Bonds and the PP -- still make sense?

[mathjak107]

LTT getting closer to zero increases the risk of future inflation. Why would it not?

Not exactly. HB’s explanation of the PP was that LTT yields tend to go lower when the market expects deflation in the future, and higher when the market expects inflation in the future. So if LTT yields approach zero, that would suggest the market has deflationary expectations.

Will inflation come eventually? Almost certainly. I just have no confidence in my ability to predict when it will arrive, so I choose to remain fully invested in all four PP assets at all times. Makes my life a lot simpler and more worry-free.

Like Kriegs said, if LTTs take a hit, one or more of the other three assets will probably dampen the blow eventually. The PP is a single diversified portfolio, not a collection of four separate portfolios.

he only problem is while the pp is one overall portfolio , when two or more of those powerful movers happen to move in the same direction as a trend the portfolio can move as much as 80-100% equities .

we have so much more effecting bonds and gold then just economic outcomes ...
like we saw in march , margin calls and lack of liquidity killed bonds and gold as stocks plunged ....you have machines doing 80% of all trades in a day with no regard for much other then their own software

[Tortoise]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

[mathjak107]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

At least they used to

[Tortoise]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

At least they used to

They still do.

[Kriegsspiel]

mathjak seems to make some money playing the short game, no shade there. I just like to put some of my money on cruise control and accept the returns it gives. Like the quant analyst at the hedge fund who said he has all his money in the total market index. Well... not like that at all, but the same ethos.

[mathjak107]

The problem is after a while even moderate downturns on large dollars become insane amounts .....a mere 7% drop today when fuel tanks are full for me represents a decade of maxing out my 401k at catch up ..


So as the dollars you deal with get bigger , protecting that money from these drops becomes important ....with me at 68 and my wife at 70 these spectacular dollar rides ain’t no fun ...

So after a nice run up like we had the last few years and being at all time highs there are things I will consider more risky at times that other times are the safer path .....


I am not comfortable with long term bonds at these levels ...I think the downside far exceeds any likely upside or protection .

I think gold may actually work out well and is way less riskier in my opinion than TLT .....

I still own loads of bonds but nothing that is overly interest rate sensitive

[Kriegsspiel]

The problem is after a while even moderate downturns on large dollars become insane amounts .....a mere 7% drop today when fuel tanks are full for me represents a decade of maxing out my 401k at catch up ..


So as the dollars you deal with get bigger , protecting that money from these drops becomes important ....with me at 68 and my wife at 70 these spectacular dollar rides ain’t no fun ...

So after a nice run up like we had the last few years and being at all time highs there are things I will consider more risky at times that other times are the safer path .....


I am not comfortable with long term bonds at these levels ...I think the downside far exceeds any likely upside or protection .

I think gold may actually work out well and is way less riskier in my opinion than TLT .....

I still own loads of bonds but nothing that is overly interest rate sensitive

budd, you're posting under the wrong account again.

[Smith1776]

budd, you're posting under the wrong account again.

lol

[ahhrunforthehills]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

I think that using TIME as a factor oversimplifies these dynamics. TIME is not what realigns correlations, it is the underlying factors.

This situation is the equivalent of building a teeter-totter on a hill. The lower rates get, many more external factors start coming into play which impact correlations (or lack thereof).

Fun fact, in case you were unaware, in 1981 Browne was advising people to adjust their holdings based on expected inflation levels. He had 6 different options of varying levels of deflation/inflation. Long story short, he would have advised 5% LTT if you were “Uncertain” about inflation levels going forward. It looks like he advised an LTT allocation of -10% (yes, that is a NEGATIVE) if you expected “Rising Inflation” (and by -15% if you were expecting “Runaway Inflation”).

1981 was of course the very end of a 30+ year LTT rate increase from 2.09% to 14.14% that began around 1946.

After he wrote those words, yields went from 14.14% in 1981 to 0.74% in 2020. Not a surprise at all that he later up’d his LTT allocation to 25% in the middle of that falling rate environment.

Harry Brown seemed to suffer from the same recency bias as every other human. He literally came up with the PP in the midrange of those interest rates coming down.

If I split the difference between Harry Brown #1 (recency bias of rising rates) and Harry Browne #2 (recency bias of falling rates) I still come up with about 10% LTT holdings (if not less)

Harry Browne today would have dumped the 4x25 PP in a heartbeat as LTT interest rates approach zero. No doubt.

