefiting from higher commodity prices (like Brazil, Mexico, Australia), commodity-linked currencies (like Canadian and Australian dollars), economies that are in a different place in their economic cycle (like Japan).

4:53 - 6:37
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

rockstar wrote: Tue Jun 21, 2022 3:05 pm
delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
No one knows how long this will persist.
Of course not.

But odds are high it’s not for 10+ years.

And we are not in a stagflation situation as yet.
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Re: Portfolio Construction in Stagflation Economy

Post by snackdog »

Unemployment would need to skyrocket and consumer demand plummet for us to be in stagflation. I haven't seen a case for that.
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Fat-Tailed Contagion wrote: Tue Jun 21, 2022 3:14 pm
delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
Depends on how you define "temporary"?

10 years? 15? 20?
Less than 10 years.

Remember that we are not “stagflating” yet.
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Re: Portfolio Construction in Stagflation Economy

Post by Whakamole »

Maybe stagflation is merely "transitory." :oops:
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Re: Portfolio Construction in Stagflation Economy

Post by rockstar »

snackdog wrote: Tue Jun 21, 2022 3:31 pm Unemployment would need to skyrocket and consumer demand plummet for us to be in stagflation. I haven't seen a case for that.
Or unemployment remains low and inflation persists. Same problem. Demand will drop as consumers spend their money on food, gas, and shelter. This is already happening. Unemployment will go up as retailers selling discretionary goods feel the pinch.

And I have no clue how long this will go on for. Our homes will start to look like the Bunkers, rather than the Jeffersons.
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Whakamole wrote: Tue Jun 21, 2022 3:40 pm Maybe stagflation is merely "transitory." :oops:
Transitory means “not permanent,” so that’s correct.

And, to repeat, we are not suffering from stagflation yet (and may not).

Generally, high inflation and high unemployment do not occur at the same time. That’s why stagflation is so noteworthy when it does happen.
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Re: Portfolio Construction in Stagflation Economy

Post by gougou »

High margin/low operating cost businesses with strong pricing power.

I like pipelines and REITs, especially ones with long term fixed rate debt and long term contracts that adjust with inflation. Earnings get tailwind from inflation, while operating costs can be kept low, at least proportionately.
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Re: Portfolio Construction in Stagflation Economy

Post by alex_686 »

Fat-Tailed Contagion wrote: Tue Jun 21, 2022 9:57 am QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?
There really is not going to be one. Stagflation by definition means that real interest rates are poor and the real economy is struggling. No place to hide.
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Re: Portfolio Construction in Stagflation Economy

Post by Fat-Tailed Contagion »

delamer wrote: Tue Jun 21, 2022 3:32 pm
Fat-Tailed Contagion wrote: Tue Jun 21, 2022 3:14 pm
delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
Depends on how you define "temporary"?

10 years? 15? 20?
Less than 10 years.

Remember that we are not “stagflating” yet.
How long did the 70s and early 80s "Stagflation" period last? 5? 10?
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Re: Portfolio Construction in Stagflation Economy

Post by hvaclorax »

What I have learned, in trying to avoid stagflation, others with the same idea will bid up the assets before you get there then same happens on return trip. A good idea may be thwarted by timing errors on each direction.
I tried this in 2000 downturn and was surprised but I learned to stay the course.
Look at your needs over the next few years. Can you wait it out? Can you afford otherwise?
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Fat-Tailed Contagion wrote: Tue Jun 21, 2022 5:43 pm
delamer wrote: Tue Jun 21, 2022 3:32 pm
Fat-Tailed Contagion wrote: Tue Jun 21, 2022 3:14 pm
delamer wrote: Tue Jun 21, 2022 1:58 pm If the portfolio goal is to save for the long term, then why would you need an allocation to deal with a temporary Stagflation situation?
Depends on how you define "temporary"?

10 years? 15? 20?
Less than 10 years.

Remember that we are not “stagflating” yet.
How long did the 70s and early 80s "Stagflation" period last? 5? 10?
Both were above 5% from 1973 to 1982.

But clearly, there’s a big difference between 5% inflation and 14% inflation.

