Worthwhile article by Ray Dalio

[NW-Bound]

... If Dalio is concerned about inflation taking off (direct monetization of federal debt obligations would certainly do that) there are other hedges.

... If you think inflation is coming up and gov'ts will print money to help relive debt, then gold is the way to keep your value in something not subject to the devalued currency.
My personal belief is that equities are a better way to counter inflation, and I am not a fan of or hold any gold.

I do not care to hoard gold either. And about equities, if the economy takes a beating such that industrial output stumbles, stocks will lose value too.

There are other hard assets, such as real estate, but these are generally not liquid and difficult to price. Where to hide?

 

[BreathFree]

I am bewildered by those who have a gleeful confidence and faith in the safety of purchasing U.S. government bonds, TIPS or otherwise. Is the belief that these extreme deficits will end, that we will grow our way out of this, or that deficits just don't matter? How does this not end in either outright default, or currency depreciation once the debt service increases to more than the revenue?

I do own U.S. bonds as part of my AA to reduce overall portfolio volatility, but I am extremely nervous considering the debtor's financials.

If Dalio is concerned about inflation taking off (direct monetization of federal debt obligations would certainly do that) there are other hedges.

I would be interested in the other inflation hedges you speak of. I am familiar with REITS, rentals, land, gold ect.

 

[OldShooter]

... I would be interested in the other inflation hedges you speak of. ...

TIPS. One scenario has the US deliberately inflating its way out of debt. Another (my preference) has the world finally abandoning the US$ as its reserve currency, leading to a significant decline in the dollar exchange rate and consequent uncontrollable inflation. In either case, I think TIPS will be fine. I see no scenario that ends with an outright US default; escaping that is too easy and the political pain is too great.

 

[BreathFree]

TIPS. One scenario has the US deliberately inflating its way out of debt. Another (my preference) has the world finally abandoning the US$ as its reserve currency, leading to a significant decline in the dollar exchange rate and consequent uncontrollable inflation. In either case, I think TIPS will be fine. I see no scenario that ends with an outright US default; escaping that is too easy and the political pain is too great.

TIPS seem to be a good solution while inflation is manageable, but will they be in the scenarios mentioned here? TIPS are adjusted based off CPI, which isn't a true inflation adjustment. It is a measure of a range of consumer spending behaviors determined by (in this scenario) those who just defaulted on their promise to pay a debt by deliberately inflating their currency. How can you have faith they will not manipulate the inflation adjustment if they will manipulate the value of the currency? I don't see how TIPS would be a trustworthy solution in this case. Wouldn't the investment have to be separate and outside the control of those who are defaulting.

 

[OldShooter]

TIPS seem to be a good solution while inflation is manageable, but will they be in the scenarios mentioned here? TIPS are adjusted based off CPI, which isn't a true inflation adjustment. It is a measure of a range of consumer spending behaviors determined by (in this scenario) those who just defaulted on their promise to pay a debt by deliberately inflating their currency. How can you have faith they will not manipulate the inflation adjustment if they will manipulate the value of the currency? I don't see how TIPS would be a trustworthy solution in this case. Wouldn't the investment have to be separate and outside the control of those who are defaulting.

Well, there is a range of increasingly improbable scenarios that one can hypothesize. Your worries appear to be further along that spectrum than mine are. The preppers have their scenarios, too. And, of course, there is the asteroid collision risk. ...

In extreme cases, governments have and will continue cook their economic data. Venezuela, Argentina, and Zimbabwe come to mind. I guess there is some small but non-zero probability that the US could do it. I think that probability is low enough that I don't worry about it.

Re manipulating the value of the currency it is indirect. Just print a little extra money. No need to mess with the CPI.

Re "separate and outside the control" of the US government? Well, now you just get someone else's reliability to obsess over. Again, not my cup of tea.

What I do think will happen in the event of high inflation is that Treasury will stop issuing TIPS aka pouring gas on a fire. When that happens, the value of those in circulation will skyrocket far beyond the usual YTM arithmetic as panic-stricken buyers will take them at any price. So I expect we'll be quite happy with our TIPS in that scenario, though overall it will be a very unpleasant experience.

 

[NW-Bound]

I have 7% of portfolio in I-bonds. I often forget I have them. It used to be a larger percentage, but I stopped buying more than 10 years ago, and these I-bonds are outgrown by the equity portion of the portfolio.

My I-bonds pay an aggregate of about 1.25% above inflation. Too bad they cannot be sold like TIPS in the case of bubble.

PS. I-bond purchased now pays 0.5% above inflation. Maybe I should get some more.

