US bonds are USD denominated and woulndt provide much of a hedge to a US investor
Global Macro Trading Journal
- Thread starter Daal
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A way to solve the issue of duration risk is to own US Bills+ US stocks and stay out of US bonds. I run the numbers and for almost the same annual return as gold, a 60/40 bill/us stock portfolio produces a 19% SD portfolio (as compared to 33% in gold). 61% winning years versus 53% with gold. Avg down year and worst year are also smaller with bills+stocks then with gold
So it looks like thats a very interesting way for non-US folks to hedge out domestic risk
That is in hindsight of course, going forward one needs to make certain assumptions and perhaps tilt things in a way that makes more sense
So one of the discoveries is that is appears that non-US investors can reach their "efficient frontier" a lot more easily if on their non-domestic exposure, they focus on US assets instead of gold. Not to say there is no room for gold, there is. I tested whether a 5% allocation to gold made sense given the US asset superiority and it did
Returns increased and avg losing year decreased with gold in. Vol also came in a bit. So the bottom line in gold for non-US is to have some, but dont focus on it
For US investors its a different game, I believe you guys have a MUCH bigger influence on the gold price. If Turkey has hyperinflation tomorrow, there might be some extra demand coming but it wont be much. But the US is more of a price setter rather than a taker. Yellen says this or that and gold will rip/collapse against every currency in the world. In the 70's gold surged by a lot more than one would expect due to the decline of the USD. For that reason, gold has more value as a hedge.
Returns increased and avg losing year decreased with gold in. Vol also came in a bit. So the bottom line in gold for non-US is to have some, but dont focus on it
For US investors its a different game, I believe you guys have a MUCH bigger influence on the gold price. If Turkey has hyperinflation tomorrow, there might be some extra demand coming but it wont be much. But the US is more of a price setter rather than a taker. Yellen says this or that and gold will rip/collapse against every currency in the world. In the 70's gold surged by a lot more than one would expect due to the decline of the USD. For that reason, gold has more value as a hedge.
This price setter characteristic adds another potential gain from owning gold. For non-US its mostly a currency effect channeled through an internationally traded commodity (the same effect you can get by owning USD bonds or other things), for a price setter like the US, it becomes more of a speculative mania that it sets off in the gold price when the USD is in trouble. That speculative mania can lead to moves that a lot bigger than gains from fixed income and things like that
http://www.themoneyillusion.com/?p=32158
Housing bubble callers were right (for a while) in the US, but wrong on Canada, Australia and the UK
Housing bubble callers were right (for a while) in the US, but wrong on Canada, Australia and the UK
Of course, at some point, US real housing prices are likely to go above their 2006 peak. The problem is that the bubble callers only tell you one part of the equation (when to sell) they dont tell you when to buy back. They dont tell you what to do if their timing is wrong and things keep rising. They dont tell you how low things need to fall for it to make sense to buy back. Gary Shilling told everyone to sell their house, and then years after 2008, he was still telling people to sell their houses. Yet home prices are still marching on
This can lead to huge problems such as a person being priced out of their home city. If your city "goes London/Vancouver/SF", the person might not be able to afford rent/buying. Then the person got to leave that town and lose a lot of contact with family/friends/business associates, or they will live in a nearby city but will face a huge increase in their commute time (a huge creator of unhapiness). The consequences are not just economical, they are emotional as well. What does that tell us? It tells us that we are naturally SHORT our home city housing prices and covering that short is a necessary and PRUDENT thing to do, even if their valuation are expensive (up to a point). So, telling people to sell their home/get out of RE is a TIMING strategy. If you sell and never get back in, thats just reckless and ridiculous. You GOT to buy back at some point if you dont run the risk of having to live in some shithole small town away from everybody you know, good jobs and things to do. Plus even a richly valued property will still produce a return that is likely to beat risk free rates (unless the valuation is just flat out ridiculous), specially if you consider all the rent money that you will be saving
But these bubble callers NEVER tell you how to execute that timing strategy and more importantly, why is that THEIR timing strategy will beat transaction costs (huge in RE) and also TAXES. Taxes are huge. They can destroy pretty much any timing strategy pretty quick (compared to buy and hold)
People like Gary Shilling and other housing bubble callers are just flat out irresponsible
