Faber: T-bills & Chill...Most of the Time

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comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

watchnerd wrote: Tue May 14, 2024 12:59 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields.
Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
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watchnerd
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

comeinvest wrote: Tue May 14, 2024 1:04 am
watchnerd wrote: Tue May 14, 2024 12:59 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields.
Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Kevin M wrote: Sun May 12, 2024 8:35 pm
Eno Deb wrote: Sun May 12, 2024 7:14 pm
Kevin M wrote: Sun May 12, 2024 3:16 pmThis seems to me analogous to saying, "I don't trust bonds". TIPS are simply bonds with a twist (inflation indexing), and they perform exactly according to bond math as they are expected to. Not trusting TIPS, or bonds, seems to be a function of not understanding them.
Or maybe a recognition that they underperform in most scenarios.
Really?

Image

I honestly didn't know what this chart would show when I created it, as I'm not too interested in bond funds at this point, so I haven't been doing these kinds of comparisons in quite awhile.
1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Inflation expectations are the main driver of TIPS performance.

2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.

3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

watchnerd wrote: Tue May 14, 2024 1:06 am
comeinvest wrote: Tue May 14, 2024 1:04 am
watchnerd wrote: Tue May 14, 2024 12:59 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields.
Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Good for you.
Nice anecdotal story. Do that a few times repeatedly, and you would no longer read finance forums; instead you could have retired in your early thirties and you would no longer have to accept any of the job offers from the Fed and from the hedge funds and quant shops that you would get.
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watchnerd
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

comeinvest wrote: Tue May 14, 2024 1:23 am Good for you.
Nice anecdotal story. Do that a few times repeatedly, and you would no longer read finance forums; instead you could have retired in your early thirties and you would no longer have to accept any of the job offers from the Fed and from the hedge funds and quant shops that you would get.
Alas, I was told market timing was bad, so didn't do it when younger.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Kevin M
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Re: Faber: T-bills & Chill...Most of the Time

Post by Kevin M »

comeinvest wrote: Tue May 14, 2024 1:10 am
Kevin M wrote: Sun May 12, 2024 8:35 pm
Eno Deb wrote: Sun May 12, 2024 7:14 pm
Kevin M wrote: Sun May 12, 2024 3:16 pmThis seems to me analogous to saying, "I don't trust bonds". TIPS are simply bonds with a twist (inflation indexing), and they perform exactly according to bond math as they are expected to. Not trusting TIPS, or bonds, seems to be a function of not understanding them.
Or maybe a recognition that they underperform in most scenarios.
Really?

Image

I honestly didn't know what this chart would show when I created it, as I'm not too interested in bond funds at this point, so I haven't been doing these kinds of comparisons in quite awhile.
1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Not so. The time period covered has both:

Image
2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.
Both funds used by PV for these asset classes are intermediate-term duration.
3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
If I make a calculation error, #Cruncher probably will let me know.
Logan Roy
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Re: Faber: T-bills & Chill...Most of the Time

Post by Logan Roy »

comeinvest wrote: Tue May 14, 2024 12:56 am
Logan Roy wrote: Sun May 12, 2024 1:17 pm I do think the past 15 years have demonstrated why you don't want to buy bonds 'at any cost' .. Tying capital up for 10 (20, 30) years in things that will return nothing doesn't make sense just because we're pursuing a 'passive' approach.

At worst, by having your capital tied up (or suffering large losses), while inflation destroys the value of those assets, you're actually footing the bill for all that stimulus (they're inflating their debt away, and in the process inflating your investments away). We talk about 'greater fool' in crypto and gold, but in this case you're buying truly worthless bonds off traders who've been front-running fed policy.

So you need a way of assessing value, and then you certainly don't want to be long duration in assets that offer terrible value.
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields. It was an accepted theory not only by media but also by rigorous academic studies, with very reasonable arguments and macroeconomic models.
Perhaps in 2026 long term treasury yields will be 1.5% again. You ignore them based on your backtesting theory. Between 2025 and 2035, the stock market crashes and treasuries go to -1% (similar to Europe, Japan between the GFC and 2021). By 2045, the stock market recovered, and treasury yields go back to 3%. You lost out on diversification benefits along with juicy rebalancing returns and yield curve rolldown returns for the rest of your life, by ignoring bonds based on some mean-reversion assumption with backtested ranges.
Having that said, I too might sell all my treasuries next time yields are below 1.5% ;)
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).

We can also point to the fact stock and bond yields had radically diverged – stocks said growth, while bonds implied we were in the midst of a crisis. One market was wrong. QE and traders front-running Fed policy (along with the fact earnings growth was healthy) hugely implicate bond prices being distorted. Ray Dalio and Bridgewater produce more data on the US economy than the Fed, and by 2021, his opinion on holding bonds was that you'd have to be "absolutely crazy". Mean reversion was probably a factor too – at some point, when you're not front-running policy, people will stop buying debt that costs them money to hold. Heavy-duty mental gymnastics to convince yourself there was an argument for bonds by then.
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watchnerd
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

Logan Roy wrote: Tue May 14, 2024 11:22 am So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).
This.

The investment thesis for investing in negative returning bonds was a better reason to buy stocks and forget bonds entirely.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Kevin M wrote: Tue May 14, 2024 11:16 am
comeinvest wrote: Tue May 14, 2024 1:10 am
Kevin M wrote: Sun May 12, 2024 8:35 pm
Eno Deb wrote: Sun May 12, 2024 7:14 pm
Kevin M wrote: Sun May 12, 2024 3:16 pmThis seems to me analogous to saying, "I don't trust bonds". TIPS are simply bonds with a twist (inflation indexing), and they perform exactly according to bond math as they are expected to. Not trusting TIPS, or bonds, seems to be a function of not understanding them.
Or maybe a recognition that they underperform in most scenarios.
Really?