[boglerdude]

What was going on culturally from 66-86 when inflation was over 2%

These days millions of us are obsessing daily about the inflation number. So how did the Fed get away with being over 2%

[mathjak107]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

I think that using TIME as a factor oversimplifies these dynamics. TIME is not what realigns correlations, it is the underlying factors.

This situation is the equivalent of building a teeter-totter on a hill. The lower rates get, many more external factors start coming into play which impact correlations (or lack thereof).

Fun fact, in case you were unaware, in 1981 Browne was advising people to adjust their holdings based on expected inflation levels. He had 6 different options of varying levels of deflation/inflation. Long story short, he would have advised 5% LTT if you were “Uncertain” about inflation levels going forward. It looks like he advised an LTT allocation of -10% (yes, that is a NEGATIVE) if you expected “Rising Inflation” (and by -15% if you were expecting “Runaway Inflation”).

1981 was of course the very end of a 30+ year LTT rate increase from 2.09% to 14.14% that began around 1946.

After he wrote those words, yields went from 14.14% in 1981 to 0.74% in 2020. Not a surprise at all that he later up’d his LTT allocation to 25% in the middle of that falling rate environment.

Harry Brown seemed to suffer from the same recency bias as every other human. He literally came up with the PP in the midrange of those interest rates coming down.

If I split the difference between Harry Brown #1 (recency bias of rising rates) and Harry Browne #2 (recency bias of falling rates) I still come up with about 10% LTT holdings (if not less)

Harry Browne today would have dumped the 4x25 PP in a heartbeat as LTT interest rates approach zero. No doubt.

exactly my sentiments ...it reaches a point that betting on negative rates is a speculation and no longer part of the traditional process where lower rates and economic slow down go hand in hand and counted on like night follows day .

you can only take the elevator to the lowest floor and then the steps have to be counted on to get to the sub basement .... then counting on disabled folks to take the steps to get to the sub basement ....it likely won't happen much .

... my opinion is we entered a different world then harry ever pictured .....

i remember we laughed at having a 5-1/4% passbook account . who knew lol...

so i simply replaced the bond portion of the pp but kept everything else pretty much .

the model i use is 21.20 % equities but uses a fund with a higher beta than an index fund up 24% ytd ,,, 25% ultra conservative bond fund , 19% short term treasury fund 1-3 years , 18% total bond fund , 18% managed high income fund ( numbers rounded )

then i keep 250-300k in gold riding herd .

[Kevin K.]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

I think that using TIME as a factor oversimplifies these dynamics. TIME is not what realigns correlations, it is the underlying factors.

This situation is the equivalent of building a teeter-totter on a hill. The lower rates get, many more external factors start coming into play which impact correlations (or lack thereof).

Fun fact, in case you were unaware, in 1981 Browne was advising people to adjust their holdings based on expected inflation levels. He had 6 different options of varying levels of deflation/inflation. Long story short, he would have advised 5% LTT if you were “Uncertain” about inflation levels going forward. It looks like he advised an LTT allocation of -10% (yes, that is a NEGATIVE) if you expected “Rising Inflation” (and by -15% if you were expecting “Runaway Inflation”).

1981 was of course the very end of a 30+ year LTT rate increase from 2.09% to 14.14% that began around 1946.

After he wrote those words, yields went from 14.14% in 1981 to 0.74% in 2020. Not a surprise at all that he later up’d his LTT allocation to 25% in the middle of that falling rate environment.

Harry Brown seemed to suffer from the same recency bias as every other human. He literally came up with the PP in the midrange of those interest rates coming down.

If I split the difference between Harry Brown #1 (recency bias of rising rates) and Harry Browne #2 (recency bias of falling rates) I still come up with about 10% LTT holdings (if not less)

Harry Browne today would have dumped the 4x25 PP in a heartbeat as LTT interest rates approach zero. No doubt.

This is a really great post! And I really appreciate the points you and mathjak107 are driving home here - including that with no disrespect for Harry Browne's genius both he and his recommendations were products of their time - how could it be otherwise?

What I've come around to - and I'm nowhere near as well-versed in the entire body of Browne's work (radio shows, interviews, etc.) as you folks are - is the view that the principles Browne taught (diversification of assets based on economic conditions, not just backtesting, a healthy distrust of both Wall Street and Washington, etc.) are "Permanent" but the 4 x 25% isn't.

[PrimalToker]

If you look at short timeframes on the order of days or a few months, I agree.

If you look at longer timeframes on the order of a couple of years or more, I think PP assets moving together tend to eventually separate and go their own ways again.

