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Old 05-30-2012, 05:33 AM   #61
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I'm enjoying watching a very bright light being shined into some unexplored places.
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Old 05-30-2012, 07:47 AM   #62
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...(snip)...
I guess he's much more responsive to and more collaborative with his audience. Compare that to guys like Bernstein who eventually stopped posting at Bogleheads, or guys like Swedroe who got tired of being called out. I know they're not economists, but off the top of my head I can't even think of an economist who posts to discussion boards and has a blog... let alone one who promptly answers reader's e-mails.

I'm enjoying watching a very bright light being shined into some unexplored places.
I appreciate people such as Bernstein and Swedroe even though they tend to be broadcasters of their ideas with only a mild tilt to interactive. However, they do tend to respond to short questions. Swedroe seems to really like responding when the interaction gets rough, I think he loves an argument.

Phau could be a breath of fresh air. I appreciate his candor. At Bogleheads it gets so long and contentious because some Bogleheads like to go on ... and on ... and on. Many of them don't seem to know how to make a concise point. I just turn it off after awhile. Here is an example, on a PE10 thread I posted a chart which showed the extreme increase in standard deviation of average 10 year earnings over recent years. Some Bogleheads got it but many seemed to totally ignore the points. They preferred to go on ... and on ... and on making their points. Well they don't call this stuff social forums for nothing I guess. I have to be patient and realize this is part cocktail hour chatter.
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Old 05-30-2012, 09:03 AM   #63
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The chart below is from a Bill Gross article of August 2003 that I saved. I think you might be able to get the full Outlook article by going to his Pimco site and looking in the archives. The chart shows government short term Treasury real rates and the idea is that the government can totally control the short term rates. Financial repression is then defined (I think) as when those real rates go negative for long periods. Currently the government is even pushing to control longer term rates. The current 3mo Tbill real yield is roughly 0.08% - inflation, or roughly the negative of the inflation rate.

BTW, I'd highly recommend Gross's monthly Outlook articles. Many people (several Bogleheads) kind of hate his guts but he is not referred to as the "bond king" for nothing. He cannot predict the future but IMO he is entertaining and insightful at times. Link to his articles: PIMCO | Insights - Investment Outlook
Hi Lsbcal!

I am familiar with the PIMCO work, and I perhaps their "new normal" is another way of describing the financial repression scenario we are currently in, or some related variant. Honestly, I cannot get through Gross's Outlooks sermons - they are just too wordy for me. I occasionally read one, and maybe I get his points, but they are often lost on me. Plus, he was so off last year on his avoidance of US Treasuries. His concerns were that interest rates would rise? This goes against the Financial Repression scenario, so with Gross I end up confused. And I'm just not willing to parse his difficult language when he seems (to me at least) terribly inconsistent.

Jeremy Grantham 7 year forecast does seem to illustrate the Financial Repression scenario as he predicts real returns for several bond classes* as negative over the next 7 years.



Several of my Morningstar buddies point out that Grantham's forecast is focused on Govt bonds, and ignores other fixed income types such as Corporate bonds, Muni bonds, and High-yield debt. Personally, only a portion of my bond allocation is Govt bonds, and that more in Municipal and GNMA - not much in Treasury bonds and none in TIPs. I'm not worried about interest rate risk in the near future, and I'm hoping the more diversified bond allocation plus >50% allocation to equities including REITs will help me get through this "financial repression" era.

* Grantham's Bond Asset Classes (from http://whitecoatinvestor.com/gmo-real-return-forecasts/)

US Bonds = Treasury Bonds
Intl Bonds = International Govt Bonds
Emerging Debt = Emerging Market Bonds
Index Linked Bonds = TIPS
Cash = Cash/Treasury Bills

FWIW - link to updated April 30, 2012 GMO forecast can be found on this page: http://www.gmo.com/America/MyHome/

Audrey
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Old 05-30-2012, 09:41 AM   #64
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Hi Lsbcal!

I am familiar with the PIMCO work, and I perhaps their "new normal" is another way of describing the financial repression scenario we are currently in, or some related variant. Honestly, I cannot get through Gross's Outlooks sermons - they are just too wordy for me. I occasionally read one, and maybe I get it points, but they are often lost on me. Plus, he was so off last year on his avoidance of US Treasuries. His concerns were that interest rates would rise? This goes against the Financial Repression scenario, so with Gross I end up confused. And I'm just not willing to parse his difficult language when he seems (to me at least) terribly inconsistent.
Hi Audrey, I know that Gross gets quite poetic in his Outlook monthly. Sometimes I just dive to the bottom and read the bold print, then read backwards to understand the message and reasoning. Occasionally there is a really good chart like the Ring of Fire chart showing countries in trouble that he posted a few years back and that are so in the news now.