I don’t know if there a cutoff for designating high vs. moderate inflation.
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Re: Portfolio Construction in Stagflation Economy

Post by arcticpineapplecorp. »

isn't an all weather portfolio supposed to work in all weather?
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Re: Portfolio Construction in Stagflation Economy

Post by YoungSisyphus »

rockstar wrote: Tue Jun 21, 2022 3:43 pm
snackdog wrote: Tue Jun 21, 2022 3:31 pm Unemployment would need to skyrocket and consumer demand plummet for us to be in stagflation. I haven't seen a case for that.
Or unemployment remains low and inflation persists. Same problem. Demand will drop as consumers spend their money on food, gas, and shelter. This is already happening. Unemployment will go up as retailers selling discretionary goods feel the pinch.

And I have no clue how long this will go on for. Our homes will start to look like the Bunkers, rather than the Jeffersons.
Agreed - the unemployment (in my opinion) is coming but that train hasn’t fully taken off. I can speak at least from what I am seeing at my company. I expect layoffs over the next six months as companies forecast increased inflationary costs and reduced revenues.
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Re: Portfolio Construction in Stagflation Economy

Post by snackdog »

rockstar wrote: Tue Jun 21, 2022 3:43 pm
snackdog wrote: Tue Jun 21, 2022 3:31 pm Unemployment would need to skyrocket and consumer demand plummet for us to be in stagflation. I haven't seen a case for that.
Or unemployment remains low and inflation persists. Same problem. Demand will drop as consumers spend their money on food, gas, and shelter. This is already happening. Unemployment will go up as retailers selling discretionary goods feel the pinch.

And I have no clue how long this will go on for. Our homes will start to look like the Bunkers, rather than the Jeffersons.
How can unemployment remain low and go up at the same time?
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Re: Portfolio Construction in Stagflation Economy

Post by BernardShakey »

rockstar wrote: Tue Jun 21, 2022 3:43 pm
snackdog wrote: Tue Jun 21, 2022 3:31 pm Unemployment would need to skyrocket and consumer demand plummet for us to be in stagflation. I haven't seen a case for that.
Or unemployment remains low and inflation persists. Same problem. Demand will drop as consumers spend their money on food, gas, and shelter. This is already happening. Unemployment will go up as retailers selling discretionary goods feel the pinch.

And I have no clue how long this will go on for. Our homes will start to look like the Bunkers, rather than the Jeffersons.
Generally, a rise in unemployment will put the lid on inflation and drive it down. Stagflation is a trifecta of a shrinking GDP, high unemployment, and high inflation. It doesn't occur often because high unemployment results in reduced demand, and then lower prices. Early 1930's is an example (deflationary).
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Re: Portfolio Construction in Stagflation Economy

Post by firebirdparts »

Two thoughts:

Gold and I suppose energy stocks would have done well in our own experience with stagflation. And in fact a basic portfolio like we see in the trinity study would actually have been okay, with the proviso that you expect not to want long term bond funds right this minute. However, I think it's too late for oil company stocks and gold. Gold is already high. There is NO WAY it can do what it did in the 70's again. I'd wager everything I have on that. Really, seriously. No way. Nobody knows nothing except that. They know that.

Second, we can talk about stagflation all we want, but we haven't achieved it. We're not there yet. If I was going to try to understand how we are going to get stagflation, I would assert that our big megatrend issues are:
1. Aging/non-growing population
2. Decarbonizing the world economy
3. Wars and such unnecessary misery issues, which may lead to increased countryA-hates-countryB trade

These three things do not increase global productivity. There is not associated economic "growth". There is activity, lots and lots of that. So this could help you keep inflation going after the economy tanks. Necessary QT is going to succeed in contracting the economy and I think if people get hungry enough a lot of them will work. I don't see why not. If I were king, I would like to see economic growth move geographically to the parts of the world that are the most behind.

It seems like, if you believed this, you'd be stock picking. I don't want to go there, but it seems like to me you would.
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Re: Portfolio Construction in Stagflation Economy

Post by strummer6969 »

firebirdparts wrote: Wed Jun 22, 2022 8:21 am Two thoughts:

Gold and I suppose energy stocks would have done well in our own experience with stagflation. And in fact a basic portfolio like we see in the trinity study would actually have been okay, with the proviso that you expect not to want long term bond funds right this minute. However, I think it's too late for oil company stocks and gold. Gold is already high. There is NO WAY it can do what it did in the 70's again. I'd wager everything I have on that. Really, seriously. No way. Nobody knows nothing except that. They know that.