I think that using TIME as a factor oversimplifies these dynamics. TIME is not what realigns correlations, it is the underlying factors.

This situation is the equivalent of building a teeter-totter on a hill. The lower rates get, many more external factors start coming into play which impact correlations (or lack thereof).

Fun fact, in case you were unaware, in 1981 Browne was advising people to adjust their holdings based on expected inflation levels. He had 6 different options of varying levels of deflation/inflation. Long story short, he would have advised 5% LTT if you were “Uncertain” about inflation levels going forward. It looks like he advised an LTT allocation of -10% (yes, that is a NEGATIVE) if you expected “Rising Inflation” (and by -15% if you were expecting “Runaway Inflation”).

1981 was of course the very end of a 30+ year LTT rate increase from 2.09% to 14.14% that began around 1946.

After he wrote those words, yields went from 14.14% in 1981 to 0.74% in 2020. Not a surprise at all that he later up’d his LTT allocation to 25% in the middle of that falling rate environment.

Harry Brown seemed to suffer from the same recency bias as every other human. He literally came up with the PP in the midrange of those interest rates coming down.

If I split the difference between Harry Brown #1 (recency bias of rising rates) and Harry Browne #2 (recency bias of falling rates) I still come up with about 10% LTT holdings (if not less)

Harry Browne today would have dumped the 4x25 PP in a heartbeat as LTT interest rates approach zero. No doubt.

This is a really great post! And I really appreciate the points you and mathjak107 are driving home here - including that with no disrespect for Harry Browne's genius both he and his recommendations were products of their time - how could it be otherwise?

What I've come around to - and I'm nowhere near as well-versed in the entire body of Browne's work (radio shows, interviews, etc.) as you folks are - is the view that the principles Browne taught (diversification of assets based on economic conditions, not just backtesting, a healthy distrust of both Wall Street and Washington, etc.) are "Permanent" but the 4 x 25% isn't.

I am not convinced HB would change his views based on today's environment, I've been re-listening to the HB radio shows which is his most recent thinking I think he would stick to 4x25 and say its all the same speculation he's heard for 5 decades claiming one asset had reached its end and to move into another. People said the same things "Can rates go lower?" "Rates are only up from here" "What about inflation?" "Is the LTT bull run is over?". The mere asking of these questions means you're speculating and predicting the future. You don't buy the bonds based on yield or what is happening in the economy, you buy the longest bonds you can no matter what because that is the best deflation protection you can buy at the time. He's also said if you're philosophically opposed to government bonds, buy the longest corporate bonds with the highest credit ratings, doesn't need to be treasuries.
The PP is based on the economic conditions from Austrian economics (the business cycle). Inflation, Deflation, Prosperity, Recession. If you don't agree with Austrian economics then the PP won't agree with you haha. However substituting a deflation asset like LTTs for another deflation asset such as STTs or even cash I think HB would agree it wouldn't break the PP but he would say you would lose the "kick" the long bonds give you during deflation.
Whether you stick with LTTs or move to cash it doesn't really matter, you're going to do better than the average investor out there.

[mathjak107]

We can’t make assumptions about what Harry would or wouldn’t do ....but we can draw our own conclusions based on all the info out there ..discussing Harry’s moves today is irrelevant , he ain’t here.

We are pretty much on our own here ....we all need to decide for ourselves and not count on what Harry would have done or not ...there is very strong logic out there as to why it could be a very risky bet to continue to hang out in Tlt ....

You may have more users today breaking ranks on long term bonds then ever before

[ahhrunforthehills]

Whether you stick with LTTs or move to cash it doesn't really matter, you're going to do better than the average investor out there.

You can say the same thing about buying hurricane insurance if you live in Michigan. But, at a certain point, the cost of the insurance just becomes a silly bet. I am trying to protect ALL of my dollars, not just some of them.

Choosing to believe that the HB PP will provide you with safety going forward is fine. Some people need to believe in an afterlife for the same psychological reasons. Feeling "safe" is a huge psychological need.

Personally, I try not to get too hung up on Browne, I need to see graphs and data so I can make real risk-adjusted decisions. In fact, the points I made about Browne were because I think that you have 2 different kinds of people on this forum.

Some are literally following what Browne wrote as if he was some type of prophet. His message supposedly timeless (keep in mind if Dalio died last year, people would still be following his now outdated advice). I was pointing out that his views were certainly not timeless even in his own investing timeline (and him being older for his most recent views does not necessarily translate into wiser).