He was definitely off on US Treasuries but has made up a lot of the lost ground. If comparing PTTRX to maybe VBTLX (Total bond mkt) I'd use rolling 3 or 5 year returns. PTTRX has done better in the past -- the future is never clear. This is my only non-index position.

Interest rates rising is not inconsistent with Financial Repression if we describe FR as negative real rates for extended periods. Also should mention one person's FR is another person's life line. Although negative real rates are ugly for the fixed income crowd, the cheap money hopefully should help to get people to take risks and goose the economy and increase employment (in some theories at least).
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Jeremy Grantham 7 year forecast does seem to illustrate the Financial Repression scenario as he predicts real returns for several bond classes as negative over the next 7 years.
Grantham's 7 year chart seems to be consistent with the facts.

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Several of my Morningstar buddies think that there are other bond/fixed income classes that Grantham hasn't modeled that may do OK, but who knows.
I like PTTRX and the new ETF version BOND because I think bonds are a mine field right now. But I also have some Total Bond Mkt. FWIW, I'm will to move to Treasuries if they outperform or even cash using a predefined timing mechanism should rates move substantially higher. Just saying this because my positions are buy-hold-but-occasionally-switch so buy-hold people can just ignore my investment positions.
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Old 05-30-2012, 09:49 AM   #65
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Interest rates rising is not inconsistent with Financial Repression if we describe FR as negative real rates for extended periods. Also should mention one person's FR is another person's life line. Although negative real rates are ugly for the fixed income crowd, the cheap money hopefully should help to get people to take risks and goose the economy and increase employment (in some theories at least).
Yes, that's true (that history shows periods of Financial Repression with high interest rates). However, I am making another couple of assumptions: that global growth will be weak and that this means inflation will be restrained, if not occasional bouts of deflation; and that given the debt overhang, govts around the world will absolutely not raise interest rates in face of weak employment and weak economies. That is why I am not worried about interest rate risk over the next several years. And, yes, the cheap money should continue to help business which makes me feel better about the equity side of my portfolio.
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Old 05-30-2012, 12:03 PM   #66
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Yes, that's true (that history shows periods of Financial Repression with high interest rates). However, I am making another couple of assumptions: that global growth will be weak and that this means inflation will be restrained, if not occasional bouts of deflation; and that given the debt overhang, govts around the world will absolutely not raise interest rates in face of weak employment and weak economies. That is why I am not worried about interest rate risk over the next several years. And, yes, the cheap money should continue to help business which makes me feel better about the equity side of my portfolio.
Yep, that is certainly the trend. I think we can say for sure that competition in societies and between countries will continue to be intense.

But note politicians are now talking about growth agendas (Europe except maybe for the Germans) more explicitly. Rates are anticipatory by the market. If there is enough political push the fires of growth could be started and we could get a surprise. Maybe good for stocks and bad initially for bonds. Governments might find they are behind in rate control on the longer end of the yield curve as the private markets take over. In the US government might welcome the chance to give back control to private market forces.

I just mention this because it might be useful to also visualize an alternate outcome. I'm not betting either way as I've set my strategy to go with the flow.
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Old 05-30-2012, 12:32 PM   #67
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I just think between the boomer retirees clamoring for yield, and the lack of demand for money to fund economic expansion, the "fires of growth" are just going to be barely burning for quite a while no matter what the politicians devise. With no wage pressures, and now commodities dropping due to slowing global economies, I just don't see an inflation surprise any time soon - the drivers just aren't there.
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Old 05-30-2012, 01:14 PM   #68
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With no wage pressures, and now commodities dropping due to slowing global economies, I just don't see an inflation surprise any time soon - the drivers just aren't there.
I'd agree that many of the traditional drivers are absent now. But the US public debt level is so high, and the temptation to use devalued currency as a way out of the situation will be so tempting, that I think it's a significant risk. Other alternatives (higher taxes or lower govt spending to enable higher debt service payments) just aren't in the cards--we may just be institutionally incapable of doing them. Inflation will be seen as the least bad option, and the easy money provided by a monetary expansion will keep the economy moving and the electorate satisfied--for the short term. And the "short term" seems to drive almost everything.
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Old 05-30-2012, 01:43 PM   #69
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I just think between the boomer retirees clamoring for yield, and the lack of demand for money to fund economic expansion, the "fires of growth" are just going to be barely burning for quite a while no matter what the politicians devise. With no wage pressures, and now commodities dropping due to slowing global economies, I just don't see an inflation surprise any time soon - the drivers just aren't there.
In the 1980's we had high real rates, growth and declining inflation. Do we really need high inflation to get growth?