Image

I honestly didn't know what this chart would show when I created it, as I'm not too interested in bond funds at this point, so I haven't been doing these kinds of comparisons in quite awhile.
1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Not so. The time period covered has both:

Image
2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.
Both funds used by PV for these asset classes are intermediate-term duration.
3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.

If you strictly look at single assets in isolation "to stay the course" of the thread, then the analysis becomes meaningless. You are showing a TIPS vs treasuries chart. It is clear based on common theory that TIPS outperform in isolation, because treasuries have more negative correlation with equities which is a benefit priced in by the market. So what were you trying to demonstrate.
comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Logan Roy wrote: Tue May 14, 2024 11:22 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Logan Roy wrote: Sun May 12, 2024 1:17 pm I do think the past 15 years have demonstrated why you don't want to buy bonds 'at any cost' .. Tying capital up for 10 (20, 30) years in things that will return nothing doesn't make sense just because we're pursuing a 'passive' approach.

At worst, by having your capital tied up (or suffering large losses), while inflation destroys the value of those assets, you're actually footing the bill for all that stimulus (they're inflating their debt away, and in the process inflating your investments away). We talk about 'greater fool' in crypto and gold, but in this case you're buying truly worthless bonds off traders who've been front-running fed policy.

So you need a way of assessing value, and then you certainly don't want to be long duration in assets that offer terrible value.
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields. It was an accepted theory not only by media but also by rigorous academic studies, with very reasonable arguments and macroeconomic models.
Perhaps in 2026 long term treasury yields will be 1.5% again. You ignore them based on your backtesting theory. Between 2025 and 2035, the stock market crashes and treasuries go to -1% (similar to Europe, Japan between the GFC and 2021). By 2045, the stock market recovered, and treasury yields go back to 3%. You lost out on diversification benefits along with juicy rebalancing returns and yield curve rolldown returns for the rest of your life, by ignoring bonds based on some mean-reversion assumption with backtested ranges.
Having that said, I too might sell all my treasuries next time yields are below 1.5% ;)
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).

We can also point to the fact stock and bond yields had radically diverged – stocks said growth, while bonds implied we were in the midst of a crisis. One market was wrong. QE and traders front-running Fed policy (along with the fact earnings growth was healthy) hugely implicate bond prices being distorted. Ray Dalio and Bridgewater produce more data on the US economy than the Fed, and by 2021, his opinion on holding bonds was that you'd have to be "absolutely crazy". Mean reversion was probably a factor too – at some point, when you're not front-running policy, people will stop buying debt that costs them money to hold. Heavy-duty mental gymnastics to convince yourself there was an argument for bonds by then.
All that is easy to say in retrospect. Nobody would have thought even remotely that -1.5% nominal in Europe at +1.5% inflation is possible for many years, nor zero to negative rates in Japan for decades. Until it happened. Many experts in 2021 said U.S. rates could never go above 3% because the national debt would be unserviceable and everything would crash. Until it happened.

Stocks have a different set of several drivers of return, and were considered overvalued too at that time. The comparison with mean reverting ratios is easy to validate in retrospect; not so much for the future.

If you were so sure, play the mean reverting game and time the market like you did 2-3 times reallocating between equities and bonds, and you will be extremely rich, no longer reading finance forums.
It seems like the majority of experts were not sure which of the two conflicting forecasts would occur, a global race to zero or reigniting inflation; or they would have become very rich playing their forecast with a long/short bet.
The problem with markets, valuations, and observables is: Some mean-revert, others don't, and yet others mean-revert until they don't - or at least not in your lifetime, as structural changes occur. Very easy to establish the range parameters looking at the charts in retrospect; not so much for the future.
Logan Roy
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Re: Faber: T-bills & Chill...Most of the Time

Post by Logan Roy »

comeinvest wrote: Tue May 14, 2024 5:34 pm
Logan Roy wrote: Tue May 14, 2024 11:22 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Logan Roy wrote: Sun May 12, 2024 1:17 pm I do think the past 15 years have demonstrated why you don't want to buy bonds 'at any cost' .. Tying capital up for 10 (20, 30) years in things that will return nothing doesn't make sense just because we're pursuing a 'passive' approach.

At worst, by having your capital tied up (or suffering large losses), while inflation destroys the value of those assets, you're actually footing the bill for all that stimulus (they're inflating their debt away, and in the process inflating your investments away). We talk about 'greater fool' in crypto and gold, but in this case you're buying truly worthless bonds off traders who've been front-running fed policy.

So you need a way of assessing value, and then you certainly don't want to be long duration in assets that offer terrible value.
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields. It was an accepted theory not only by media but also by rigorous academic studies, with very reasonable arguments and macroeconomic models.
Perhaps in 2026 long term treasury yields will be 1.5% again. You ignore them based on your backtesting theory. Between 2025 and 2035, the stock market crashes and treasuries go to -1% (similar to Europe, Japan between the GFC and 2021). By 2045, the stock market recovered, and treasury yields go back to 3%. You lost out on diversification benefits along with juicy rebalancing returns and yield curve rolldown returns for the rest of your life, by ignoring bonds based on some mean-reversion assumption with backtested ranges.
Having that said, I too might sell all my treasuries next time yields are below 1.5% ;)
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).

We can also point to the fact stock and bond yields had radically diverged – stocks said growth, while bonds implied we were in the midst of a crisis. One market was wrong. QE and traders front-running Fed policy (along with the fact earnings growth was healthy) hugely implicate bond prices being distorted. Ray Dalio and Bridgewater produce more data on the US economy than the Fed, and by 2021, his opinion on holding bonds was that you'd have to be "absolutely crazy". Mean reversion was probably a factor too – at some point, when you're not front-running policy, people will stop buying debt that costs them money to hold. Heavy-duty mental gymnastics to convince yourself there was an argument for bonds by then.
All that is easy to say in retrospect. Nobody would have thought even remotely that -1.5% nominal in Europe at +1.5% inflation is possible for many years, nor zero to negative rates in Japan for decades. Until it happened. Many experts in 2021 said rates could never go above 3% because the national debt would be unserviceable and everything would crash. Until it happened.