 

[BreathFree]

What I do think will happen in the event of high inflation is that Treasury will stop issuing TIPS aka pouring gas on a fire. When that happens, the value of those in circulation will skyrocket far beyond the usual YTM arithmetic as panic-stricken buyers will take them at any price. So I expect we'll be quite happy with our TIPS in that scenario, though overall it will be a very unpleasant experience.

All good points. I especially like this one quoted - that possibility never occurred to me.



I do try to out think and probably overthink every scenario. I am hopeful things don't get that bad and I don't dwell on it. I am proud to say I am not a prepper yet.

 

[daylatedollarshort]

Besides owning TIPS, to plan for potential high inflation in retirement, we refinanced when rates bottomed out to a fixed rate mortgage and in general are into sustainable living and low overhead. Inflation won't impact the cost of the water or kwh we are able cut back on using, plus we're cheap dates. We went to free concert in the park last night and a free screening of the Apollo 11 movie today, so 20% inflation on $0 is still $0.


I'm not a full fledged prepper, but we are into sustainable living, like using solar power and energy efficient gadgets and appliances, so some of those ideas overlap.

 

[bmcgonig]

An annuity linked to inflation?


(I'll see myself out)

 

[Spock]

When the U.S. had its most severe economic crisis it "called in" physical gold holdings, forcing citizens to sell at $20/troy ounce.

Nothing stops the U.S. government from a repeat...at whatever price they set.

If Dalio is concerned about inflation taking off (direct monetization of federal debt obligations would certainly do that) there are other hedges.

At time gold was circulated currency, its not any more. There is no more claim to the asset than there is to your car, house, or stocks. Also the gov called it in, but didn't go door to door to collect it. If one volunteers to give up your personal property, thats up to them. And from the amount of pre-1933 coins still available 85 years later it appears only a fraction volunteered.

 

[eytonxav]

Ken Moraif, head of a Dallas Investment firm, has always said gold is not an inflation hedge, but rather a hedge against fear. I am not sure how many periods of inflation saw little appreciation in gold, but I guess you could say inflation does cause fear, but so do a lot of other things.

 

[MichaelB]

Ken Moraif, head of a Dallas Investment firm, has always said gold is not an inflation hedge, but rather a hedge against fear. I am not sure how many periods of inflation saw little appreciation in gold, but I guess you could say inflation does cause fear, but so do a lot of other things.

He makes a good point. Although it’s difficult to say, given the nature of our forum, in an economic system of two components, capital and labor, the best hedge against inflation is labor, while capital loses.

I think “recency” has softened our collective views and fear of inflation. There has been so little in the past 1-2 decades, compared with the 70’s-80’s, we no longer fear it. History shows inflation destroys capital, especially fixed income.

 

[Montecfo]

To those who strongly disagree with Dalio, I am what your view is on how the worldwide debt addiction gets resolved and what expected impact on your portfolio?

I am agnostic but I do view his position as rational and perhaps even likely.

 

[OldShooter]

... I think “recency” has softened our collective views and fear of inflation. There has been so little in the past 1-2 decades, compared with the 70’s-80’s, we no longer fear it. ...

+100

Averaging over the past 20 years or so we have an inflation number of around 2.7% IIRC. Over 50 years, it is 4.1%.

It can't happen here? Well if the world succeeds at dethroning the dollar as the world's reserve currency, which almost everyone would like to do, and the dollar's value drops 20%, then the cost of many things goes up 25%. Not just the TV set you don't need to buy. Food, oil, clothing, ... basically anything that is imported or (importantly) that is priced in a worldwide market. This includes the wheat that is grown and sold to you by the farmer down the road.

 

[OldShooter]

... how the worldwide debt addiction gets resolved and what expected impact on your portfolio?

I am agnostic but I do view his position as rational and perhaps even likely.

There is a good quotation often attributed to John Kenneth Galbraith:

“The only function of economic forecasting is to make astrology look respectable.”

actually from Ezra Solomon, an influential US economist, professor of economics at Stanford University and a member of the Council of Economic Advisors during the Nixon administration.

So, I have no idea what the answer to your question is and IMO no one else does either. Nate Silver, in "the signal and the noise" talks about economic forecasting and says the the pundits and talking heads' forecasts are less accurate than those of less prominent economists. He theorizes that keeping those pundit jobs requires making dramatic un-nuanced forecasts.

 

[DrRoy]

A quite interesting read, but hard to figure out with comfort if it should be acted upon.

 

[Dtail]

A quite interesting read, but hard to figure out with comfort if it should be acted upon.

