Prices, Inflation/Deflation, Interest Rates & The Fed

Pendleton

Pelican
Peter Schiff hypothesized in his latest podcast that the strong pullback in interest rates from the recent highs (from 1.55% or 1.415%) may have been due to significant Fed intervention, which will show up on next week's balance sheet report. If we've already reached that level of debt monetization, I would expect the inflation trades to finally take off. Gold and silver in particularly might get a nice bounce from the recent strong pullbacks. At least, that is the trade I am going to try to make but with the acceptance that I may be trying to catch a falling knife.
 

Blade Runner

Pelican
I've done my part in nudging friends and family into crypto. A white pill I got not too long ago was somebody bought some DogeCoin due to the WSB antics. And yes, DCA is the way to go. People don't need to take out a mortgage to own a piece of Bitcoin.
This week is going to be the last real chance to grab BTC at a reasonable price. So tell your friends/family/etc. to get whatever they can, just get some.
 

tothepoint

Woodpecker
So which happens, scenario 1 or 2? Also, a responder told wonderboi that businesses don't always increase prices with increased demand, which is true ... for a while. So GDP may catch up.

I think there is too much tinkering and confusion for them to pull this off well. Something will give, and the market will get spooked. They can and have kept the game going (think of it, it's been a long time since 2009), and they can prolong it a bit, but anything beyond 15 months would shock me at this point. If we get to Fall without a 20%+ draw down, I will be 100% in cash of whatever my remaining paper assets are.

If you have a 5-10 year horizon it doesn't really matter. The wsb crowd is scared of the rising rates because they are into Chinese EV stocks with terrible fundamentals. Those will be the first to go, many have shaved 20% in the last week alone. Tesla, a meme stock at this point, will also take a beating.

Others like Amazon for example are already trading sideways since 8 months now while posting record profits. I wouldn't worry at all putting my money into this one during the next 18-24 months. It's just a matter of separating the winners from the losers, no need to rotate into other assets.
 
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At this point you have to be an outright fool, ignorant or lazy (or all of the above) to not own at least some BTC.

I have said for over 2 years that it's going to be the most obvious retrospective "Man, that was such an easy trade / was so obvious, I can't believe I didn't get in!!!" that we have ever seen.

No. You should consider your way of viewing investing or trading. After my many years I've learned it's all so variable from person to person. Look at @Arado and me. Other than some minor overlap we probably don't play in the same asset pools. That informs our experiences and so our opinions, interests, etc. THAT'S what's so great about this...I get some of the puzzle pieces I'm missing when I talk to him. No one has the total picture. Just in this thread alone I still remain VERY committed to there not being any inflation.

I also don't use BTC and I have no interest in it outside general observations for other markets. Fool, ignorant, or lazy? You tell me.
 
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Arado

Pelican
Gold Member
No. You should consider your way of viewing investing or trading. After my many years I've learned it's all so variable from person to person. Look at @Arado and me. Other than some minor overlap we probably don't play in the same asset pools. That informs our experiences and so our opinions, interests, etc. THAT'S what's so great about this...I get some of the puzzle pieces I'm missing when I talk to him. No one has the total picture. Just in this thread alone I still remain VERY committed to there not being any inflation.

I also don't use BTC and I have no interest in it outside general observations for other markets. Fool, ignorant, or lazy? You tell me.
That's fair though I would channel what George Gammon says - there's no certainties, only probabilities. We don't know what the future holds, but we have our own view of what's likely and what isn't. You have to structure your portfolio to reflect the relative probability you assign to different scenarios, whether inflation, deflation, hyperinflation, great depression 2.0, social collapse, economic boom, etc. Ultimately we don't know what the Fed will do or how geopolitics or other black swans will influence things, so it's about having a hedge for different scenarios.

Also important to separate out one's ideology from what one thinks is likely. On many Bitcoin debates I hear Keynesians opposing Bitcoin because they think the government should have a monopoly over money creation in order to pursue social justice goals and redistribution, rather than because they think Bitcoin has a flaw in the technology. They knew about Bitcoin years ago and then missed out on the gains because they opposed it ideologically. Many MMTers will strongly deny any hint of inflation in order to justify more printing and distribution, and in the meantime may stay in big tech or bonds which will get hammered in heavy inflation. There were also gold bugs in 2010 who hated what the Fed was doing so much that they sat out the equity rally. Try to stay objective.
 

aynrus

Kingfisher
That's fair though I would channel what George Gammon says - there's no certainties, only probabilities. We don't know what the future holds, but we have our own view of what's likely and what isn't. You have to structure your portfolio to reflect the relative probability you assign to different scenarios, whether inflation, deflation, hyperinflation, great depression 2.0, social collapse, economic boom, etc. Ultimately we don't know what the Fed will do or how geopolitics or other black swans will influence things, so it's about having a hedge for different scenarios.