If you were so sure, play the mean reverting game and time the market like you did 2-3 times reallocating between equities and bonds, and you will be extremely rich, no longer reading finance forums.
It seems like the majority of experts were not sure which of the two conflicting forecasts would occur, a global race to zero or a reigniting inflation, or they would have become very rich.
It was easy at the time. I started getting out of bonds in 2014, and was completely out by 2015 .. And as I said, even if you thought yields were going lower, you were still better in stocks or alts, as they were better value – if we thought yields would stay below 1% for long, stocks would've been on PEs over 100.

German bunds on negative yields made sense for some trades – hedged yields offered slightly better value than US treasuries. But academics have their own version of how markets work. That's why there was so much nonsense coming from them. I didn't hear that nonsense from people with skin in the game, like Dalio.
comeinvest
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Logan Roy wrote: Tue May 14, 2024 5:58 pm
comeinvest wrote: Tue May 14, 2024 5:34 pm
Logan Roy wrote: Tue May 14, 2024 11:22 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Logan Roy wrote: Sun May 12, 2024 1:17 pm I do think the past 15 years have demonstrated why you don't want to buy bonds 'at any cost' .. Tying capital up for 10 (20, 30) years in things that will return nothing doesn't make sense just because we're pursuing a 'passive' approach.

At worst, by having your capital tied up (or suffering large losses), while inflation destroys the value of those assets, you're actually footing the bill for all that stimulus (they're inflating their debt away, and in the process inflating your investments away). We talk about 'greater fool' in crypto and gold, but in this case you're buying truly worthless bonds off traders who've been front-running fed policy.

So you need a way of assessing value, and then you certainly don't want to be long duration in assets that offer terrible value.
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields. It was an accepted theory not only by media but also by rigorous academic studies, with very reasonable arguments and macroeconomic models.
Perhaps in 2026 long term treasury yields will be 1.5% again. You ignore them based on your backtesting theory. Between 2025 and 2035, the stock market crashes and treasuries go to -1% (similar to Europe, Japan between the GFC and 2021). By 2045, the stock market recovered, and treasury yields go back to 3%. You lost out on diversification benefits along with juicy rebalancing returns and yield curve rolldown returns for the rest of your life, by ignoring bonds based on some mean-reversion assumption with backtested ranges.
Having that said, I too might sell all my treasuries next time yields are below 1.5% ;)
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).

We can also point to the fact stock and bond yields had radically diverged – stocks said growth, while bonds implied we were in the midst of a crisis. One market was wrong. QE and traders front-running Fed policy (along with the fact earnings growth was healthy) hugely implicate bond prices being distorted. Ray Dalio and Bridgewater produce more data on the US economy than the Fed, and by 2021, his opinion on holding bonds was that you'd have to be "absolutely crazy". Mean reversion was probably a factor too – at some point, when you're not front-running policy, people will stop buying debt that costs them money to hold. Heavy-duty mental gymnastics to convince yourself there was an argument for bonds by then.
All that is easy to say in retrospect. Nobody would have thought even remotely that -1.5% nominal in Europe at +1.5% inflation is possible for many years, nor zero to negative rates in Japan for decades. Until it happened. Many experts in 2021 said rates could never go above 3% because the national debt would be unserviceable and everything would crash. Until it happened.

If you were so sure, play the mean reverting game and time the market like you did 2-3 times reallocating between equities and bonds, and you will be extremely rich, no longer reading finance forums.
It seems like the majority of experts were not sure which of the two conflicting forecasts would occur, a global race to zero or a reigniting inflation, or they would have become very rich.
It was easy at the time. I started getting out of bonds in 2014, and was completely out by 2015 .. And as I said, even if you thought yields were going lower, you were still better in stocks or alts, as they were better value – if we thought yields would stay below 1% for long, stocks would've been on PEs over 100.

German bunds on negative yields made sense for some trades – hedged yields offered slightly better value than US treasuries. But academics have their own version of how markets work. That's why there was so much nonsense coming from them. I didn't hear that nonsense from people with skin in the game, like Dalio.
Stocks don't need PE 100 when bonds are 1%. It depends on the economy, and it just so happens that the U.S. equity markets beat everything else. If it was that easy just plugging in valuations into the Fed model which everybody knows, everybody would have done it, and the divergence would not have occurred.
You will say the Fed controlled the yield curve; I think debatable and not entirely true; but it's not an excuse: Then you and I or "experts" could have shorted treasury futures in your asset allocation for very high Sharpe ratios (if you were that sure). Many recognized firms did play global interest rate anomalies, but they didn't catch the right time period, and went under (Bill Gross the bond king comes to mind); very few got the timing right, and they are now heroes in the media (survivorship bias) - until they mess up some big bet in the future and their logic stops working.
Like I said, predict ca. 3 similar divergent markets reliably, and we talk again. Getting 3 coin flips right is much harder than 1 coin flip. But if you get 2-3 right, for example 2-3 out of 2002, 2007-2009, 2020, 2022-2023, and you reallocated accordingly, you will be very rich and I probably won't hear from you on the forum any longer.
Some global divergent markets you can play right now; but of course they may or may not play out and mean-revert; at least not according to and obeying your logic. In 10-20 years, we know which ones mean-reverted and which not, and what the future mean value and range parameters were. Then some of us will be very smarty pants "predicting the past".
Like I said: Some markets and observables mean-revert, others don't, and yet others mean-revert until they don't - or at least not in your lifetime, as structural changes occur. Very easy to establish the range parameters looking at the charts in retrospect; not so much for the future.
McQ
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Re: Faber: T-bills & Chill...Most of the Time

Post by McQ »

Logan Roy wrote: Tue May 14, 2024 11:22 am ...
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. ...
Logan Roy, I am shocked ... shocked! that you would say such things about my colleagues.

