Ray Dalio on Bonds
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Re: Ray Dalio on Bonds
Thanks Mathjak107 and ahrunforthehills! Wise advice all around.
Re: Ray Dalio on Bonds
I suppose you could consider this approach as a plan B...
https://www.youtube.com/watch?v=E0GQ1Gx8YCw
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Re: Ray Dalio on Bonds
Another way to consider LTTs
LTTs are good for deflation and hopefully are a counter when stocks tube...but ultimately a bond ride is as stated before. You can expect the i-rate of the bond.
So given that.
Steady - the interest rate
Deflation - Some cap gains
Inflation - Some cap losses
So an argument against LTTs could be an old Meat Loaf song...2 outta 3 aint bad.
LTTs are good for deflation and hopefully are a counter when stocks tube...but ultimately a bond ride is as stated before. You can expect the i-rate of the bond.
So given that.
Steady - the interest rate
Deflation - Some cap gains
Inflation - Some cap losses
So an argument against LTTs could be an old Meat Loaf song...2 outta 3 aint bad.
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Re: Ray Dalio on Bonds
given a choice between deflation and inflation , the fed would shift the odds greatly over to inflation . we are already on an inflationary path as far as the fed goes
that is really the crux of the quandary..
so much is going on that is inflationary .
remember that steady interest rate is already a loss in real return .so you really have 2 against and one for
that is really the crux of the quandary..
so much is going on that is inflationary .
remember that steady interest rate is already a loss in real return .so you really have 2 against and one for
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Re: Ray Dalio on Bonds
If the fed doesn’t see inflation pickup in late 2020 or early 2021 they will almost certainly turn to another round of QE before anything else.mathjak107 wrote: ↑Fri Sep 25, 2020 5:20 am given a choice between deflation and inflation , the fed would shift the odds greatly over to inflation . we are already on an inflationary path as far as the fed goes
that is really the crux of the quandary..
so much is going on that is inflationary .
remember that steady interest rate is already a loss in real return .so you really have 2 against and one for
This should drop LTT yields (which is typically bullish for stocks). However, there is a strong possibility that yields rise quickly (as many remaining LTT bond holders will think that the long end of the yield curve has runout of gas.
That money will move into gold (which is essentially a 0% bond with no counter-party risk) and/or stocks.
LTT bonds do not correlate the same way at zero rates as they do at higher rates.
This is PRECISELY why they fed NEEDS inflation higher come hell or high-water. Another financial crisis at zero rates would be DEVASTATING. They need rates to get off the ropes to try and get an extra bullet or two into their gun. This is literally the purpose of the Federal Reserve.
There is a huge difference in effectiveness when you are running negative real yields vs negative nominal yields. Negative real yields (with non-negative nominal rate) supports the economy. Negative nominal yields would have very little stimulative effect.
So, I think that even if we could win with LTT going forward over the short-term, you would win with gold and/or stock as well. This makes LTT seem like an unnecessary risk all around.
Granted, bond convexity is powerful, however you would be taking a LOT of risk not only on the up/down bet of yields, but even if you win that bet you still need to hope that those gains don’t vanish quickly as the big-boys dump their positions on the market.
As I have said before, there are a lot of deflationary forces in the system. Banks are certainly not lending (and probably won’t be without a government guarantee for loans). As such, LTT looks pretty good in the short term. But make no mistake, you are betting against the fed big-time.
Does anyone here really think that the fed is incapable of inflation in a fiat monetary system?? Am I missing something here??
For argument sake, let’s pretend that the fed is completely helpless against deflation and you have slow growth. LTT does well, but so does gold (even more so when rates hit zero and below). What about deflation with fast growth? Stocks would outperform LTT.
Again, what am I missing besides a “you never know for sure what can happen” type of argument?? (which IMHO does deserve some allocation, but is not nearly strong enough of an argument to justify a 25% allocation in terms of risk).
Last edited by ahhrunforthehills on Fri Sep 25, 2020 1:52 pm, edited 1 time in total.
