Gyroscopic Investing

U.S. Treasuries not the safe bet they once were, research says

They found that investors did not, as they had during previous episodes of global financial stress, pile into Treasuries and drive up their value. Instead, investors marked down Treasury securities, much as they did for bonds from other countries.

I'm not sure what to make of this, if anything.

Xan wrote: ↑Mon Aug 26, 2024 1:40 pm U.S. Treasuries not the safe bet they once were, research says

They found that investors did not, as they had during previous episodes of global financial stress, pile into Treasuries and drive up their value. Instead, investors marked down Treasury securities, much as they did for bonds from other countries.

I'm not sure what to make of this, if anything.

Isn't it irrelevant if you hold them to term?

But that is not the Permanent Portfolio way. This introduces the desired volatility but seemingly only in one direction?

I agree that investors in general should question the basic assumption that U.S. treasury bonds are free of credit risk. (So hold gold.) On the other hand, I don't see a better alternative when it comes to having an asset that reacts positively to falling rates and deflation.

Then again, I actually hold Canadian treasury bonds.

Smith1776 wrote: ↑Mon Aug 26, 2024 5:52 pm I agree that investors in general should question the basic assumption that U.S. treasury bonds are free of credit risk.

I don't question the basic assumption that U.S. treasury bonds are free of credit risk. Or any other country that issues debt repayable in its own currency - they can always print more. Now excessive printing may lead to other problems such as inflation, but that is not a credit default. If a country issues debt payable in another country's currency (e.g. bonds issued by Argentina government with a promise to be repaid in US dollars), then there is credit risk.

coasting wrote: ↑Tue Aug 27, 2024 9:24 pm

Smith1776 wrote: ↑Mon Aug 26, 2024 5:52 pm I agree that investors in general should question the basic assumption that U.S. treasury bonds are free of credit risk.

I don't question the basic assumption that U.S. treasury bonds are free of credit risk. Or any other country that issues debt repayable in its own currency - they can always print more. Now excessive printing may lead to other problems such as inflation, but that is not a credit default. If a country issues debt payable in another country's currency (e.g. bonds issued by Argentina government with a promise to be repaid in US dollars), then there is credit risk.

All seems correct to me.

I understand that perspective but don't necessarily agree.

The last time the U.S. defaulted on its debt was 1971, and the time previous to that was 1933. We often paint this narrative that these were simply changes or repudiation to the gold standard, but in reality, they were simply defaults.

Smith1776 wrote: ↑Wed Aug 28, 2024 3:39 pm I understand that perspective but don't necessarily agree.

The last time the U.S. defaulted on its debt was 1971, and the time previous to that was 1933. We often paint this narrative that these were simply changes or repudiation to the gold standard, but in reality, they were simply defaults.

Those were indeed defaults, but none of them were defaults on a fiat currency with debt denominated in that currency. THAT regime only started as a result of the 1970s default.

Xan wrote: ↑Wed Aug 28, 2024 4:08 pm

Smith1776 wrote: ↑Wed Aug 28, 2024 3:39 pm I understand that perspective but don't necessarily agree.

The last time the U.S. defaulted on its debt was 1971, and the time previous to that was 1933. We often paint this narrative that these were simply changes or repudiation to the gold standard, but in reality, they were simply defaults.

Those were indeed defaults, but none of them were defaults on a fiat currency with debt denominated in that currency. THAT regime only started as a result of the 1970s default.

I was alive and alert during 1971. I don't remember any default. I do remember Nixon imposing price controls.

A dollar went from being redeemable for 1/35 oz of gold to being redeemable for... nothing. That's a default.

Xan wrote: ↑Wed Aug 28, 2024 4:08 pm

Smith1776 wrote: ↑Wed Aug 28, 2024 3:39 pm I understand that perspective but don't necessarily agree.

The last time the U.S. defaulted on its debt was 1971, and the time previous to that was 1933. We often paint this narrative that these were simply changes or repudiation to the gold standard, but in reality, they were simply defaults.

Those were indeed defaults, but none of them were defaults on a fiat currency with debt denominated in that currency. THAT regime only started as a result of the 1970s default.

Great points, both of you.

Who are the bond vigilantes?

ochotona wrote: ↑Fri Nov 22, 2024 11:19 am Who are the bond vigilantes?