Are you insinuating that they care more about statistically significant results in support of theory, as opposed to earning excess returns after all-in costs?

Shocking indeed.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Logan Roy
Posts: 2016
Joined: Sun May 29, 2022 10:15 am

Re: Faber: T-bills & Chill...Most of the Time

Post by Logan Roy »

comeinvest wrote: Tue May 14, 2024 6:55 pm
Logan Roy wrote: Tue May 14, 2024 5:58 pm
comeinvest wrote: Tue May 14, 2024 5:34 pm
Logan Roy wrote: Tue May 14, 2024 11:22 am
comeinvest wrote: Tue May 14, 2024 12:56 am

Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields. It was an accepted theory not only by media but also by rigorous academic studies, with very reasonable arguments and macroeconomic models.
Perhaps in 2026 long term treasury yields will be 1.5% again. You ignore them based on your backtesting theory. Between 2025 and 2035, the stock market crashes and treasuries go to -1% (similar to Europe, Japan between the GFC and 2021). By 2045, the stock market recovered, and treasury yields go back to 3%. You lost out on diversification benefits along with juicy rebalancing returns and yield curve rolldown returns for the rest of your life, by ignoring bonds based on some mean-reversion assumption with backtested ranges.
Having that said, I too might sell all my treasuries next time yields are below 1.5% ;)
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. Had bonds gone sub-zero, stocks would've still been the better investment (they were cheaper, and their discounted cashflows were getting better even faster).

We can also point to the fact stock and bond yields had radically diverged – stocks said growth, while bonds implied we were in the midst of a crisis. One market was wrong. QE and traders front-running Fed policy (along with the fact earnings growth was healthy) hugely implicate bond prices being distorted. Ray Dalio and Bridgewater produce more data on the US economy than the Fed, and by 2021, his opinion on holding bonds was that you'd have to be "absolutely crazy". Mean reversion was probably a factor too – at some point, when you're not front-running policy, people will stop buying debt that costs them money to hold. Heavy-duty mental gymnastics to convince yourself there was an argument for bonds by then.
All that is easy to say in retrospect. Nobody would have thought even remotely that -1.5% nominal in Europe at +1.5% inflation is possible for many years, nor zero to negative rates in Japan for decades. Until it happened. Many experts in 2021 said rates could never go above 3% because the national debt would be unserviceable and everything would crash. Until it happened.

If you were so sure, play the mean reverting game and time the market like you did 2-3 times reallocating between equities and bonds, and you will be extremely rich, no longer reading finance forums.
It seems like the majority of experts were not sure which of the two conflicting forecasts would occur, a global race to zero or a reigniting inflation, or they would have become very rich.
It was easy at the time. I started getting out of bonds in 2014, and was completely out by 2015 .. And as I said, even if you thought yields were going lower, you were still better in stocks or alts, as they were better value – if we thought yields would stay below 1% for long, stocks would've been on PEs over 100.

German bunds on negative yields made sense for some trades – hedged yields offered slightly better value than US treasuries. But academics have their own version of how markets work. That's why there was so much nonsense coming from them. I didn't hear that nonsense from people with skin in the game, like Dalio.
Stocks don't need PE 100 when bonds are 1%. It depends on the economy, and it just so happens that the U.S. equity markets beat everything else. If it was that easy just plugging in valuations into the Fed model which everybody knows, everybody would have done it, and the divergence would not have occurred.
You will say the Fed controlled the yield curve; I think debatable and not entirely true; but it's not an excuse: Then you and I or "experts" could have shorted treasury futures in your asset allocation for very high Sharpe ratios (if you were that sure). Many recognized firms did play global interest rate anomalies, but they didn't catch the right time period, and went under (Bill Gross the bond king comes to mind); very few got the timing right, and they are now heroes in the media (survivorship bias) - until they mess up some big bet in the future and their logic stops working.
Like I said, predict ca. 3 similar divergent markets reliably, and we talk again. Getting 3 coin flips right is much harder than 1 coin flip. But if you get 2-3 right, for example 2-3 out of 2002, 2007-2009, 2020, 2022-2023, and you reallocated accordingly, you will be very rich and I probably won't hear from you on the forum any longer.
Some global divergent markets you can play right now; but of course they may or may not play out and mean-revert; at least not according to and obeying your logic. In 10-20 years, we know which ones mean-reverted and which not, and what the future mean value and range parameters were. Then some of us will be very smarty pants "predicting the past".
Like I said: Some markets and observables mean-revert, others don't, and yet others mean-revert until they don't - or at least not in your lifetime, as structural changes occur. Very easy to establish the range parameters looking at the charts in retrospect; not so much for the future.
The Fed model's case in point. The principle's right, but it's not how markets work .. Markets price ahead – so throughout the post-GFC bull market, analysts were always pricing on expected higher rates – as Buffett said: rates work like gravity .. Likewise, the reason I didn't short treasuries was because I'd have been waiting 7 years with capital tied up, and maybe a 30% return after costs? It made much more sense to be long growth.

As Bogle said, there are times when it is obvious. We had a growing economy. Why would tying capital up for 30 years, to get a 3% return, make sense? Only if you were betting on further cuts. And if you were, you wouldn't be buy-and-hold – you'd know you have to exit that trade before the whole market tries to.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Logan Roy »

McQ wrote: Tue May 14, 2024 9:46 pm
Logan Roy wrote: Tue May 14, 2024 11:22 am ...
The problem with academics is they'll always try to twist reality to fit the theory. This (back in 2014) convinced me to get out of bonds:

Image

^^ Economist and market rate path forecasts are useless. Monkeys with crayons would do better. So when yields were 1%, whatever academics were using to convince themselves prices were 'efficient', the chances of rates going higher were just as good as lower. And bonds on those prices – with no real return – were at best a total crapshoot. There was no investment case. ...
Logan Roy, I am shocked ... shocked! that you would say such things about my colleagues.

