Why should I buy Treasuries now?

[BearBones]

Back to the original question, why LT treasuries now.  This question remains my biggest hang-up, as I am sure it is for many. You have provided sound advice about market timing Craig and MediumTex. But, for me, it is not as much a matter of timing as a concern about risk vs. reward, upside vs. downside. So please help me with this one; I probably have a serious flaw in my knowledge of bonds and/or my logic.

Here is an exaggerated example using round numbers. Since LT bonds are at historically low yields, there is not a lot of room left to fall. They are near the floor. If yields fell from around 4% to 0% (would probably signal the approach of Armageddon), that would translate to a return of about 120% for the 30 year bond, right, assuming price change approximates change in interest rate x duration? Such a return would not be trivial, but it is unlikely, and THAT WOULD BE IT after that. On the other hand, if rates climb, the sky is the limit, and the loss could rapidly approach 100%. Even it yields climbed back to levels of 7%, the loss would be about 90%. The same cannot be said of gold and equities for which, theoretically, the sky is the limit for returns, justifying their potential downside of 100% loss.

As far as the PP goes, then, the LT bonds are there to protect from a deflationary environment. But, at historically low yields, I wonder if their upside is enough to carry the portfolio and justify their risk. What would HB say?

[6 Iron]

As far as the PP goes, then, the LT bonds are there to protect from a deflationary environment. But, at historically low yields, I wonder if their upside is enough to carry the portfolio and justify their risk. What would HB say?

I cannot channel HB, but I suspect he would ask himself if there was another asset besides LT bonds that would do a better job of protecting the portfolio in a deflationary environment, or when interest rates are going down. At present, I do not see one. I am chastened by the Japan experience, and believe that they still represent a valuable component of the portfolio.

[craigr]

The losses are not linear. In the 1970- early 1980s rates climbed to over 10%. Yet, the portfolio value turned in real returns because of the gold allocation. No it was not a good decade for bond holders. But they didn't lose 90% of their value.

BTW. LT Bond rates fell below 2% during the Great Depression. So things can happen that nobody expects.

As for the LT bond debate. During this whole thing about the inevitability of bond rates rising and causing massive losses I have held onto my bonds. They have done nothing but pay me decent interest twice a year without complaint. At the same time the people hiding out in short term issues have been getting zero percent (or close to it). They may be right about LT bonds going up from here, but during all the gnashing of teeth I continue to collect interest payments and get capital appreciation as rates have fallen. The markets are just not predictable.

Even if you bought at the worst peak of the LT bonds in early 2009 (when they were around 2.5%) they posted a loss of -22% for the year. Yet the portfolio value in total posted +8% gains for the year (stocks went up sharply along with gold as interest rates recovered). Looking at assets in isolation it is easy to focus only on the -22% loss. But overall it meant nothing at all to the portfolio even if you were unlucky enough to buy at the absolute worst time for LT bonds for decades. Only total portfolio value matters.

But also remember that in 2008 when the markets crashed it was LT bonds that covered the portfolio losses. This was also a time when people said LT bonds were going to get killed due to inflation. They were wrong. So doing without LT bonds has its own risks.

[BearBones]

You folks are amazing! You respond so quickly, and your answers are so consistently grounded in impassivity about future market conditions.

Reminds me of asking my father, "Can I have a car?"
"No, there is no need for you to own a car at age 18."
"But what if I payed for gas?"
"No, there is no need for you to own a car at age 18."
"But what if I kept it at my friends."
"No, there is no need for you to own a car at age 18."
"But what if I took REALLY good care of it?"
"No, there is no need for you to own a car at age 18."

Hmm. Maybe I will ask the same question again in another thread...

What specifically do you mean by "the losses are not linear," Craig.

[MediumTex]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

[craigr]

What specifically do you mean by "the losses are not linear," Craig.

Meaning that rising interest rates do not equate to a linear loss in your bond prices. The maturity of the bond and coupon payment play into how much the bond will ultimately be affected by rising rates. I would have to sit down and work up a spreadsheet to calculate what kind of interest rates we'd need to see 90% loss in bond prices from today. But my off-the-cuff guess is they'd be very high that it would mean very bad inflation is taking place and at that point you better be holding gold.

To add to Tex's point. If we really have deflation now that means the paltry 4% the LT bonds are paying may be more like 6% real (assuming 1-2% deflation). So even though it may appear that bond yields are low, they may actually be at historic averages. There is simply no way to guess these things and if we get a Japan situation you'll think that 4-5% yield is a kingly sum.

It really is a tremendously bad idea to look at assets in isolation in any portfolio, but especially the Permanent Portfolio. It is designed to work with volatility for an advantage. Not owning all the assets breaks the protection IMO.