I wonder if here's any free tool to do some portfolio modeling involving extreme events.
I posted portfoliocharts.com before, which models drawdown and all kinds of other parameters, but this backtests on US data going back 50 years/down to 1971, I believe - which should include somewhat high inflation in the 70s but not hyperinflation or collapse.
 
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Source

Book (PDF downloadable)
"Dying of Money: Lessons of the Great German and American Inflations" by Jens O. Parsson


AAA post, thanks for link to Dying of Money pdf book
 

aynrus

Kingfisher
This article discusses risks of hyperinflation and deflation to portfolio and mentions additional angle on precious metals - taxes.
IRS considers gold and silver "collectibles" and imposes maximum long term capital gains tax - 28%, which includes ETFs.
(general long-term capital gains tax rates are 0, 15 and 20% - having modest income one can keep tax at 0%)
Investing in miners isn't subject to 28% collectibles taxation, by the way.
After applying 28% capital gains rate for US persons, the returns on precious metals over long periods are a lot lower than on real-inflation-adjusted declining-trend charts, even.

Sprott advertises PSLV, structured as trust, as Canadian PFIC offering means to lower capital gains tax to 15-20% - but US persons have to be aware that investing in PFICs can be a real tax complexity nightmare, and a double whammy if state-level taxation is involved, something Sprott won't discuss, I guess. (some avoid PFICs like a plague due to IRS alone)

Believing Gold is a Reliable Inflation Hedge​

Gold does not have nearly the reputation of a financial crisis savior as widely assumed. For those who may refuse to even consider this possibility (i.e., gold bugs), the reasons are:

  1. The fact that gold does not always appreciate in value, as many claim or imply.
  2. The fact that gold exposes owners to 28 percent long-term capital gains taxes which, in hyperinflation, cause you to owe real taxes on hyperinflated, paper “gains.”
  3. The fact that governments throughout history have penalized gold ownership or resorted to financial repression, such as forcing citizens to sell their gold to the government at below-market rates.
  4. The fact that even such inflation “protection” as gold does provide often arrives so late that it was not at all helpful while inflation was in full swing.
 

aynrus

Kingfisher
About structuring portfolio against inflation, deflation and extreme events.

There had been "Permanent portfolio" invented back in 1980s by Harry Browne, which was supposed to withstand a lot of extreme events (arguably not real collapse, though). After high inflation of the 70s this was a very hot topic - though further big inflation didn't materialize and if someone stuck to Permanent portfolio since the 80s they'd have missed on huge stock market gains in subsequent years (as soon as they were able to hold through the drawdowns) - but Permanent portfolio kept low risk.

Permanent portfolio was: 25% stocks (Browne recommended sticking to major index funds tied to general stuff like S&P), 25% Treasury bonds, 25% "cash" (meant treasury bills or CDs), and 25% precious metals.
- notice that portfolio was designed in the early 80s, right after gold and silver price collapse, though not at the bottom yet - which was an ok entry point, but just few years earlier precious metals entry would lead to huge permanent losses in that portion of investment.
It seems like Browne did not realize that gold/silver would never regain those peak 1979 inflation-adjusted values. Modeling is here:
Heat map is of interest, especially.
Start date sensitivity (SDS) - very important, the smaller % the better
Drawdown chart
Max drawdown: 14%, max duration of drawdown: 5 years, SDS: 5.5% (low/good),
average "real" return (official inflation-adjusted): 5.2%,
1 standard deviation return: 5.2%+/-7.1 = -1.9% to +12.3% range,

This was somewhat similar to: "Let every man divide his money into three parts, and invest a third in land [real estate], a third in business [stocks] and a third in reserve. [cash-like instruments, which included gold at that time as gold was money]” - except the Permanent portfolio does not include real estate.

Based on Permanent, "All weather portfolio" was created, which consists of: 55% U.S. bonds, 30% U.S. stocks, and 15% hard assets (Gold + Commodities). Modeling for one version is here:
Max drawdown: 16%, max duration of drawdown: 10 years, SDS - 15.1% (bad)
average "real" return (official inflation-adjusted): 5.7%,
1 standard deviation return: 5.7+/-7.9 = -2.2% to 13.6%

Golden Butterfly, a balanced one that offers higher returns while low risk:
20% total stock market (such as S&P-tied), 20% (small cap value stocks), 20% long term bonds, 20% short term bonds, 20% precious metals (or split with REITs)
Max drawdown: 11%, max duration of drawdown: 3 years, SDS - 6.6% (low),
average "real" return (official inflation-adjusted): 6.5%,
1 standard deviation return: 6.5+/-7.9 = -1.4% to 14.4%


The modeling (most of which is actual backtest) above includes 70s inflation but does not include Venezuela-style hyperinflation/collapse or Great Depression. (I think holy texts' recommendations would be more suitable as they include large percent of real estate).
Even in that modeling above replacing gold with REITs seems to improve portfolio performance and ranking.
Can enter 100% gold or 100% REITs into my-portfolio design section of that site and see performance. Gold has 78% drawdown, max decades, REITs show max 51% drawdown and max 7 years.