Just glancing at all these recent titles seems to indicate that the bond vigilantes still seem to have their power:


https://www.npr.org/2024/11/14/nx-s1-51 ... -investors

Actually, any bond investor who is acting as a momentum trader using moving averages or whatever method is a bond vigilante... you don't have to be acting in concert with the big dogs.

The article doesn't convince me that Treasuries aren't still (in the immortal J.M. Lawson quip) "the best horse at the glue factory" but I do think that there hasn't been a compelling argument for owning LTT's for many years now.

The question then, for non-purists, is what to do instead. I think all of the reasons given to avoid anything other than Treasuries still apply, so corporates and mixed-quality funds like BND are out. The original argument to hold LTT's for deflation protection made sense as far as it went, except that deflation is a rare event in the U.S. and allocating a full 25% to buy insurance against it is stupid (see William Bernstein's comprehensive discussion in his book "Deep Risk"). I could see 10% - maybe - when and if the yield curve isn't inverted anymore.

Personally I've gone with 20% VTIP, 15% VGIT and 5% cash (SGOV) in my modified Golden Butterfly. TIPS of course weren't around when the PP was invented. Of course I know the arguments against them (not enough market history, no help in a flight to safety, etc.) but the fact of the matter is that short-term TIPS (VTIP's duration is ~2 years) offer by far the best response to sudden or unexpected inflation. VTIP has also trounced both short and intermediate nominal Treasuries since its inception in 2012 and did better during the 2022 bond market massacre than any other bond fund I know of.

Would be interested in hearing what other "non-purists" are doing.

I don’t know if it has come up, but for me it gets increasingly difficult & unttractive to hold LTT as I get older. The other assets, no problem.

Same with me, I don't enjoy owning LTTs, but I continue to do so. 20%.

Not sure I trust tips, in fact I know I don't. The CPI they are indexed against is subject to too much manipulation. They continually change its definition and miraculously it always results in lower inflation output. Its also put out by the famous BLS folks, the ones that have to revise jobs reports 50% on a frequent basis.

Doesn't make any sense to me to not trust TIPS but trust nominal Treasuries, given that they are issued by the same entity.

And the performance of VTIP speaks for itself. There are good reasons it's the only TIPS fund used in Vanguard's retirement portfolios.

> deflation is a rare event

Will be dumping LTTs when Fed starts buying long again. If they dont I'm screwed. That why I keep asking why some countries have 20% inflation with 20% rates instead of 2% and 2%

Funny, I was thinking of starting a new topic, named "Whither TLT?" or some such thing. Apparently, of all the ETFs out there, TLT was one of the (if not THE) single hardest hit over the last few years, and the value of my TLT holdings was underwater by 33% not terribly long ago (now it's "merely" worth 18% less than what I put into it... yay??). I suppose I could try and DCA my way out of it, but I've been trying that for years, and it never seems to get better for long. I know, the HBPP preaches the long view and ignoring it but for 1-2 times a year. LTT is barely 15% of my total PP mix (so it hasn't hit the rebalancing triggers yet) and while I know I should take advantage of the bargains, I've been burned before, and yearly. Does anyone have any sage words of advice - are things going to get better for LTT? Keep DCA'ing and hang in there? Retool my PP? What?

Hal French wrote: ↑Fri Nov 29, 2024 1:04 am Does anyone have any sage words of advice - are things going to get better for LTT? Keep DCA'ing and hang in there? Retool my PP? What?

Well, HB said in his radio show that one asset class will always be performing poorly. But... it doesn't make it any easier to tolerate. A family member in our self-managed retirement account is very risk adverse, so we chose a Vanguard LifeStrategy Fund (VDCO) and Gold to make this issue less "visible".

Have a look at the LifeStrategy Fund and its approximate constituents. Would getting results such as VDCO be easier to tolerate? If so perhaps consider a US version of VDCO?

Note we don't have a TLT equivalent ETF here, so we use an allocation of ~50% Intermediate bonds in lieu of 25% LTT & 25% Cash. VDCO is 30/70 Equity/Intermediate Bonds.

Even though intermediate bonds don’t do the job *from a pp perspective* I like buying them because I can likely get my money back before I die. I’m not sure why I’m so comfortable with an infinite time horizon regarding equities and gold, but perhaps it’s simply because they eventually perform.

I don’t want my wife to be stuck with long term bonds.