[craigr]

I would like to see Craig use some of his influence to talk with Cuggino amd get a PP ETF started.   ;D

Sadly, it is incredibly expensive to start a mutual fund. The layers of bureaucracy at the federal and state level is daunting. It is even more expensive to keep it going while you get enough assets to make it worth your time. You'd have to charge well in excess of 1% a year I think to get it to be workable. Even then, the operator will be paying much out of pocket expenses for backend bookeeping/compliance/etc. until you can get in the black.

I think there is a market for this type of fund, but doing so for a cheap enough price is the problem even assuming you get past all the regulatory hurdles.

[moda0306]

KevD & Others skeptical of LT Bonds,

I have one word for you: Japan.

I don't have time to look up details, but their national (public) debt is much higher than ours, and their Long-term bonds are now at 1% or so.  I'm not saying the US will go to 1%, but it could happen.  Imagine how much your 4.3% 30-years will return if that's the case for us?  Gold is all you need to hold for the opposite.  It's a machine... an almost perfect one at that.  In fact, only in times of prosperity would I feel the pressure to drop it... it's when you have currency issues that you're glad to have 25% gold, or deflationary spirals (tough to get out of) that you're glad you have 50% LT bonds and cash.

LT treasuries have excellent traits about them, and their disadvantages can be hedged against by owning gold & stocks.

Short of getting into options & other risky diversions, I don't think there's a better portfolio out there.  I try to tell people about it but their interest is limited.  Tough to swallow sometimes because I feel like I've found the golden goose.

[KevD]

I would like to see Craig use some of his influence to talk with Cuggino amd get a PP ETF started. 

Sadly, it is incredibly expensive to start a mutual fund. The layers of bureaucracy at the federal and state level is daunting. It is even more expensive to keep it going while you get enough assets to make it worth your time. You'd have to charge well in excess of 1% a year I think to get it to be workable. Even then, the operator will be paying much out of pocket expenses for backend bookeeping/compliance/etc. until you can get in the black.

I think there is a market for this type of fund, but doing so for a cheap enough price is the problem even assuming you get past all the regulatory hurdles.

If there was some reliable way of measuring demand, it seems one of the ETF sponsors could get it off the ground.

iShares seems the shoe-in.  They already have 4 funds that would work:

TLT - iShares Barclays
IAU - iShares COMEX Gold Trust
IVV - S&P 500 iShares
SHY - iShares Barclays 1-3 Year Treasury Bond Fund

Give it a reasonably low ER and advertise the hell out of it. 

Over the last few months, I've seen a fair amount of discussion of PP around the net, but almost everyone hates at least one asset class, and that keeps them from buying in to the concept.  To me, an ETF seems like a logical solution.  From iShare's point of view, it would have a double purpose of helping boost their gold and S&P 500 ETFs, which have been less popular than GLD or SPY.

[Snowman9000]

OK, thought exercise....
Who here would buy LT bonds if rates were 1%?
I really don't think I could do it. Things would be seriously bad at that point, IMO. 

[foglifter]

If there was some reliable way of measuring demand, it seems one of the ETF sponsors could get it off the ground.

iShares seems the shoe-in.  They already have 4 funds that would work:

TLT - iShares Barclays
IAU - iShares COMEX Gold Trust
IVV - S&P 500 iShares
SHY - iShares Barclays 1-3 Year Treasury Bond Fund

Give it a reasonably low ER and advertise the hell out of it.  

Over the last few months, I've seen a fair amount of discussion of PP around the net, but almost everyone hates at least one asset class, and that keeps them from buying in to the concept.  To me, an ETF seems like a logical solution.  From iShare's point of view, it would have a double purpose of helping boost their gold and S&P 500 ETFs, which have been less popular than GLD or SPY.

iShares could have boosted their gold and Treasuries ETFs much more easily - by including the two into their 25-free-trade-ETFs deal with Fidelity. By some obscure reason IAU and TLT haven't made it to the list, while EEM, EMB, TIP, and SCZ were included.

Talking about PP ETF as an idea overall - I think craigr outlined the situation perfectly: we PP followers read and talk about PP-related topics and at some point we get to the conclusion that "everybody talks about PP". But in reality we are very, very few - a far cry from what an ETF sponsor would have considered a substantial level of demand capable to justify administrative expenses.

[MediumTex]

We PP followers read and talk about PP-related topics and at some point we get to the conclusion that "everybody talks about PP". But in reality we are very, very few - a far cry from what an ETF sponsor would have considered a substantial level of demand capable to justify administrative expenses.

Remember, too, that there isn't much of a "story" to tell when it comes to the PP.

We are basically saying we have no idea what will happen in the future, which way the economy will go, what interest rates will do, etc.  We are professing utter and complete indifference about what the future may hold.

A fund like that would make a pretty boring road show.  