Re: Ray Dalio on Bonds
No, factually it is not...mathjak107 wrote: ↑Fri Sep 25, 2020 5:20 am given a choice between deflation and inflation , the fed would shift the odds greatly over to inflation . we are already on an inflationary path as far as the fed goes
that is really the crux of the quandary..
so much is going on that is inflationary .
remember that steady interest rate is already a loss in real return .so you really have 2 against and one for
https://fred.stlouisfed.org/series/M1
https://fred.stlouisfed.org/series/M1V
I'm not saying inflation won't happen down the line but I am saying it isn't happening now. Here are two graphs that, together, tell you if inflation is happening. Everyone knows about the top graph, but too few people understand both M1 and M1V have to be going up to have inflation. What you are seeing is just like what happened in 2008. The Fed is flooding the market with money and it isn't being used. Turns out the real economy actually matters and monetary theory only gets you so far.
So gentle readers, when both are going up, be worried. Until then, inflation isn't and won't be a thing.
For those interested in a deeper dive...https://open.lib.umn.edu/macroeconomics ... e%20period.
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Re: Ray Dalio on Bonds
This is correct. As I mentioned before, there are a lot of deflationary forces in the system and I expect that LTT yields will drop further as the fed tries to get control of the deflation. Again, banks are not lending. I heard that they have a 0.1% cost to carry a loan... but they still refuse to lend.Kbg wrote: ↑Fri Sep 25, 2020 8:47 amNo, factually it is not...mathjak107 wrote: ↑Fri Sep 25, 2020 5:20 am given a choice between deflation and inflation , the fed would shift the odds greatly over to inflation . we are already on an inflationary path as far as the fed goes
that is really the crux of the quandary..
so much is going on that is inflationary .
remember that steady interest rate is already a loss in real return .so you really have 2 against and one for
https://fred.stlouisfed.org/series/M1
https://fred.stlouisfed.org/series/M1V
I'm not saying inflation won't happen down the line but I am saying it isn't happening now. Here are two graphs that, together, tell you if inflation is happening. Everyone knows about the top graph, but too few people understand both M1 and M1V have to be going up to have inflation. What you are seeing is just like what happened in 2008. The Fed is flooding the market with money and it isn't being used. Turns out the real economy actually matters and monetary theory only gets you so far.
So gentle readers, when both are going up, be worried. Until then, inflation isn't and won't be a thing.
For those interested in a deeper dive...https://open.lib.umn.edu/macroeconomics ... e%20period.
The lower rates are AND the higher the risk of deflation, the more likely it is they will not recoup their investment if they have to foreclose a property. That is why I said that many of these deflationary forces are hard to fix without a government guarantee on the loans.
This is all great for LTT. As I said before, LTT looks pretty good in the short-term.
The problem is that betting on LTT is essentially a short-term bet. As a long-term bet, the upside/downside are too uneven. Timing your sale of LTT as you transition from the short-term bet to a long-term bet could be problematic for a typical retail investor.
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Re: Ray Dalio on Bonds
inflation is NOT only about money supply . in fact most inflation in our lives is not monetary inflation . it is supply ,demand and shortage price inflation .
things like lumber quietly shot up 80% . all the rebuilding from hurricanes , rioting and the wild fires has thrown lots of pressure on many commodities ...
workers getting sick or companies in the supply chain not able to function at 100% , shortages in lots of consumer goods all are creating inflationary pressures .
groceries have been way higher too. what has shown slow rises in inflation is energy falling .
Among the items that have seen the biggest price hikes in grocery stores are:
Beef and veal, up 25.1 percent
Eggs, up 12.1 percent
Pork, up 11.8 percent
Poultry, up 8.7 percent
all this has nothing to do with the money supply ....if we can stop the over use prices will fall . the problem is we cant stop over using things .
the cpi and our personal cost of living are very very different .... a cpi index has no regard for how many times i buy an item vs you . or the fact i may buy a higher priced item with bigger price increases but lasts 2x as long . it also does not consider what we are willing to sub out of class in our lives .
so a price change index is only comparing prices around the 1500 mini economies we have . it has nothing to do with your cost of living personally
things like lumber quietly shot up 80% . all the rebuilding from hurricanes , rioting and the wild fires has thrown lots of pressure on many commodities ...
workers getting sick or companies in the supply chain not able to function at 100% , shortages in lots of consumer goods all are creating inflationary pressures .
groceries have been way higher too. what has shown slow rises in inflation is energy falling .