Are you insinuating that they care more about statistically significant results in support of theory, as opposed to earning excess returns after all-in costs?

Shocking indeed.
In a sense .. I think the problem with being more interested in theory than reality is they often don't understand the nature of the system they're trying to measure – so there might be a lot of missing context between what is and isn't statistically significant. And I think like in a lot of humanities subjects, it comes down to a disdain between the people writing about it and the people actually doing it.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Kevin M »

comeinvest wrote: Tue May 14, 2024 5:23 pm
Kevin M wrote: Tue May 14, 2024 11:16 am
comeinvest wrote: Tue May 14, 2024 1:10 am
Kevin M wrote: Sun May 12, 2024 8:35 pm
Eno Deb wrote: Sun May 12, 2024 7:14 pm Or maybe a recognition that they underperform in most scenarios.
Really?

Image

I honestly didn't know what this chart would show when I created it, as I'm not too interested in bond funds at this point, so I haven't been doing these kinds of comparisons in quite awhile.
1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Not so. The time period covered has both:

Image
2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.
Both funds used by PV for these asset classes are intermediate-term duration.
3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.
I don't think you know how to read the chart. Deflation (month over month) is when the line is descending, inflation is when it is ascending. There was significant deflation in the 2009-2010 period, and the significant inflation in the 2020-2022 period was followed by significant deflation in the 2022-2023 period, for example.
comeinvest wrote: Tue May 14, 2024 5:23 pmIf you strictly look at single assets in isolation "to stay the course" of the thread, then the analysis becomes meaningless. You are showing a TIPS vs treasuries chart. It is clear based on common theory that TIPS outperform in isolation, because treasuries have more negative correlation with equities which is a benefit priced in by the market. So what were you trying to demonstrate.
Once again, not the topic of this thread. Did you read the linked article in the first post?
If I make a calculation error, #Cruncher probably will let me know.
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Re: Faber: T-bills & Chill...Most of the Time

Post by silvergga »

Eno Deb wrote: Sat May 11, 2024 9:07 pm Personally I don't trust TIPS. Historically there were long stretches of time where they significantly underperformed treasuries of similar duration even in real terms, then we had negative yields, and during the recent inflation spike they utterly failed since the price decline caused by the rising interest rates more than offset the principal adjustment. As far as I'm concerned TIPS haven't demonstrated yet that they are a better inflation hedge than stocks (or even T-Bills, as discussed above).

Another thing is that I don't really have a specific foreseeable "consumption liability" to match.

Anyway, for me this isn't so much about TIPS vs treasuries but about durations and risk/return tradeoffs.
You are just looking at TIPS wrong because you say you don’t trust it because it doesn’t protect you from inflation with its intermediate market price before the bond matures.

That is not what TIPS is about as it provides inflation protection from your purchase date to its maturity date.

TIPS is doing exactly as it’s supposed to and are perfectly fine for people who can afford to build a TIPS ladder, and have their non-TIPS money invested in stocks and other risk assets.
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Re: Faber: T-bills & Chill...Most of the Time

Post by bogles the mind »

watchnerd wrote: Tue May 14, 2024 1:06 am
comeinvest wrote: Tue May 14, 2024 1:04 am
watchnerd wrote: Tue May 14, 2024 12:59 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields.
Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Where did you put everything?
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

bogles the mind wrote: Wed May 15, 2024 7:07 pm
watchnerd wrote: Tue May 14, 2024 1:06 am
comeinvest wrote: Tue May 14, 2024 1:04 am
watchnerd wrote: Tue May 14, 2024 12:59 am
comeinvest wrote: Tue May 14, 2024 12:56 am
Nobody knew end of 2021 that treasury yields wouldn't keep sinking to zero or below, following international yields.
Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Where did you put everything?
I allocated funds (kept in MMF) to create an LMP TIPS ladder (still being built as missing rungs come up for auction) to last me until age 67, when I claim full SS.

Some remainder went into the risky bond allocation you see in my risk portfolio once yields stopped being negative real.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Faber: T-bills & Chill...Most of the Time

Post by silvergga »

watchnerd wrote: Wed May 15, 2024 7:46 pm
bogles the mind wrote: Wed May 15, 2024 7:07 pm
watchnerd wrote: Tue May 14, 2024 1:06 am
comeinvest wrote: Tue May 14, 2024 1:04 am
watchnerd wrote: Tue May 14, 2024 12:59 am

Eh, I dunno...

Seemed pretty clear by November 2021 that the Fed was going to pivot based on their public statements and their change in tone regarding inflation not being just 'transitory'.
In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Where did you put everything?
I allocated funds (kept in MMF) to create an LMP TIPS ladder (still being built as missing rungs come up for auction) to last me until age 67, when I claim full SS.

Some remainder went into the risky bond allocation you see in my risk portfolio once yields stopped being negative real.
Why not to 70? Just curious.
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

silvergga wrote: Wed May 15, 2024 8:00 pm
watchnerd wrote: Wed May 15, 2024 7:46 pm
bogles the mind wrote: Wed May 15, 2024 7:07 pm
watchnerd wrote: Tue May 14, 2024 1:06 am
comeinvest wrote: Tue May 14, 2024 1:04 am

In retrospect, it seems also "pretty clear" to me that what the Fed said had some relevance. It's much easier to predict the past than the future.
If you can reliably predict interest rates, you can be rich very soon, and no longer have to read message boards.
But your second half-sentence alone tells me that you are fooling yourself. By the time the Fed said something, that "something" was already priced into the forward yield curve with whatever likelihood the market judged that said "something" would occur, and to the extent it would occur. You would have had to come up with that crystal ball forecast before the Fed mentioned something, and reliably and repeatedly so, to have an edge.
Oh, I shifted my AA in July 2021, 4 months before the Fed made public statements.