Would be interesting to see some extreme events (and prolonged ones) modeling on portfolios.
 
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Arado

Pelican
Gold Member
About structuring portfolio against inflation, deflation and extreme events.

There had been "Permanent portfolio" invented back in 1980s by Harry Browne, which was supposed to withstand a lot of extreme events (arguably not real collapse, though). After high inflation of the 70s this was a very hot topic - though further big inflation didn't materialize and if someone stuck to Permanent portfolio since the 80s they'd have missed on huge stock market gains in subsequent years (as soon as they were able to hold through the drawdowns) - but Permanent portfolio kept low risk.

Permanent portfolio was: 25% stocks (Browne recommended sticking to major index funds tied to general stuff like S&P), 25% Treasury bonds, 25% "cash" (meant treasury bills or CDs), and 25% precious metals.
- notice that portfolio was designed in the early 80s, right after gold and silver price collapse, though not at the bottom yet - which was an ok entry point, but just few years earlier precious metals entry would lead to huge permanent losses in that portion of investment.
It seems like Browne did not realize that gold/silver would never regain those peak 1979 inflation-adjusted values. Modeling is here:
Heat map is of interest, especially.
Start date sensitivity (SDS) - very important, the smaller % the better
Drawdown chart
Max drawdown: 14%, max duration of drawdown: 5 years, SDS: 5.5% (low/good),
average "real" return (official inflation-adjusted): 5.2%,
1 standard deviation return: 5.2%+/-7.1 = -1.9% to +12.3% range,

This was somewhat similar to: "Let every man divide his money into three parts, and invest a third in land [real estate], a third in business [stocks] and a third in reserve. [cash-like instruments, which included gold at that time as gold was money]” - except the Permanent portfolio does not include real estate.

Based on Permanent, "All weather portfolio" was created, which consists of: 55% U.S. bonds, 30% U.S. stocks, and 15% hard assets (Gold + Commodities). Modeling for one version is here:
Max drawdown: 16%, max duration of drawdown: 10 years, SDS - 15.1% (bad)
average "real" return (official inflation-adjusted): 5.7%,
1 standard deviation return: 5.7+/-7.9 = -2.2% to 13.6%

Golden Butterfly, a balanced one that offers higher returns while low risk:
20% total stock market (such as S&P-tied), 20% (small cap value stocks), 20% long term bonds, 20% short term bonds, 20% precious metals (or split with REITs)
Max drawdown: 11%, max duration of drawdown: 3 years, SDS - 6.6% (low),
average "real" return (official inflation-adjusted): 6.5%,
1 standard deviation return: 6.5+/-7.9 = -1.4% to 14.4%


The modeling (most of which is actual backtest) above includes 70s inflation but does not include Venezuela-style hyperinflation/collapse or Great Depression. (I think holy texts' recommendations would be more suitable as they include large percent of real estate).
Even in that modeling above replacing gold with REITs seems to improve portfolio performance and ranking.
Can enter 100% gold or 100% REITs into my-portfolio design section of that site and see performance. Gold has 78% drawdown, max decades, REITs show max 51% drawdown and max 7 years.

Would be interesting to see some extreme events (and prolonged ones) modeling on portfolios.
Interesting portfolio - when in the 70's do they start? If all the way at the end then the bond trade may come out positive as we've been in a 40 year bond bull market. But even Buffett has turned sour on bonds. If we're facing a scenario like the 70s then most financial advisors will be unprepared with their 60/40 stocks bonds portfolios. The average person owns very little gold.

 

Blade Runner

Pelican
Do REITs have to advertise somewhere when they can liquidate and pay off shareholders, at the latest? I've talked to people about this and I find it odd when they can't tell him how long the REIT is legally allowed to hold their money, at a maximum at least.
 

aynrus

Kingfisher
Interesting portfolio - when in the 70's do they start? If all the way at the end then the bond trade may come out positive as we've been in a 40 year bond bull market. But even Buffett has turned sour on bonds. If we're facing a scenario like the 70s then most financial advisors will be unprepared with their 60/40 stocks bonds portfolios. The average person owns very little gold.

All their portfolio modeling and backtest starts from 1970.
I mentioned Heat Map as a very good chart to look at for each, it shows that -
you can see performance by start year.