Second, we can talk about stagflation all we want, but we haven't achieved it. We're not there yet. If I was going to try to understand how we are going to get stagflation, I would assert that our big megatrend issues are:
1. Aging/non-growing population
2. Decarbonizing the world economy
3. Wars and such unnecessary misery issues, which may lead to increased countryA-hates-countryB trade

These three things do not increase global productivity. There is not associated economic "growth". There is activity, lots and lots of that. So this could help you keep inflation going after the economy tanks. Necessary QT is going to succeed in contracting the economy and I think if people get hungry enough a lot of them will work. I don't see why not. If I were king, I would like to see economic growth move geographically to the parts of the world that are the most behind.

It seems like, if you believed this, you'd be stock picking. I don't want to go there, but it seems like to me you would.
It seems like equities might not have the tailwinds they once did and it would be difficult to get the kind of broad based index returns that we have been used to.

Given that, my options are:
1. Do nothing and stick with my AA.
2. Play a game of whack-a-mole with sector funds.
3. Get into stock picking. I'm not confident I can pick the winners and I'm not confident in fund managers' abilities either.

#1 seems to be my best option.
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Re: Portfolio Construction in Stagflation Economy

Post by Logan Roy »

Bridgewater don't talk much about consumer staples (some people's idea of a stagflation hedge), but have quite a bit of their AUM in P&G, KO, PEP, COST, WMT.. Also a fair bit in Healthcare: JNJ, ABT, MDT.

Staples have been bid up quite a bit. Obviously the problem with repositioning now is much of what's expected to happen should be priced in – Bridgewater's portfolio's looked like a stagflation portfolio for as long as I can recall. The fear of stagflation is obviously that the tool we use to tame inflation is designed to tighten spending – so it's: how much tightening will we need, and how much is that likely to affect businesses?
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Re: Portfolio Construction in Stagflation Economy

Post by Marseille07 »

delamer wrote: Tue Jun 21, 2022 3:28 pm Of course not.

But odds are high it’s not for 10+ years.

And we are not in a stagflation situation as yet.
Based on what? I actually wouldn't be surprised if it takes 10 years. Pretty sure people in 1974 didn't think it'd last till 1982.
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Marseille07 wrote: Thu Jun 23, 2022 12:45 am
delamer wrote: Tue Jun 21, 2022 3:28 pm Of course not.

But odds are high it’s not for 10+ years.

And we are not in a stagflation situation as yet.
Based on what? I actually wouldn't be surprised if it takes 10 years. Pretty sure people in 1974 didn't think it'd last till 1982.
It sounds like I have more faith in the Fed’s ability to prevent an extended period of stagflation than you do.

The highest odds are that some shock to the economy will occur in the next 10 years that neither of us saw coming.
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Re: Portfolio Construction in Stagflation Economy

Post by Marseille07 »

delamer wrote: Thu Jun 23, 2022 9:39 am It sounds like I have more faith in the Fed’s ability to prevent an extended period of stagflation than you do.

The highest odds are that some shock to the economy will occur in the next 10 years that neither of us saw coming.
Well...even Volcker the Great took 3 years to fight inflation, and the FF rate was already like 10% back then. Powell is starting from 0%.
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Marseille07 wrote: Thu Jun 23, 2022 10:19 am
delamer wrote: Thu Jun 23, 2022 9:39 am It sounds like I have more faith in the Fed’s ability to prevent an extended period of stagflation than you do.