Dumped all my intermediate and long nominal Treasuries, reduced my equity exposure from 70% to 40% (also because of pending retirement).
Where did you put everything?
I allocated funds (kept in MMF) to create an LMP TIPS ladder (still being built as missing rungs come up for auction) to last me until age 67, when I claim full SS.

Some remainder went into the risky bond allocation you see in my risk portfolio once yields stopped being negative real.
Why not to 70? Just curious.
I might fill in 68-70 later. Haven't decided if it's really even necessary given full SS (in current dollars) would cover 96% of our present cost of living.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Kevin M wrote: Wed May 15, 2024 4:38 pm
comeinvest wrote: Tue May 14, 2024 5:23 pm
Kevin M wrote: Tue May 14, 2024 11:16 am
comeinvest wrote: Tue May 14, 2024 1:10 am
Kevin M wrote: Sun May 12, 2024 8:35 pm
Really?

Image

I honestly didn't know what this chart would show when I created it, as I'm not too interested in bond funds at this point, so I haven't been doing these kinds of comparisons in quite awhile.
1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Not so. The time period covered has both:

Image
2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.
Both funds used by PV for these asset classes are intermediate-term duration.
3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.
I don't think you know how to read the chart. Deflation (month over month) is when the line is descending, inflation is when it is ascending. There was significant deflation in the 2009-2010 period, and the significant inflation in the 2020-2022 period was followed by significant deflation in the 2022-2023 period, for example.
The chart clearly says on the y axis "percentage change from year ago". Your statement is just plain wrong, and you are not reading the chart right.
All your statements in this post. The average inflation 2008-2010 was ca. 2-2.5%, similar to the entire period until 2021. There was no deflation in 2022-2023.
Last edited by comeinvest on Fri May 17, 2024 3:39 am, edited 1 time in total.
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Kevin M wrote: Wed May 15, 2024 4:38 pm
comeinvest wrote: Tue May 14, 2024 5:23 pmIf you strictly look at single assets in isolation "to stay the course" of the thread, then the analysis becomes meaningless. You are showing a TIPS vs treasuries chart. It is clear based on common theory that TIPS outperform in isolation, because treasuries have more negative correlation with equities which is a benefit priced in by the market. So what were you trying to demonstrate.
Once again, not the topic of this thread. Did you read the linked article in the first post?
Once again, the discussion becomes meaningless when not viewed within the context of a portfolio. The context provides an explanation for the outperformance of TIPS vs nominal treasuries. What else were you trying to demonstrate then. The original post and reference were not about TIPS in particular. I am unable to reconstruct how TIPS made it into this thread.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Kevin M »

comeinvest wrote: Fri May 17, 2024 3:29 am
Kevin M wrote: Wed May 15, 2024 4:38 pm
comeinvest wrote: Tue May 14, 2024 5:23 pm
Kevin M wrote: Tue May 14, 2024 11:16 am
comeinvest wrote: Tue May 14, 2024 1:10 am 1. This chart is not representative. It includes a period of unexpectedly and rapidly rising inflation, but no period of unexpectedly and significantly falling inflation.
Not so. The time period covered has both:

Image
2. Besides that, you would have to match durations for a performance comparison. You can argue you did that implicitly by comparing Sharpe ratios; but because of (1.) it's not clear where the difference in Sharpe ratios in your backtest came from.
Both funds used by PV for these asset classes are intermediate-term duration.
3. Thirdly, because almost every investor has equities as one of the primary asset classes in their asset allocations, what really matters is the performance of a combined equities + [TIPS or treasuries] portfolio. That is where treasuries usually win in the long run.
In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.
I don't think you know how to read the chart. Deflation (month over month) is when the line is descending, inflation is when it is ascending. There was significant deflation in the 2009-2010 period, and the significant inflation in the 2020-2022 period was followed by significant deflation in the 2022-2023 period, for example.
The chart clearly says on the y axis "percentage change from year ago". Your statement is just plain wrong, and you are not reading the chart right.
You are correct. I should have said "disinflation" instead of "deflation". It's also correct that when the line is below 0, there was net year over year deflation; i.e., net YoY inflation from Jul 2008 to Jul 2009 was -2.1% (negative inflation = deflation).

My statement about the slope of the line is correct for the index (not for YoY change), so let's look at that:

Image

Here we see significant deflation from Jul 2008 to Dec 2008, by which time the CPI was lower than it was in Jan 2008. We also see net deflation for the one-year period from Jul 2008 to Jul 2009, which we also see in the YoY chart.

So we have at least one example of extended deflation in the time period covered by the PV chart.

Let's take a step back and consider what the PV chart was responding to, which was a statement that nominals outperform TIPS in most scenarios. To investigate, I simply looked at the longest period available in PV, and we see that over this period the statement was incorrect.

Let's take an even bigger step back and consider what it would mean if the statement that nominals usually outperform TIPS would be generally true if we had more TIPS data.

My starting assumption is that the expected return of nominals and TIPS of the same duration is about the same, and that breakeven inflation is a reasonable proxy for expected inflation. Yes, there are some premia involved, but they are not observable and they tend to offset each other. If the expected returns were not about the same on a risk-adjusted basis, we'd expect the difference to be arbitraged away.

It follows that if nominals can be expected to generally outperform TIPS, then the market's inflation expectations as represented by BEI are generally too low. That would indeed be the case if the nominal inflation risk yield premium can reliably be expected to be larger than the TIPS liquidity risk yield premium. In this case, one would expect to be rewarded in the long run for taking more risk with nominals.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Faber: T-bills & Chill...Most of the Time

Post by FactualFran »

As to whether nominals usually outperform TIPS, here is a graph of the breakeven inflation of each new issue of 10-year TIPS at auction versus what the actual inflation to maturity has been, where the breakeven inflation is the difference between the auction yield of the TIPS and the reported 10-year nominal constant maturity yield for the auction date.