I have shared the PP concept with some pretty sharp money managers that I cross paths with professionally, hoping that they would see the elegance in its design, especially the way it takes the concepts of uncertainty and volatility and embraces them.  No luck...these guys don't get it either.  I'm not sure they want to get it.  If something that simple were to get out, it would put a lot of market wizards out of work.

I notice that people often have trouble even listening to a description of the thinking behind the PP; they get hung up on the individual assets and are not able to see the inter-relationships among the assets.  They want to start telling me how it's not a good idea before I am even finished describing it.

The PP is one of those things in life that rarely sinks in immediately.  It's like some kind of zen koan that one must ponder and meditate on for a while before the meaning begins to emerge.  That's one of the things I like about it...it is truly subtle in its conception and wise in its view of the world.  

Perhaps a PP MadLib to the lyrics of the Doors' "Texas Radio and the Big Beat" would provide a useful vehicle for telling someone about the strategy:

I wanna tell you about Texas Radio and the PP
Comes out of the Virginia swamps
Cool and slow with plenty of precision
With a structure that is narrow and hard to master

Some call the PP heavenly in its brilliance
Others, mean and scornful of the Wall Street dream
I love the friends I have gathered together in this internet forum
We have discussions in honor of our investments
This is the land where the Masters of the Universe died

The non-correlated asset Negroes in the forest brightly feathered
They are saying, "Forget Jim Cramer and his minions.
Live with us in forests of indifference toward future market conditions.
Out here on the perimeter there is no CNBC reception.
Out here we is stoned - until it's time to rebalance."

Listen to this, and I'll tell you 'bout the heartache
I'll tell you 'bout the heartache and the loss of capital
I'll tell you 'bout the hopeless bear market night
The meager food for souls forgot
I'll tell you 'bout the hedge fund manager with raw iron soul

I'll tell you this
No eternal reward will forgive us now for wasting our hard earned savings

I'll tell you 'bout Texas Radio and the PP
Soft drivin', slow and mad, like some new investing language

Now, listen to this, and I'll tell you 'bout the Texas
I'll tell you 'bout the Texas Radio
I'll tell you 'bout making non-correlated assets and volatility work for you
Wandering far from the dens of fortune tellers and thieves
I'll tell you 'bout the PP and its simple beauty

[Tortoise]

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

From an international sell-off of U.S. Treasury securities, perhaps?

When fear reaches critical mass, it creates a "run" on whatever is feared.  Human nature, I guess.  If enough of our foreign creditors come to the eventual realization that U.S. federal debt is a Ponzi scheme--and the biggest one ever, at that--they just might feel the urge to sell their dollars instead of sit on them.  If that were to happen, I'm guessing we'd see the dollar prices of a lot of goods and services start to get bid up by our foreign creditors.

Not sure how likely that scenario is, though.  If a sell-off happens, maybe it will happen slowly enough for the market to adjust to the change in novel and perhaps totally unforeseen ways.

[MediumTex]

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

From an international sell-off of U.S. Treasury securities, perhaps?

When fear reaches critical mass, it creates a "run" on whatever is feared.  Human nature, I guess.  If enough of our foreign creditors come to the eventual realization that U.S. federal debt is a Ponzi scheme--and the biggest one ever, at that--they just might feel the urge to sell their dollars instead of sit on them.  If that were to happen, I'm guessing we'd see the dollar prices of a lot of goods and services start to get bid up by our foreign creditors.

Not sure how likely that scenario is, though.  If a sell-off happens, maybe it will happen slowly enough for the market to adjust to the change in novel and perhaps totally unforeseen ways.

Here's what is important to think about when considering that scenario, though:

If everyone is selling treasuries, what are they going to be buying?  Greek debt? Irish debt? Latin American debt? Russian debt? Japanese debt? 

In other words, the U.S. only looks broke until you begin comparing it to other nations, and all of the sudden the U.S. doesn't look so bad.

[LNGTERMER]

I wanna tell you about Texas Radio and the PP
Comes out of the Virginia swamps
Cool and slow with plenty of precision
With a structure that is narrow and hard to master

Some call the PP heavenly in its brilliance
Others, mean and scornful of the Wall Street dream
I love the friends I have gathered together in this internet forum
We have discussions in honor of our investments
This is the land where the Masters of the Universe died

The non-correlated asset Negroes in the forest brightly feathered
They are saying, "Forget Jim Cramer and his minions.
Live with us in forests of indifference toward future market conditions.
Out here on the perimeter there is no CNBC reception.
Out here we is stoned - until it's time to rebalance."