Among the items that have seen the biggest price hikes in grocery stores are:
Beef and veal, up 25.1 percent
Eggs, up 12.1 percent
Pork, up 11.8 percent
Poultry, up 8.7 percent
all this has nothing to do with the money supply ....if we can stop the over use prices will fall . the problem is we cant stop over using things .
the cpi and our personal cost of living are very very different .... a cpi index has no regard for how many times i buy an item vs you . or the fact i may buy a higher priced item with bigger price increases but lasts 2x as long . it also does not consider what we are willing to sub out of class in our lives .
so a price change index is only comparing prices around the 1500 mini economies we have . it has nothing to do with your cost of living personally
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Re: Ray Dalio on Bonds
Mathjak makes a really good point. People like to say “inflation” and “deflation” as an all-or-nothing proposition. Different sectors have different rates across the board. Each person is impacted by those factors differently.
Not to mention how hedonics and geometric weighting skew it further. Afterall, self-driving car technology would technically be a deflationary force against the cost of everyday consumables (since you are getting more car for the same amount of money).
I suppose this is why the fed doesn’t come in with guns blazing too hard and takes a more measured approach. Inflation is a slippery slope.
Great posts guys.
Not to mention how hedonics and geometric weighting skew it further. Afterall, self-driving car technology would technically be a deflationary force against the cost of everyday consumables (since you are getting more car for the same amount of money).
I suppose this is why the fed doesn’t come in with guns blazing too hard and takes a more measured approach. Inflation is a slippery slope.
Great posts guys.
Re: Ray Dalio on Bonds
Don't disagree at all on a personal expenditures level. However, when we are talking about bonds and associated interest rates no one gives a crap about your personal economy, completely irrelevant. If I wanted to spend the time looking I'm sure I could find 4 things that price wise went the other direction and macro sets macro rates not micro.
But let's go with one price that impacts millions of people and is likely one of their largest if not largest expenditures consistently...https://www.macrotrends.net/2604/30-yea ... rate-chart
BAM...down 21% YoY.
But let's go with one price that impacts millions of people and is likely one of their largest if not largest expenditures consistently...https://www.macrotrends.net/2604/30-yea ... rate-chart
BAM...down 21% YoY.
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Re: Ray Dalio on Bonds
bottom line is still going to be how tlt does going forward vs more conservative diversified bonds from short to intermediate
Re: Ray Dalio on Bonds
Completely agree...and I do very much like a basic tenet of the PP and HB...we can’t predict the future. All we can do is evaluate risk vs. reward which is easy to do with bonds and cash, factor in our personal circumstances and make a choice. As an older guy I think dialing down duration makes the most sense, but if I was 25 it probably doesn’t matter as you simply want max return and can ride the cycle and invest new savings at higher interest rates which will work out fine over the long haul.
Re: Ray Dalio on Bonds
This has turned into an exceptionally high-quality thread thanks to you guys!
I'm not ready to "go there" yet but I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS. Of course he's anything but a PP'er, with ~33% bonds and everything else in small cap and value tilted fully internationally-diversified equity index funds. But I can see the wisdom of just giving up on yield from bonds and treating them as ballast. The Fed certainly wants us to do just that.
I'm not ready to "go there" yet but I can see why Jonathan Clements just split his bond allocation into half short-term Treasuries half short-term TIPS. Of course he's anything but a PP'er, with ~33% bonds and everything else in small cap and value tilted fully internationally-diversified equity index funds. But I can see the wisdom of just giving up on yield from bonds and treating them as ballast. The Fed certainly wants us to do just that.
Re: Ray Dalio on Bonds
Yeah, it’s tough out there. This circumstance was not in HBs historical data set guaranteed. Not even the Great Depression saw what we have going on now.
The allocation you refer to is pretty clear in its assumptions.