Image

Positive values indicate that actual inflation was higher than expected, in other words, TIPS did better than nominals. The number of times one did better than the other were about the same. In terms of the differences in the averages, when TIPS did better they did "more better" than when nominals did better.
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Re: Faber: T-bills & Chill...Most of the Time

Post by hudson »

FactualFran wrote: Fri May 17, 2024 7:16 pm As to whether nominals usually outperform TIPS, here is a graph of the breakeven inflation of each new issue of 10-year TIPS at auction versus what the actual inflation to maturity has been, where the breakeven inflation is the difference between the auction yield of the TIPS and the reported 10-year nominal constant maturity yield for the auction date.

Image

Positive values indicate that actual inflation was higher than expected, in other words, TIPS did better than nominals. The number of times one did better than the other were about the same. In terms of the differences in the averages, when TIPS did better they did "more better" than when nominals did better.
Thanks!
FactualFran, what's your plan?
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Re: Faber: T-bills & Chill...Most of the Time

Post by FactualFran »

hudson wrote: Sat May 18, 2024 6:38 am Thanks!
FactualFran, what's your plan?
My investment plan is along the lines of T-Bills & Chill. The only bonds I plan to buy going forward are T-Bills and one issue of TIPS that at maturity will be rolled to another issue that will mature 12 months later.
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Re: Faber: T-bills & Chill...Most of the Time

Post by hudson »

FactualFran wrote: Sat May 18, 2024 11:53 am
hudson wrote: Sat May 18, 2024 6:38 am Thanks!
FactualFran, what's your plan?
My investment plan is along the lines of T-Bills & Chill. The only bonds I plan to buy going forward are T-Bills and one issue of TIPS that at maturity will be rolled to another issue that will mature 12 months later.
Thanks!
T-Bills and TIPS: what's not to like!
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Re: Faber: T-bills & Chill...Most of the Time

Post by Kevin M »

FactualFran wrote: Fri May 17, 2024 7:16 pm As to whether nominals usually outperform TIPS, here is a graph of the breakeven inflation of each new issue of 10-year TIPS at auction versus what the actual inflation to maturity has been, where the breakeven inflation is the difference between the auction yield of the TIPS and the reported 10-year nominal constant maturity yield for the auction date.

Image

Positive values indicate that actual inflation was higher than expected, in other words, TIPS did better than nominals. The number of times one did better than the other were about the same. In terms of the differences in the averages, when TIPS did better they did "more better" than when nominals did better.
Nice. I remember doing something similar with FRED data. Ah, found it. Here's a similar chart for BEI and subsequent 10 year annualized inflation for BEI values from Jan 2003 through Mar 2012 (I did this in Mar 2022):

Image

Your chart is superior because we have auction data further back than we have FRED real CMT data, and you've added the two most recent years. Moderate recency bias (period covered by my chart) certainly would confirm the view of nominal outperforming TIPS, while your chart provides a more complete historical perspective.

One of the purposes of my analysis was to investigate BEI compated to year over year inflation as a predictor of subsequent inflation, which is seen here:

Image

Clearly BEI is a much better predictor than YoY inflation.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Faber: T-bills & Chill...Most of the Time

Post by comeinvest »

Kevin M wrote: Fri May 17, 2024 3:39 pm
comeinvest wrote: Fri May 17, 2024 3:29 am
Kevin M wrote: Wed May 15, 2024 4:38 pm
comeinvest wrote: Tue May 14, 2024 5:23 pm
Kevin M wrote: Tue May 14, 2024 11:16 am
Not so. The time period covered has both:

Image


Both funds used by PV for these asset classes are intermediate-term duration.


In this thread we're discussing an article the covered tactical timing for bonds only; stocks were not included in the articles analysis or recommendations. I'm trying to stay within the scope of the thread in my replies.
I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.
I don't think you know how to read the chart. Deflation (month over month) is when the line is descending, inflation is when it is ascending. There was significant deflation in the 2009-2010 period, and the significant inflation in the 2020-2022 period was followed by significant deflation in the 2022-2023 period, for example.
The chart clearly says on the y axis "percentage change from year ago". Your statement is just plain wrong, and you are not reading the chart right.
You are correct. I should have said "disinflation" instead of "deflation". It's also correct that when the line is below 0, there was net year over year deflation; i.e., net YoY inflation from Jul 2008 to Jul 2009 was -2.1% (negative inflation = deflation).

My statement about the slope of the line is correct for the index (not for YoY change), so let's look at that:

Image

Here we see significant deflation from Jul 2008 to Dec 2008, by which time the CPI was lower than it was in Jan 2008. We also see net deflation for the one-year period from Jul 2008 to Jul 2009, which we also see in the YoY chart.

So we have at least one example of extended deflation in the time period covered by the PV chart.

Let's take a step back and consider what the PV chart was responding to, which was a statement that nominals outperform TIPS in most scenarios. To investigate, I simply looked at the longest period available in PV, and we see that over this period the statement was incorrect.

Let's take an even bigger step back and consider what it would mean if the statement that nominals usually outperform TIPS would be generally true if we had more TIPS data.

My starting assumption is that the expected return of nominals and TIPS of the same duration is about the same, and that breakeven inflation is a reasonable proxy for expected inflation. Yes, there are some premia involved, but they are not observable and they tend to offset each other. If the expected returns were not about the same on a risk-adjusted basis, we'd expect the difference to be arbitraged away.