Also keep in mind that some people here take Browne's "philosophy" with a grain of salt. Some of us already had a similar investment strategy without Harry Browne (after-all, there are tons of people that have a balance of stock/intermediate treasuries/gold that never even heard of HB). Others may have found it researching lazy portfolios in a simba spreadsheet. Either way, some of us had the RESEARCH lead us to a similar ALLOCATION as Browne had. From there we found this forum. It was NOT from some simplified "set in stone" economic cycles and the debatable narrative that went around it.

In other words, the SAFETY ALLOCATION that led us here, is now leading us away from here. It isn't performance chasing. In fact, it is the opposite.

From my perspective, Harry Brown's PP should simply be treated like a well-behaved child. You can feel pretty safe trusting it during regular times... but if the house is on fire, you better keep an eye on it.

For example, correct me if I am wrong, but if you had some 1946 Hungary inflation where prices doubled every 15.6 hours, in a HB PP you would just keep trading in that gold for more of that awesome Hungarian paper.

The safety of the PP can be an illusion in abnormal situations. We are currently in an abnormal situation.

[Kriegsspiel]

From my perspective, Harry Brown's PP should simply be treated like a well-behaved child. You can feel pretty safe trusting it during regular times... but if the house is on fire, you better keep an eye on it.

All well and good. I know when I first started with it, we were talking about similar stuff (IIRC it was adding 5% to stocks and taking it away from gold, and adding international stocks).

For example, correct me if I am wrong, but if you had some 1946 Hungary inflation where prices doubled every 15.6 hours, in a HB PP you would just keep trading in that gold for more of that awesome Hungarian paper.

The safety of the PP can be an illusion in abnormal situations. We are currently in an abnormal situation.

Just before I got here, a guy named Clive was making that argument (but where gold was the declining asset that you kept rebalancing into as it went to 0).

[mathjak107]

Big difference though with the bonds .....we hit the ground floor ..it is not just business as usual and rates fall ....this time and this close to zero may very well be the this time is different scenario .....it is a totally different game in my opinion

[ahhrunforthehills]

Big difference though with the bonds .....we hit the ground floor ..it is not just business as usual and rates fall ....this time and this close to zero may very well be the this time is different scenario .....it is a totally different game in my opinion

+1

[Kevin K.]

So then the question becomes what to do with the bond and cash allocation, as well as if any tweaks are in order with the other assets.

If one is going to stick with 100% Treasuries it's hard for me to see any argument for anything longer in duration than Tbills given the yield curve. At ~.13% interest it's easy to see the appeal of, say, an equally safe short-term CD from Ally Bank or Navy Federal Credit Union paying .80-.90% and of course maxing out the 10K yearly limit for iBonds is a no-brainer.

Beyond that I really don't know. Locking in a negative nominal return for short-term TIPS doesn't appeal. A truly heretical thought would be to put up to 20% in a short-term corporate bond fund for some real return on part of what is after all a 50% bond and cash allocation in the PP. The Fed is backstopping corporates in a massive way and Powell made it clear last Friday that they intend the current interest rate situation to persist for years to come.

Any other bright ideas?

[Kriegsspiel]

I'm thinking about getting a mortgage.

[drumminj]

I'm thinking about getting a mortgage.

Isn't that basically shorting the dollar, with leverage?

[Kriegsspiel]

It might be a bright idea! Ideally I'd use my VA loan to buy a multifamily property where the rent from the other units will cover all of my housing expenses. And after a year I have the option of moving out and renting the unit I was living in for cash flow.

I also like the idea of buying a house in need of a total rehab and fixing it up myself while living in it, but I can't use the VA loan for something like that.

[ahhrunforthehills]

I don’t think I could ever get into real estate now. The government was just way too quick to halt evictions during a downturn without compensation to landlords. Not to mention, if things don’t get better economically, property taxes will probably get nasty.

I think the safest approach currently is either 25% stock, 25% gold, and 50% STT if you are thinking a MAJOR crash is fairly possible in the next few years. 30%/30%/40% if you think the stock market isn’t facing a major crash (or go for a 2:1 stock to gold ratio of 40/20/40 if you are feeling extra bullish).

I don’t think you necessarily need LTT when Gold can basically pull the same wagon.

https://www.listenmoneymatters.com/wp-c ... eather.jpg

[mathjak107]

I'm thinking about getting a mortgage.

Isn't that basically shorting the dollar, with leverage?

actually a mortgage is neutral by itself .. it is what you buy with it that is the investment with leverage ... as an example , if i bought bonds with that mortgage money the mortgage is not an inflation hedge .