I plotted these 3 portfolios using another tool, Portfolio Analyzer, and seems like Golden Butterfly performs much better than the other 2 while having higher 50-year Sharpe ratio (means it uses less risk for same returns).
Golden Butterfly seems riskier at first as it has higher drawdown (but very short max drawdown duration) - from the charts, though, looks like at the drawdown lowest point the value still stays above other 2 portfolios - bigger drawdown is minimized by higher earlier returns. (this is of course based on at least several years of hold time)

As to bonds (treasury): here are chart and table for US stocks/bonds going back to 1874 that I found (real monthly returns) - 20/80 means 20% stocks/80% bonds.
In the 1940s was another bad time for bonds returns. Stock-heavier portfolios perform better even when risk-adjusted over long periods - assuming no collapse when stocks would just become worthless while treasury bonds would not default yet. During Nazi Germany hyperinflation stocks supposedly retained and even gained inflation-adjusted value as some claim. That's why Golden Butterfly performs better, while having same risk as other 2 - at least based on 50 years of data.
Risk versus returns chart below, based on 1970 to now, Golden Butterfly is the best:

longtermportfolioreturns.jpgportfolioreturnstable.jpg
 
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aynrus

Kingfisher
Do REITs have to advertise somewhere when they can liquidate and pay off shareholders, at the latest? I've talked to people about this and I find it odd when they can't tell him how long the REIT is legally allowed to hold their money, at a maximum at least.
I'd personally only deal with publicly-traded REITs, you an just sell shares/liquid. Any REIT liquidation info should be in the Prospectus.
If it's not there, I'd check Private Placement Memorandum/contact Investor Relations department and ask which document provides this info, also would ask about share redemption clause. If info isn't easily accessible upfront I wouldn't deal with it... My understanding that non-publicly traded REITs usually have required holding period in the lines of 10 years, after that they'd liquidate, which might be replaced by being listed on exchange instead.
Of course it can go into bankruptcy (market crash + too leveraged), in this case equity holder gets the money after the creditors, same as regular company.
 

Arado

Pelican
Gold Member
This is an interesting tweet thread by Raoul Pal admitting that currency is debasing, but 'hard assets' like gold and real estate aren't keeping up while BTC and big tech are, creating a weird mix of deflation and inflation. I think there may be validity to it, but let's see what happens in this next round of printing.



 

aynrus

Kingfisher
Couple threads here on why inflation hurts society:




Also good charts in this report showing best asset classes during inflation:

View attachment 29584
View attachment 29585

Have to disagree with those who provided the last/chart table.... simply not true. Stocks consistently outperform inflation or at least keep up with it over last 90 years - over a long term, they have short drawdowns. Gold is declining and is not keeping up with inflation over a long term. (inflation in USD), except during relatively short runs up in price.
I'd be very careful about anyone making statements such as "In Gold we trust" aka affiliated/in business of precious metals sales or simply trying to prop up the asset they bought during previous high and suffered real losses on. These particular people disclaim about their numerous affiliations with gold-related businesses/conflict of interest.

Tax rate is also a factor in performance against inflation, and US max fixed long-term capital gains tax rate of 28% applied to precious metals is a serious factor - one can have much lower rate on other investments, in fact can have 0% rate if they have moderate total income.

As to Safedean, he starts off saying all the right things but then goes into pretty scammy-sounding pitch: "Only with bitcoin can you plan for the future. Only with bitcoin can you repel the fiat vampires draining your lifeblood. ".

Mark Moss responded to him:
The tragedy is the lost opportunity costs from all these entrepreneurs who should be "specializing" in being the best brain surgeon or solving another big problem, but instead can only use half of their focus because the other half has to be on investing to beat inflation
Expressionless face
- actually, all these 'brain surgeons'' 401K did quite well and kept up with inflation in 2020 so far, and they hardly spent any time managing them.

These "death of fiat" proclamations just can not be serious... Inflation is nothing new, and panic brings all kinds of scammers out of the woodwork. Nothing new, business as usual, US had high inflation in the 70s and survived just fine, same about other countries that have/had much worse inflation. Inflation spikes/money devaluation actually existed before fiat, during gold/silver money times, due to mass gold importation. The governments can put the foot down any time, ban crypto, and gone overnight will be high BTC valuations, one can just secretly trade zillion of crapcoins then (or play online poker). Ponzi schemes and all kinds of "safe haven" pushers always flourish during increased inflation times, nothing new here too. They really hate the word diversification, and every one of them has the one and only solution.

As to destroying the system and fiat...as evil as the system is, it'll outlive anyone betting against it now, I'm pretty sure of that one. They just locked up entire world population in pens, put dog muzzles on them and injecting them with unkown poisons (there will be no traveling between countries soon without poison injection, most likely)...these folks are a lot more than a one trick pony and will deal with anything that threatens their system. Means if crypto starts to pose a real treat (rather than being online trading game and potential tax-producing cow that it is now), they'll deal with it overnight.

It really boils down to: what percent of their savings one can invest into risky/very volatile speculative assets, with understanding they might need to exit that timely. Generally 1-3%, I believe, same as day trading risk management rule.
 
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