This can lead to huge problems such as a person being priced out of their home city. If your city "goes London/Vancouver/SF", the person might not be able to afford rent/buying. Then the person got to leave that town and lose a lot of contact with family/friends/business associates, or they will live in a nearby city but will face a huge increase in their commute time (a huge creator of unhapiness). The consequences are not just economical, they are emotional as well. What does that tell us? It tells us that we are naturally SHORT our home city housing prices and covering that short is a necessary and PRUDENT thing to do, even if their valuation are expensive (up to a point). So, telling people to sell their home/get out of RE is a TIMING strategy. If you sell and never get back in, thats just reckless and ridiculous. You GOT to buy back at some point if you dont run the risk of having to live in some shithole small town away from everybody you know, good jobs and things to do. Plus even a richly valued property will still produce a return that is likely to beat risk free rates (unless the valuation is just flat out ridiculous), specially if you consider all the rent money that you will be saving
But these bubble callers NEVER tell you how to execute that timing strategy and more importantly, why is that THEIR timing strategy will beat transaction costs (huge in RE) and also TAXES. Taxes are huge. They can destroy pretty much any timing strategy pretty quick (compared to buy and hold)
People like Gary Shilling and other housing bubble callers are just flat out irresponsible
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The time to sell your home is if it goes like Japan did in the 80's. If it reaches such an absurd level that it cant be economically justified in any way, shape or form, then sure, sell. A crash is almost sure to happen within a few years, then you can buyback a lot lower
And in my view, the same principle can be applied to the first 5-15% allocation one has to equities. Thats a bucket that probably should NEVER be removed. Not that the components inside of the bucket cant be changed, they can depending on what they do/their value, etc. I'm referring to having 0% in equities because you 'think things are going to end badly'. That first bucket provides so much bang for the buck in terms of diversification/protection against inflation/capital growth that it simply inprudent to get rid of it. Very similarly to how the widow, that I was referring to earlier, tries to get rid of all risk by sitting in on-demand savings accounts and then proceeds to get hosed by financial repression risk
But its also related to another short that most people have, that is the short of real gains/income. We need those real gains and real income in order to live and retire. That first bucket of equities helps to close down that short to certain degree. To get rid of the bucket is to risk a significant short squeeze in that natural short
And in my view, the same principle can be applied to the first 5-15% allocation one has to equities. Thats a bucket that probably should NEVER be removed. Not that the components inside of the bucket cant be changed, they can depending on what they do/their value, etc. I'm referring to having 0% in equities because you 'think things are going to end badly'. That first bucket provides so much bang for the buck in terms of diversification/protection against inflation/capital growth that it simply inprudent to get rid of it. Very similarly to how the widow, that I was referring to earlier, tries to get rid of all risk by sitting in on-demand savings accounts and then proceeds to get hosed by financial repression risk
But its also related to another short that most people have, that is the short of real gains/income. We need those real gains and real income in order to live and retire. That first bucket of equities helps to close down that short to certain degree. To get rid of the bucket is to risk a significant short squeeze in that natural short
So those are two buckets that I dont think make sense to almost ever to be removed, the % of your networth that you need to hedge your housing costs (whether in your home city, or the city you plan to live in the future) and the first bucket of equity risk (something ~10%) that provides a big bang for the buck in terms of diversification plus they help cover the natural need that we have for real income/gains/inflation protection.
I mentioned that first diversification benefit that adding an asset class (like stocks) into a portfolio has. But when you factor in the 'natural shorts' that we have and that we are closing them by adding real estate and stocks in a portfolio, the risk reduction is EVEN GREATER. Shorts are one of the riskiest positions due unliminted loss and limited gains, when you close it, your risks go down, not up (especially if the thing that is being short, tends to rise along with natural human progress).
So essentially we have a situation where we kill two birds with one stone, we add one or two asset classes to a portfolio (generating the Markowitz diversification effect) and close a big risky 'short position' (or at least, decrease it) that people have as a result of being born (the natural shorts)
Effectively, you increase risk (buy risk assets) but dramatically REDUCE your risk. Its "risk free risk taking"
I mentioned that first diversification benefit that adding an asset class (like stocks) into a portfolio has. But when you factor in the 'natural shorts' that we have and that we are closing them by adding real estate and stocks in a portfolio, the risk reduction is EVEN GREATER. Shorts are one of the riskiest positions due unliminted loss and limited gains, when you close it, your risks go down, not up (especially if the thing that is being short, tends to rise along with natural human progress).
So essentially we have a situation where we kill two birds with one stone, we add one or two asset classes to a portfolio (generating the Markowitz diversification effect) and close a big risky 'short position' (or at least, decrease it) that people have as a result of being born (the natural shorts)
Effectively, you increase risk (buy risk assets) but dramatically REDUCE your risk. Its "risk free risk taking"
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