The highest odds are that some shock to the economy will occur in the next 10 years that neither of us saw coming.
Well...even Volcker the Great took 3 years to fight inflation, and the FF rate was already like 10% back then. Powell is starting from 0%.
The last time I checked, 3 was significantly less than 10. :happy

So, getting back to the topic at hand, are you making changes to your portfolio?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Portfolio Construction in Stagflation Economy

Post by Elysium »

Fat-Tailed Contagion wrote: Tue Jun 21, 2022 9:57 am
QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?
Vanguard published paper on their 2022 economic outlook and expected return forecasts, in that they've given 3 model portfolios for various scenarios. The baseline one is obviously the base case. I would think the downside model is the stagflation case. See below:

Image

A heavy dose of Commodities, fair amount of Short Tips, and surprisingly a large dose of Long Term Treasuries which befuddles me. Wouldn't LTT get killed in above trend inflation below trend growth. I can only think they are using it as hedge against increased exposure to Commodities.

Anyhow, none of these portfolios would have done extremely well between 1972-1982 period, the middle one would've kept up slight better than others.
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Re: Portfolio Construction in Stagflation Economy

Post by Marseille07 »

delamer wrote: Thu Jun 23, 2022 10:43 am The last time I checked, 3 was significantly less than 10. :happy

So, getting back to the topic at hand, are you making changes to your portfolio?
Nope. I think equities would rebound and I don't have bonds. I have cash but cash is fine here as the APY will go up.
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Re: Portfolio Construction in Stagflation Economy

Post by nedsaid »

Whakamole wrote: Tue Jun 21, 2022 3:40 pm Maybe stagflation is merely "transitory." :oops:
Don't say that! Now you've done it, jinxed the economy and the markets. :wink:
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Re: Portfolio Construction in Stagflation Economy

Post by delamer »

Marseille07 wrote: Thu Jun 23, 2022 10:50 am
delamer wrote: Thu Jun 23, 2022 10:43 am The last time I checked, 3 was significantly less than 10. :happy

So, getting back to the topic at hand, are you making changes to your portfolio?
Nope. I think equities would rebound and I don't have bonds. I have cash but cash is fine here as the APY will go up.
Well, that’s funny because I’m in pretty much the same position (only about 10% bonds) and also not making changes.
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Re: Portfolio Construction in Stagflation Economy

Post by Marseille07 »

delamer wrote: Thu Jun 23, 2022 12:04 pm Well, that’s funny because I’m in pretty much the same position (only about 10% bonds) and also not making changes.
Cash is actually fine because the APY goes up *without losing the NAV*. Bonds do not face the same fate; the coupon rate goes up but the NAV goes down.
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Re: Portfolio Construction in Stagflation Economy

Post by garlandwhizzer »

Portfolio adjustments in preparation for persistent stagflation reduce expected long term portfolio returns when stagflation doesn't occur or if it does not persist for long a long period of years. Furthermore, if we do get stagflation persisting for many years, no portfolio does well. Persistent stagflation is associated with stubbornly persistent rising inflation that refuses to nomalize. If that happens there is no place to hide in terms of creating real positive returns because rising inflation can turn nominal gains from commodities, etc., into real loses.

We know how to stop rising inflation if that situation happens. Raise rates until the economy goes into a severe recession with high unemployment--that kills inflation--but it is a heavy price to pay and not one popular with the political class. One way or another there is likely to be pain in store for us in the future. The question is how much pain--has it reached an apex now?--and when will it be felt maximally--now or years down the road? Inflation rose for 15 years starting in the late 1960s. Once well established, it can become self-sustaining in a self-reinforcing wage price cycle. We are not there now and hopefully will avoid it.

It is entirely possible that we'll succeed with a "soft landing" without significant damage more than now. No matter what assets you have in your portfolio, a great deal of patience will be required going forward. The future is very unlikely to be as generous to us as our past. If things get bad, you'll be tempted like many were in the 1970s and early 1980s to give up on investing. That is always a mistake.

Personally, I do not believe it wise to now abandon a widely diversified portfolio (V + TSM, US + INTL, SC + LC, TIPS + Treasuries+ Cash) in favor of one designed for stagflation with heavy overweights to commodities for example.

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Re: Portfolio Construction in Stagflation Economy

Post by Logan Roy »

Elysium wrote: Thu Jun 23, 2022 10:47 am
Fat-Tailed Contagion wrote: Tue Jun 21, 2022 9:57 am
QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?
Vanguard published paper on their 2022 economic outlook and expected return forecasts, in that they've given 3 model portfolios for various scenarios. The baseline one is obviously the base case. I would think the downside model is the stagflation case. See below:

Image

A heavy dose of Commodities, fair amount of Short Tips, and surprisingly a large dose of Long Term Treasuries which befuddles me. Wouldn't LTT get killed in above trend inflation below trend growth. I can only think they are using it as hedge against increased exposure to Commodities.