It follows that if nominals can be expected to generally outperform TIPS, then the market's inflation expectations as represented by BEI are generally too low. That would indeed be the case if the nominal inflation risk yield premium can reliably be expected to be larger than the TIPS liquidity risk yield premium. In this case, one would expect to be rewarded in the long run for taking more risk with nominals.
I think your sample period had on average more unexpected inflation than unexpected deflation.
Your assessment however is the same as my understanding of the theory. TIPS earn an illiquidity premium in relation to nominal treasuries; while nominal treasuries earn an inflation risk premium in relation to TIPS. In the long run it might be a wash; especially if adjusted for the actual risks taken in either case.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Doc »

"T-bills & chill...Most of the Time"

Given the current political climate with its high uncertainty of major market effects whether good or bad makes me play safe as possible in the short run. So my current philosophy is:

T-bills and Chill .. at least until November.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

Doc wrote: Mon May 20, 2024 11:07 am "T-bills & chill...Most of the Time"

Given the current political climate with its high uncertainty of major market effects whether good or bad makes me play safe as possible in the short run. So my current philosophy is:

T-bills and Chill .. at least until November.
This is actually not what the article advocates, i.e. holding T-bills because you're trying to hedge some future outcome.

The method discussed looks only at present data: T-bill rates vs bond yields, in the moment.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Doc »

watchnerd wrote: Mon May 20, 2024 11:43 am
Doc wrote: Mon May 20, 2024 11:07 am "T-bills & chill...Most of the Time"

Given the current political climate with its high uncertainty of major market effects whether good or bad makes me play safe as possible in the short run. So my current philosophy is:

T-bills and Chill .. at least until November.
This is actually not what the article advocates, i.e. holding T-bills because you're trying to hedge some future outcome.

The method discussed looks only at present data: T-bill rates vs bond yields, in the moment.
I understand. My point is that given the current short term uncertainty looking at long term data to make a decision may not be very useful. We didn't have this level of political uncertainty in the long term.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Faber: T-bills & Chill...Most of the Time

Post by watchnerd »

Doc wrote: Mon May 20, 2024 12:07 pm
watchnerd wrote: Mon May 20, 2024 11:43 am
Doc wrote: Mon May 20, 2024 11:07 am "T-bills & chill...Most of the Time"

Given the current political climate with its high uncertainty of major market effects whether good or bad makes me play safe as possible in the short run. So my current philosophy is:

T-bills and Chill .. at least until November.
This is actually not what the article advocates, i.e. holding T-bills because you're trying to hedge some future outcome.

The method discussed looks only at present data: T-bill rates vs bond yields, in the moment.
I understand. My point is that given the current short term uncertainty looking at long term data to make a decision may not be very useful. We didn't have this level of political uncertainty in the long term.
Whether uncertainty is higher or lower than normal, it's public information, and thus should be priced in.
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Re: Faber: T-bills & Chill...Most of the Time

Post by Kevin M »

comeinvest wrote: Mon May 20, 2024 4:04 am
Kevin M wrote: Fri May 17, 2024 3:39 pm
comeinvest wrote: Fri May 17, 2024 3:29 am
Kevin M wrote: Wed May 15, 2024 4:38 pm
comeinvest wrote: Tue May 14, 2024 5:23 pm I don't think there was significant unexpected deflation in this time period - it hovered around 2%-2.5% which was expected and implied before, until 2021. But there was significant unexpectedly high inflation 2022-2024 which boosted TIPS performance by probably 10% or more, just eyeballing the chart an integrating over the inflationary years.
I don't think you know how to read the chart. Deflation (month over month) is when the line is descending, inflation is when it is ascending. There was significant deflation in the 2009-2010 period, and the significant inflation in the 2020-2022 period was followed by significant deflation in the 2022-2023 period, for example.
The chart clearly says on the y axis "percentage change from year ago". Your statement is just plain wrong, and you are not reading the chart right.
You are correct. I should have said "disinflation" instead of "deflation". It's also correct that when the line is below 0, there was net year over year deflation; i.e., net YoY inflation from Jul 2008 to Jul 2009 was -2.1% (negative inflation = deflation).

My statement about the slope of the line is correct for the index (not for YoY change), so let's look at that:

Image

Here we see significant deflation from Jul 2008 to Dec 2008, by which time the CPI was lower than it was in Jan 2008. We also see net deflation for the one-year period from Jul 2008 to Jul 2009, which we also see in the YoY chart.

So we have at least one example of extended deflation in the time period covered by the PV chart.

Let's take a step back and consider what the PV chart was responding to, which was a statement that nominals outperform TIPS in most scenarios. To investigate, I simply looked at the longest period available in PV, and we see that over this period the statement was incorrect.

Let's take an even bigger step back and consider what it would mean if the statement that nominals usually outperform TIPS would be generally true if we had more TIPS data.

My starting assumption is that the expected return of nominals and TIPS of the same duration is about the same, and that breakeven inflation is a reasonable proxy for expected inflation. Yes, there are some premia involved, but they are not observable and they tend to offset each other. If the expected returns were not about the same on a risk-adjusted basis, we'd expect the difference to be arbitraged away.

It follows that if nominals can be expected to generally outperform TIPS, then the market's inflation expectations as represented by BEI are generally too low. That would indeed be the case if the nominal inflation risk yield premium can reliably be expected to be larger than the TIPS liquidity risk yield premium. In this case, one would expect to be rewarded in the long run for taking more risk with nominals.
I think your sample period had on average more unexpected inflation than unexpected deflation.
Yes, in thinking about it a bit, we can see that that's a truism if we use BEI as the measure of expected inflation. If realized inflation is higher than original BEI, TIPS will outperform, and vice versa. That's pretty much the definition of BEI.
Your assessment however is the same as my understanding of the theory. TIPS earn an illiquidity premium in relation to nominal treasuries; while nominal treasuries earn an inflation risk premium in relation to TIPS. In the long run it might be a wash; especially if adjusted for the actual risks taken in either case.
Yep.
If I make a calculation error, #Cruncher probably will let me know.
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