I know this time really isn't the same but I'd avoid using my understanding of economics to make investment decisions. Not that I think some people here are doing that . There are too many moving parts and too many faulty models.

Another thought, if real rates went up retirees would eventually come to love it (after the rate increase shock ebbs). With all the competitive pressures people are just glad to have a job -- at first. So wage demands would be low perhaps for some years. Just some wild thoughts.
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Old 05-30-2012, 02:44 PM   #70
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I'd agree that many of the traditional drivers are absent now. But the US public debt level is so high, and the temptation to use devalued currency as a way out of the situation will be so tempting, that I think it's a significant risk. Other alternatives (higher taxes or lower govt spending to enable higher debt service payments) just aren't in the cards--we may just be institutionally incapable of doing them. Inflation will be seen as the least bad option, and the easy money provided by a monetary expansion will keep the economy moving and the electorate satisfied--for the short term. And the "short term" seems to drive almost everything.
I agree. I'd add that it isn't just US government debt that is high. We have state and local debt at very high levels and the same is true for developed country debt (Europe/Japan). Nor is it just government debt, personal debt while coming down is still near record level. (I suspect as a percentage of debt to asset, debt levels for consumer is probably at a record level. The housing price collapsed and stocks are down slightly from the peak and saving have been depleted for many people)

In short we have a lot of people that would be benefit from high inflation and relatively small class of savers who are hurt by it. It is true us inflation prophets have been proven wrong for a number of years. However, with so many people benefiting from high inflation, and the victims including people like Saudi kings, and Chinese klepocrats I fear us savers are going to be viewed as collateral damage. To put it another way the one big driver of inflation is the determination of governments to make it happen.
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Old 05-30-2012, 03:01 PM   #71
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There are only two kinds of inflation. 1) Not enough 2) Too much. No matter which one we have, it's the other we want. The biggest losers from each type of inflation are the same: retired people.

There are still billions of people in the world with very low incomes and lots of opportunity for the world economy to grow. We are probably just in a normal global business cycle that looks bad now but will be much different in a year or two.
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Old 05-30-2012, 03:05 PM   #72
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We are probably just in a normal global business cycle that looks bad now but will be much different in a year or two.
I hope to God you're right!
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Old 05-30-2012, 03:12 PM   #73
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I know this time really isn't the same but I'd avoid using my understanding of economics to make investment decisions. Not that I think some people here are doing that . There are too many moving parts and too many faulty models.

Another thought, if real rates went up retirees would eventually come to love it (after the rate increase shock ebbs). With all the competitive pressures people are just glad to have a job -- at first. So wage demands would be low perhaps for some years. Just some wild thoughts.
I also don't make investment moves based on my economic outlook - other than trying to be well diversified so that I am not stuck in two simple, and likely expensive, asset classes (i.e. intermediate govt bonds, large-cap US stocks) like the portfolio survival models seems to favor.

Will retirees love it when the real rates go up? I don't think so, because IMO it will likely be accompanied by increased inflation that might hurt them even worse.

FWIW - I think The Fed has been trying to get inflation to increase for a couple of years now, and they have not been successful. I don't think it's that easy to do absent other drivers, and IMO a large debt overhang simply isn't enough. Japan hasn't been successful either.

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Old 05-30-2012, 05:47 PM   #74
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I also don't make investment moves based on my economic outlook - other than trying to be well diversified so that I am not stuck in two simple, and likely expensive, asset classes (i.e. intermediate govt bonds, large-cap US stocks) like the portfolio survival models seems to favor.
...
Audrey, I'm curious what you are then favoring? I promise not to critique your choices and if you prefer not to discuss this, just ignore this question.