Anyhow, none of these portfolios would have done extremely well between 1972-1982 period, the middle one would've kept up slight better than others.
I imagine the LTT is, as you say, a hedge against deflation – in so much as at some point inflation reverses, and you want to store some of that inflationary energy in a good deflation hedge for when that happens.

Are you able to backtest TIPS and short duration TIPS over the '72-82 period? I know there is simulated TIPS return data out there, but I've not been able to find it in a while. Would be great if Portfolio Visualizer could implement that.
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Re: Portfolio Construction in Stagflation Economy

Post by Elysium »

Logan Roy wrote: Thu Jun 23, 2022 2:24 pm
Elysium wrote: Thu Jun 23, 2022 10:47 am
Fat-Tailed Contagion wrote: Tue Jun 21, 2022 9:57 am
QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?
Vanguard published paper on their 2022 economic outlook and expected return forecasts, in that they've given 3 model portfolios for various scenarios. The baseline one is obviously the base case. I would think the downside model is the stagflation case. See below:

Image

A heavy dose of Commodities, fair amount of Short Tips, and surprisingly a large dose of Long Term Treasuries which befuddles me. Wouldn't LTT get killed in above trend inflation below trend growth. I can only think they are using it as hedge against increased exposure to Commodities.

Anyhow, none of these portfolios would have done extremely well between 1972-1982 period, the middle one would've kept up slight better than others.
I imagine the LTT is, as you say, a hedge against deflation – in so much as at some point inflation reverses, and you want to store some of that inflationary energy in a good deflation hedge for when that happens.

Are you able to backtest TIPS and short duration TIPS over the '72-82 period? I know there is simulated TIPS return data out there, but I've not been able to find it in a while. Would be great if Portfolio Visualizer could implement that.
Actually no I have not done any back test - just said it didn't make too much difference based on what I understand the returns were for stocks, bonds, and commodities. So, assuming commodities performed really well, at 15% it would have made some difference, but how much is a question. I do know that a 80/20 stocks/bonds portfolio did something like 6.5% annualized and inflation averaged 9%, so TIPS and Commodities would have made it slightly better. Just a question of how much and what it is worth. Longer term, we know commodities would hurt returns and if stagflation doesn't present itself like 72-82 then we get whipsawed.
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Re: Portfolio Construction in Stagflation Economy

Post by Logan Roy »

Elysium wrote: Thu Jun 23, 2022 4:31 pm
Logan Roy wrote: Thu Jun 23, 2022 2:24 pm
Elysium wrote: Thu Jun 23, 2022 10:47 am
Fat-Tailed Contagion wrote: Tue Jun 21, 2022 9:57 am
QUESTION: What is (would be/ would have been) an excellent portfolio during a period of Stagflation?
Vanguard published paper on their 2022 economic outlook and expected return forecasts, in that they've given 3 model portfolios for various scenarios. The baseline one is obviously the base case. I would think the downside model is the stagflation case. See below:

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A heavy dose of Commodities, fair amount of Short Tips, and surprisingly a large dose of Long Term Treasuries which befuddles me. Wouldn't LTT get killed in above trend inflation below trend growth. I can only think they are using it as hedge against increased exposure to Commodities.

Anyhow, none of these portfolios would have done extremely well between 1972-1982 period, the middle one would've kept up slight better than others.
I imagine the LTT is, as you say, a hedge against deflation – in so much as at some point inflation reverses, and you want to store some of that inflationary energy in a good deflation hedge for when that happens.