Kevin K. wrote: ↑Thu Nov 28, 2024 6:21 pm Doesn't make any sense to me to not trust TIPS but trust nominal Treasuries, given that they are issued by the same entity.

Sure it does. They both have a non zero default risk, sure, but Nominal Treasurys are a fixed rate, locked in for the life of the instrument.
Tips are adjusted up and down based on government statistics. They are effectively a floating rate instrument, with a 'fixed' component, except that fixed component can be erased by the government statistic should it indicate 'deflation'. A government statistic that they like to tweak the definition of due to political whims, and calculated by government bureaucrats that can't make it in the private sector. Remember, TIPs can actually turn negative and lower principal value.

Far more opportunity for molestation with a TIP than a nominal Treasury.

Hal French wrote: ↑Fri Nov 29, 2024 1:04 am Does anyone have any sage words of advice - are things going to get better for LTT? Keep DCA'ing and hang in there? Retool my PP? What?

Stay the course. Maybe trim the position, but I wouldn't jump out. The most dangerous sentence in investing is 'This time its different'.

The stock market will crash. War will escalate somewhere. Treasurys will be a safe haven asset, and the 30 year's yield will go down. I've already taken the losses, I TLHd, and now im gonna enjoy the interest payments.

I find it helpful to occasionally revisit Browne's stated reasons for the four assets in the PP (this summary is from Wikipedia):

"25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund.
25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means U.S. Treasury bills.
25% in precious metals (gold) in order to provide protection during periods of inflation. Browne recommends gold bullion coins."

While it's called the "Permanent" portfolio I think it's actually very much a product of the time when it was created (and as we know, there were several other allocations Browne applied the same name to anyway). There was no Total Stock Market fund at the time, no TIPS and we were in the midst of what turned out to be a 40+ year bond bull market.

As William Bernstein and others have pointed out, the four economic scenarios Browne was concerned about are not even close to being equally likely to occur, and have radically different costs to ensure against. Prosperity is the most likely scenario, historically - which is why the Golden Butterfly ups the equities to 40%. Inflation is the next biggest threat, but as we also know Browne was mistaken in claiming that gold is an effective inflation hedge. Stocks CAN be, over many decades, but otherwise the only asset in the PP that helps with it is the T-Bills. IMHO T-Bills and short TIPS are likely a better option still (or just replacing 80-100% of the entire portfolio with a 30 year TIPS ladder offering over 4% real SWR at today's rates). Recession is the next most likely scenario and cash is indeed a good hedge, though again allocating a full 25% of the portfolio to combat a situation that is, historically, not likely to be long-lived is questionable. Deflation is the least likely scenario: it has happened just twice in U.S. history (1930-33 during the Great Depression and briefly from 2007-2009 during the GFC). It makes the least send of all to allocate a full quarter of the portfolio, at great expense, to combat this least likely scenario.

I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise. I think the GB is a significant improvement on the original PP but historically it has worked even better if you switch out the bond barbell with a true intermediate term (i.e. 5 year not 10) Treasury fund like VFITX. But the biggest improvement comes from not just upping the stocks but including SCV and in so doing creating a stock allocation that is going to be successful without relying on the outsized returns from a few big tech firms as TSM is.

Kevin K. wrote: ↑Fri Nov 29, 2024 9:15 am As William Bernstein and others have pointed out, the four economic scenarios Browne was concerned about are not even close to being equally likely to occur,
…
I mean I get the appeal of equal weighting in terms of simplicity and rebalancing but IMHO it makes no sense otherwise.
…

It’s an agnostic portfolio, and I think having an equal weighting is more about having proper protection than about predicting the future or calculating the likelihood of one event occuring.

Imaging wearing linen armor instead of kevlar because, well, the risk of getting shot is unlikely. I think that’s the protection that some long term bonds will bring instead of something closer to 25%.

Of course, that protection comes at a cost: underperforming something like a 100% equities portfolio. It’s not like buying inexpensive life insurance with a large payout. You get a smooth ride but are very likely to underperform, even though the pp has shown to perform decently over time if you stick with it.

I could be wrong, but that’s how I see it. I don’t think it’s only about simplicity.

P.S. I reread this, Kevin, and thought that it might look like I thought you were pushing for LTTs but as a smaller proportion. That is not the case. It’s simply why I think Harry didn’t link % of assets to probabilities of events.