Regarding the above assets classes: When I look at my portfolio I do have some exposure to intermediate govt though Pimco is underweight US Treasury, and overweight TIPS + foreign (see M*). My total bond market has a good size chunk of US intermed Treasury. Also I own a large chunk of large-cap US value index.
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Old 05-30-2012, 10:18 PM   #75
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Interesting comment... I have an opposite view. I think our global econonic prospects are darker. Advances and economic progress will only benefit the few, not the masses. And I am very worried about a future nuclear armed Iran.
Have you read the book "Abundance"? The reason I'm asking is that there are several behavioral-psychology reasons behind having such a bleak outlook, and there are several technological improvements that give more cause for optimism.

There are many other nuclear countries that are far more deadly than Iran. There. Does that make you feel better?

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Hi Audrey, I know that Gross gets quite poetic in his Outlook monthly.
I used to read his columns, but I got tired of having to look up every third word in my Oxford English Dictionary...

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I agree. I'd add that it isn't just US government debt that is high. We have state and local debt at very high levels and the same is true for developed country debt (Europe/Japan). Nor is it just government debt, personal debt while coming down is still near record level. (I suspect as a percentage of debt to asset, debt levels for consumer is probably at a record level. The housing price collapsed and stocks are down slightly from the peak and saving have been depleted for many people)
In short we have a lot of people that would be benefit from high inflation and relatively small class of savers who are hurt by it. It is true us inflation prophets have been proven wrong for a number of years. However, with so many people benefiting from high inflation, and the victims including people like Saudi kings, and Chinese klepocrats I fear us savers are going to be viewed as collateral damage. To put it another way the one big driver of inflation is the determination of governments to make it happen.
Another possibility is the way we've changed the accounting rules in the last 30 years. Now that municipal & state govts actually have to account for their pension/healthcare liabilities (to say nothing of the Dept of Defense), the debt burden is much harder to ignore.

In other words, I think we're making progress just by raising our awareness.
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Old 05-30-2012, 11:10 PM   #76
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Audrey, I'm curious what you are then favoring? I promise not to critique your choices and if you prefer not to discuss this, just ignore this question.

Regarding the above assets classes: When I look at my portfolio I do have some exposure to intermediate govt though Pimco is underweight US Treasury, and overweight TIPS + foreign (see M*). My total bond market has a good size chunk of US intermed Treasury. Also I own a large chunk of large-cap US value index.
In equities in addition to US large cap, I have US Mid-cap and Small-cap, plus foreign large-cap and mid-cap, and a big chunk of REITS. In bonds, I have several diversified intermediate bond funds that have a lot of corporate debt, GNMA fund and municiple bond fund, plus a multi sector bond fund that has foreign debt, emerging market debt barbelled with treasuries/TIPs (FSICX).
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Old 05-31-2012, 04:52 AM   #77
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In equities in addition to US large cap, I have US Mid-cap and Small-cap, plus foreign large-cap and mid-cap, and a big chunk of REITS. In bonds, I have several diversified intermediate bond funds that have a lot of corporate debt, GNMA fund and municiple bond fund, plus a multi sector bond fund that has foreign debt, emerging market debt barbelled with treasuries/TIPs (FSICX).
Most of these asset classes are not considered in Wade's pessimistic projection. Add to that emerging market equities and commodities. If a portfolio is exposed to a wide variety of these it has a greater chance of surviving.
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Old 05-31-2012, 05:20 AM   #78
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In short we have a lot of people that would be benefit from high inflation and relatively small class of savers who are hurt by it. .
But wouldn't inflation be attacked by the gov't raising interest rates and thereby help savers with higher yields/returns?
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Old 05-31-2012, 07:40 AM   #79
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Most of these asset classes are not considered in Wade's pessimistic projection. Add to that emerging market equities and commodities. If a portfolio is exposed to a wide variety of these it has a greater chance of surviving.
Exactly! Which is why I'm hoping my more diversified allocation will translate to a better portfolio survival. It certainly outperformed the traditional large-cap/US-bond balanced funds in the late 00's.

I don't own commodities or emerging market equities directly, but I know some of my funds hold this stuff directly or indirectly (actually, one of them holds quite a bit of commodity related stuff like Ag and Oil). And even big US companies sell into emerging markets.

At times I have considered adding something like Fidelity Strategic Real Return to my allocation (mix of REITs, commodities, floating rate loans and TIPs), but frankly, I have been slow to act on this point simply because I expect the global slowdown to last for a while.
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Old 05-31-2012, 08:00 AM   #80
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Here is an interesting view of the markets for the last 18 years. Plot shows Emerging Mkts, SP500, European, and Pacific. I think Pacific suffered from the Japan exposure:





Also plotted these for 3 year (36 month) rolling return periods:


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