Listen to this, and I'll tell you 'bout the heartache
I'll tell you 'bout the heartache and the loss of capital
I'll tell you 'bout the hopeless bear market night
The meager food for souls forgot
I'll tell you 'bout the hedge fund manager with raw iron soul

I'll tell you this
No eternal reward will forgive us now for wasting our hard earned savings

I'll tell you 'bout Texas Radio and the PP
Soft drivin', slow and mad, like some new investing language

Now, listen to this, and I'll tell you 'bout the Texas
I'll tell you 'bout the Texas Radio
I'll tell you 'bout making non-correlated assets and volatility work for you
Wandering far from the dens of fortune tellers and thieves
I'll tell you 'bout the PP and its simple beauty

bravo MT, awesome.

Edit:

Here's what is important to think about when considering that scenario, though:

If everyone is selling treasuries, what are they going to be buying?  Greek debt? Irish debt? Latin American debt? Russian debt? Japanese debt?

The relativity theorem as described by Einstein prevails here, the US is strong comparatively, a reaffirmation that the laws of physics do apply to ecomomics as well . I am really starting to see the wisdom of HB.

[Storm]

Man, what an awesome Doors song you just made up new lyrics to, MT.

Craig, you need to get a loop of that song where Jim Morrison isn't talking, just loop it in Garageband over and over again, and do your best Jim Morrison impression... 

[vnatale]

I am only resurrecting this nearly 10 year old Topic because it seems to be a frequently asked question at various times - LIKE NOW!


Vinny

[vnatale]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

This was an outstanding post within this Topic.....

Vinny

[Tortoise]

This was an outstanding post within this Topic.....

I'm sure you've noticed in your "forum archaeology" that MediumTex generated a disproportionately large number of outstanding posts here. The guy has a rare clarity of thought and expression.

[vnatale]

This was an outstanding post within this Topic.....

I'm sure you've noticed in your "forum archaeology" that MediumTex generated a disproportionately large number of outstanding posts here. The guy has a rare clarity of thought and expression.

Yes. But only later.

I first focused all on Craig. Read every single post he ever wrote on the Bogle Heads forum. Then, in the process, discovered here and read everything that we wrote here. Since he was a prolific poster in both places that took a fair amount of time.

It was only when I embarked on my forum archeology, I then discovered that Tex was Craig's equal. And, actually, upon joining this forum, it was Tex to whom I sent my first private message, thanking him for the book. At that time, I was unaware that he'd basically stopped participating.

Vinny

[AdamA]

It was only when I embarked on my forum archeology, I then discovered that Tex was Craig's equal. And, actually, upon joining this forum, it was Tex to whom I sent my first private message, thanking him for the book. At that time, I was unaware that he'd basically stopped participating.

Vinny

When I first discovered this forum I used to check every day to see if he had posted anything new. His stuff was really great. Articulate and thought provoking.

I wonder what happened to him.

[vnatale]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

[pmward]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

Yes stockcharts.com's "Perf Chart" includes total return with all distributions included. PortfolioVisualizer also does the same. Stockcharts.com a bit overkill for anyone that only wants to track performance, so unless you want the advanced charting abilities PortfolioVisualizer is probably the tool I would recommend.

[foglifter]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

Yes stockcharts.com's "Perf Chart" includes total return with all distributions included. PortfolioVisualizer also does the same. Stockcharts.com a bit overkill for anyone that only wants to track performance, so unless you want the advanced charting abilities PortfolioVisualizer is probably the tool I would recommend.

PV is a great tool, unfortunately their new business model removed the most interesting features from the basic account.

[Kevin K.]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

I just finished re-reading William Bernstein's "Deep Risk : How History Informs Portfolio Design." He has this to say about deflation:

"...deflation, while more rare [than inflation], carries with it, as demonstrated recently in Japan, a far more serious deep risk in the form of its potentially destructive effect on the real value of equities. (It's also a bit imprecise to think of "deflation" as the intrinsic nature of the risk; rather it's the underlying prolonged economic depressions that produce the deflation, along with catastrophic political and socioeconomic costs that typically accompany deflation). Three main ways of purchasing protection against deflation are available: Treasury bills and bonds; once again, international diversification [of equities]; and, paradoxically, gold, which, as the DMS database shows, appreciates more in real value with deflationary spirals than with severe inflation.

Unfortunately, inflation is a far more likely scourge, and a tilt towards long bonds and bills carries a very high cost should inflation occur. A related cost of long bonds and bills is foregone stock returns, and particularly foregoing the inflation protection offered by globally diversified equities against deflation. The best, and certainly the cheapest, way to defend against inflation is, once again, international diversification of stock holdings."

MT in the quote above says that LTT's are the ONLY protection against deflation and that's not so. Now admittedly deflation, which is a very rare event in the modern era, is looking a whole lot more possible now that at any time in the past 100 years, but that doesn't mean that LTT's paying 1.5% are the only defensive tool available to us.