Interest rates going up, US large cap too expensive. If those are your assumptions, it makes sense.
I personally don’t believe in a small cap value premium at all. However, it’s clear from the evidence large cap tech and small cap value swap outperformance periods. A simple index or etf ratio plotted on stockcharts dot com will tell you if a move is underway along those lines.
The allocation you refer to is pretty clear in its assumptions.
Interest rates going up, US large cap too expensive. If those are your assumptions, it makes sense.
I personally don’t believe in a small cap value premium at all. However, it’s clear from the evidence large cap tech and small cap value swap outperformance periods. A simple index or etf ratio plotted on stockcharts dot com will tell you if a move is underway along those lines.
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Re: Ray Dalio on Bonds
To be honest, I definitely can't drink alcohol in this economic environment.
My logic says to not gamble and distance myself from LTT for long-term safety.
BUT...
I look at charts like this that show how many people are betting that rates have nowhere to go but up, and the contrarian in me would bet the farm that rates will continue to defy the masses once I had a couple shots in me:
https://hedgopia.com/wp-content/uploads ... /TYX-2.png
The lending standards are just ridiculously tight right now. It makes me wonder how can rates possibly go up short-term?
Other fun eye-candy... look at the short-positions against the Nasdaq recently:
https://hedgopia.com/wp-content/uploads ... /NDX-2.png
The markets are definitely not boring (despite what my wife says)!
My logic says to not gamble and distance myself from LTT for long-term safety.
BUT...
I look at charts like this that show how many people are betting that rates have nowhere to go but up, and the contrarian in me would bet the farm that rates will continue to defy the masses once I had a couple shots in me:
https://hedgopia.com/wp-content/uploads ... /TYX-2.png
The lending standards are just ridiculously tight right now. It makes me wonder how can rates possibly go up short-term?
Other fun eye-candy... look at the short-positions against the Nasdaq recently:
https://hedgopia.com/wp-content/uploads ... /NDX-2.png
The markets are definitely not boring (despite what my wife says)!
Re: Ray Dalio on Bonds
This is a really good discussion.
It brings to mind a paragraph out of the Intelligent Investor.
It brings to mind a paragraph out of the Intelligent Investor.
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Re: Ray Dalio on Bonds
My sub for long term treasuries is split between floating rate short term loans in The etf FLOT
VTIPS SHORT TERM TIPS
DBC COMMODITIES INDEX
The rest of the portfolio is 25% equities, ultra short term bonds 1-3 year treasuries, total bond and a high income fund with
250k in gold Gld riding shotgun
VTIPS SHORT TERM TIPS
DBC COMMODITIES INDEX
The rest of the portfolio is 25% equities, ultra short term bonds 1-3 year treasuries, total bond and a high income fund with
250k in gold Gld riding shotgun
Re: Ray Dalio on Bonds
OK it looks like we have a solution to the LTT interest rate problem. It pays 3% and comes with a free order of egg rolls and possibly a novel virus.
https://www.cnbc.com/2020/09/25/china-i ... -2021.html
https://www.cnbc.com/2020/09/25/china-i ... -2021.html
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Re: Ray Dalio on Bonds
so we still have the conflict between the ray dalio all weather portfolio which made no changes and is not only 40% long term treasuries but also 15% intermediate treasuries for a whopping 55% in bonds vs the fact bridgewater dumped TLT AND DALIO SEES NO POINT IN OWNING LONG TERM BONDS or even the 10 year ..
talk about investing confusion . you think either bridgewater or dalio would have changed the all weather.
i did a little instant x-ray this morning .
breaking out the two portfolio's i run and assigning the gold position to only the smaller inflation model i show the smaller inflation oriented model
is:
28% equities .
21% bonds split between vtip and flot
13% dbc commodities
38% gold gld .
on the other hand the larger conventional model is .
24 % equities
25% ultra short bond fund
17 % 1-3 year treasury fund
17% a total bond fund
17% high yield type fund .
so i have the smaller inflation weighted portfolio flying fighter cover over the larger conventional model since 50% of the smaller portfolio is in powerful inflaion weighted assets .
talk about investing confusion . you think either bridgewater or dalio would have changed the all weather.
i did a little instant x-ray this morning .
breaking out the two portfolio's i run and assigning the gold position to only the smaller inflation model i show the smaller inflation oriented model
is:
28% equities .