+1
Sounds interesting, but.......

 

[bmcgonig]

+100

Averaging over the past 20 years or so we have an inflation number of around 2.7% IIRC. Over 50 years, it is 4.1%.

It can't happen here? Well if the world succeeds at dethroning the dollar as the world's reserve currency, which almost everyone would like to do, and the dollar's value drops 20%, then the cost of many things goes up 25%. Not just the TV set you don't need to buy. Food, oil, clothing, ... basically anything that is imported or (importantly) that is priced in a worldwide market. This includes the wheat that is grown and sold to you by the farmer down the road.

Looking at the DXY chart the dollar plunged twice in the last 40+ years. The last time about 41% from 2000 to 2007/8. No inflation to speak of in that period. Not sure what to make of it.

 

[Housewife]

I was under the impression that BW’s all weather fund had always had a decent chunk in gold. Presumably less so in his much larger pure alpha fund. My info is dated, but I thought his all weather has actually been quite volatile (for an “all weather” fund), and his pure alpha had a period of mediocre absolute returns. Does he plan to implement his strategy in either/both type of strategies? I would find it peculiar to consistently allocate more than 10% in gold of any non-speculative portfolio over an extended period of time.

 

[Cut-Throat]

A quite interesting read, but hard to figure out with comfort if it should be acted upon.

My best moves are to do nothing.

 

[samclem]

What I do think will happen in the event of high inflation is that Treasury will stop issuing TIPS aka pouring gas on a fire. When that happens, the value of those in circulation will skyrocket far beyond the usual YTM arithmetic as panic-stricken buyers will take them at any price. So I expect we'll be quite happy with our TIPS in that scenario, though overall it will be a very unpleasant experience.

An interesting approach. It does require that prospective buyers continue to trust that the US Govt will continue to honor the whole TIPS deal and not find a way around it. More significantly, it requires that I sell my life jacket to somebody else at a time when it is also most useful to me, too (which is a general attribute of almost all hedging strategies). At any rate, having this option if the circumstances arise is a good thing, and something that I-bonds don't have (which may make up for the some of the downside of TIPS, including taxable phantom interest in "regular" accounts). And, if the USG doesn't stop selling TIPS, at least they'll keep paying inflation-adjusted interest.

 

[NW-Bound]

An interesting approach. It does require that prospective buyers continue to trust that the US Govt will continue to honor the whole TIPS deal and not find a way around it. More significantly, it requires that I sell my life jacket to somebody else at a time when it is also most useful to me, too (which is a general attribute of almost all hedging strategies)...

You cannot have your cake and eat it too.

In contrast with giving up your life jacket, you only sell these hedges a bit at a time to convert to food. Your life is finite, so hopefully you will not live the end of your life in misery. That's all one can hope for if things turn bad.

As far as your offsprings, if they will be still working, labor will fare better than capital, as MichaelB pointed out earlier.

 

[samclem]

You cannot have your cake and eat it too.

I suppose if you owned a business that had inflation-proof earnings, that would be a pretty good thing. The income/dividends would rise with inflation and you'd benefit from that without needing to sell the business/equity.

But, selling the TIPS bit-by-bit for income would probably accomplish much the same thing in the final analysis.
I'm a lazy cuss, and opening a Treasury Direct account and dealing with the ongoing hassle of it might exceed my inertia threshold. A TIPS fund or ETF is a possibility, but they don't behave the same as the bonds themselves, and paying 0.2% per year--outrageous.

 

[MichaelB]

Expected return for Treasuries and TIPs of the same maturity has to be similar, otherwise it will be arbitraged away by the Fed or bond traders. If expected return for nominal treasuries is negative and the same maturity TIPs is positive, who would buy the Treasuries? They would be bought by the Fed at a price high enough to push the real rate negative until it matches the nominal Treasury rate.

 

[NW-Bound]

... I'm a lazy cuss, and opening a Treasury Direct account and dealing with the ongoing hassle of it might exceed my inertia threshold. A TIPS fund or ETF is a possibility, but they don't behave the same as the bonds themselves, and paying 0.2% per year--outrageous.

As mentioned, it's been 15 years since I bought and also redeemed some I Bonds. The "connection" to my banking account is still there, and it's a simple matter to move money with a few clicks on the mouse.

I stopped buying more when the fixed rate above inflation dropped to a value too low to be worthwhile. In fact, it went to 0% for many years, meaning they pay exactly the inflation rate and no more. Just looked, and it's now 0.5% above inflation.

PS. Seeing what the European and Japanese banks are paying, I have to say that we are spoiled brats.