Are you able to backtest TIPS and short duration TIPS over the '72-82 period? I know there is simulated TIPS return data out there, but I've not been able to find it in a while. Would be great if Portfolio Visualizer could implement that.
Actually no I have not done any back test - just said it didn't make too much difference based on what I understand the returns were for stocks, bonds, and commodities. So, assuming commodities performed really well, at 15% it would have made some difference, but how much is a question. I do know that a 80/20 stocks/bonds portfolio did something like 6.5% annualized and inflation averaged 9%, so TIPS and Commodities would have made it slightly better. Just a question of how much and what it is worth. Longer term, we know commodities would hurt returns and if stagflation doesn't present itself like 72-82 then we get whipsawed.
With 25% in commodities and short duration TIPS (and nearly 25% in LTT), I think it would have weathered the 1970s very similarly to a Permanent Portfolio.

It's a rough analog, to try and get the start date where we need it – big rebalancing bonus from the 1970s – it's actually a lot like the portfolio I came up with for this environment:

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Elysium
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Re: Portfolio Construction in Stagflation Economy

Post by Elysium »

Logan Roy wrote: Fri Jun 24, 2022 5:52 am
With 25% in commodities and short duration TIPS (and nearly 25% in LTT), I think it would have weathered the 1970s very similarly to a Permanent Portfolio.

It's a rough analog, to try and get the start date where we need it – big rebalancing bonus from the 1970s – it's actually a lot like the portfolio I came up with for this environment:

Image
The problem with this is that it is skewed by one time outstanding Gold performance in the 70's. We know it had a once in a lifetime runup during that period coming off the Gold standard, and it returned 23% annualized during the 10 year period from 1972-1982 when inflation averaged 9%. Portfolios with heavy allocation to Gold did very well, regardless of how much else in stocks & bonds they held. The same cannot be expected of Gold or Commodities today. They're having a run up due to supply shocks and Oil price boom, however, expecting them to keep this up for next 10 years is a big ask. In all likelihood it will pull back by next year and then you get hurt by having that exposure, or worse get whipsawed like those investors who got into Commodities after 2004.
exodusNH
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Re: Portfolio Construction in Stagflation Economy

Post by exodusNH »

Elysium wrote: Thu Jun 23, 2022 10:47 am A heavy dose of Commodities, fair amount of Short Tips, and surprisingly a large dose of Long Term Treasuries which befuddles me. Wouldn't LTT get killed in above trend inflation below trend growth. I can only think they are using it as hedge against increased exposure to Commodities.
Maybe because if long-term bonds get to >= 3.5%, you've got historically high returns and a good chance of a future economic decline, lowering rates and raising the value of those long-term bonds?
Logan Roy
Posts: 121
Joined: Sun May 29, 2022 10:15 am

Re: Portfolio Construction in Stagflation Economy

Post by Logan Roy »

Elysium wrote: Fri Jun 24, 2022 7:25 am
Logan Roy wrote: Fri Jun 24, 2022 5:52 am
With 25% in commodities and short duration TIPS (and nearly 25% in LTT), I think it would have weathered the 1970s very similarly to a Permanent Portfolio.

It's a rough analog, to try and get the start date where we need it – big rebalancing bonus from the 1970s – it's actually a lot like the portfolio I came up with for this environment:

Image
The problem with this is that it is skewed by one time outstanding Gold performance in the 70's. We know it had a once in a lifetime runup during that period coming off the Gold standard, and it returned 23% annualized during the 10 year period from 1972-1982 when inflation averaged 9%. Portfolios with heavy allocation to Gold did very well, regardless of how much else in stocks & bonds they held. The same cannot be expected of Gold or Commodities today. They're having a run up due to supply shocks and Oil price boom, however, expecting them to keep this up for next 10 years is a big ask. In all likelihood it will pull back by next year and then you get hurt by having that exposure, or worse get whipsawed like those investors who got into Commodities after 2004.
Yes, I'd be inclined to agree. And in simple, inflation-adjusted terms, we've gone into this with gold looking quite a bit more expensive than it was in 1972.

However, gold has been a pretty good analog for commodities, and has a fairly inverse medium-term relationship with the dollar (for obvious reasons). So if we were to get a repeat of the kind of inflation we got from '72-82, a proportion of that should be expressed through some combination of gold and commodities. My Bloomberg Commodities Index ETF was up 65% over 12 months, as of a couple of weeks back (albeit in GBP, which has fallen relative to the dollar). I think it would be very useful to have the simulated TIPS data for the 70s.

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