21% bonds split between vtip and flot
13% dbc commodities
38% gold gld .
on the other hand the larger conventional model is .
24 % equities
25% ultra short bond fund
17 % 1-3 year treasury fund
17% a total bond fund
17% high yield type fund .
so i have the smaller inflation weighted portfolio flying fighter cover over the larger conventional model since 50% of the smaller portfolio is in powerful inflaion weighted assets .
Re: Ray Dalio on Bonds
Not sure where I read this but my guess is it’s true...you don’t charge the fees they do with what is in Tony Robinson’s book.
Re: Ray Dalio on Bonds
The issue there is conflating the All Weather Portfolio, which is the name for a Bridgewater hedge fund that constantly changes it's allocation, with the All Seasons Portfolio, which is what Robinson calls the retail investor set-in-and-forget-it portfolio he came up with after talking with Dalio.
Adam at Movement Capital has a good short piece that echoes you comments Mathjak107 about how boneheaded it is to call a portfolio that doesn't defend against inflation "All Weather:"
https://movement.capital/history-of-tip ... onds-work/
Anyway both of your allocations sound great to me - better than the All Seasons and unlike the All Weather something that a retail investor has access to and can implement. Thanks for sharing your approach.
Adam at Movement Capital has a good short piece that echoes you comments Mathjak107 about how boneheaded it is to call a portfolio that doesn't defend against inflation "All Weather:"
https://movement.capital/history-of-tip ... onds-work/
Anyway both of your allocations sound great to me - better than the All Seasons and unlike the All Weather something that a retail investor has access to and can implement. Thanks for sharing your approach.
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Re: Ray Dalio on Bonds
I apologize if you already mentioned this, but what ratio do you have allocated between these 2 portfolio allocations? Are you 50%/50% in each allocation?mathjak107 wrote: ↑Sat Sep 26, 2020 5:58 am so we still have the conflict between the ray dalio all weather portfolio which made no changes and is not only 40% long term treasuries but also 15% intermediate treasuries for a whopping 55% in bonds vs the fact bridgewater dumped TLT AND DALIO SEES NO POINT IN OWNING LONG TERM BONDS or even the 10 year ..
talk about investing confusion . you think either bridgewater or dalio would have changed the all weather.
i did a little instant x-ray this morning .
breaking out the two portfolio's i run and assigning the gold position to only the smaller inflation model i show the smaller inflation oriented model
is:
28% equities .
21% bonds split between vtip and flot
13% dbc commodities
38% gold gld .
on the other hand the larger conventional model is .
24 % equities
25% ultra short bond fund
17 % 1-3 year treasury fund
17% a total bond fund
17% high yield type fund .
so i have the smaller inflation weighted portfolio flying fighter cover over the larger conventional model since 50% of the smaller portfolio is in powerful inflaion weighted assets .
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Re: Ray Dalio on Bonds
I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time
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Re: Ray Dalio on Bonds
Do these totals look about right?mathjak107 wrote: ↑Sat Sep 26, 2020 11:57 am I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time
25% Equities
17% Gold/Commodities
58% Fixed Income
based off of:
25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP
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Re: Ray Dalio on Bonds
Yes .most of the bonds are only slightly interest rate sensitive.ahhrunforthehills wrote: ↑Sat Sep 26, 2020 12:45 pmDo these totals look about right?mathjak107 wrote: ↑Sat Sep 26, 2020 11:57 am I am one third inflation model Two thirds conventional. Also have lots of cash going in all the time
25% Equities
17% Gold/Commodities
58% Fixed Income
based off of:
25.33% Equities
12.67% Gold
4.33% Commodities
16.67% Ultra Short Bond Fund
11.33% 1-3 Year Treasury Fund
11.33% Total Bond Fund
11.33% High Yield Type Fund
3.50% FLOT
3.50% VTIP