Global Macro Trading Journal

In think in general, UST bonds make a little more sense as an inflation/hyperinflation hedge (for non-USD investors). If we consider that gold has been 'running hot' over the past few decades and its only term return is more like 0.7% real (if that)

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If I were to reduce the returns of gold in my database, then whatever benefits it brings (slighly better than 10y USTs, in terms of reducing vol in a portfolio, during the sample) would pale in comparisson to the reduction in returns that it would bring (0.7% real is a lot lower than 3.6% real, specially if you compound that for a life-time, in my database, gold is running at 4.27% real a year). So its an expensive hedge, if I were to add another bear market into the sample, then there would be volatility consquences as well.

But there could be some tax advantages to owning gold (you only pay when you sell, unlike bonds which might be taxed more frequently). Also, with US bonds, you take US hyperinflation risk, which doesnt happen with gold. So, overall, its hard to compare the two, its a case by case basis. At the end of the day, one is better off having both in the portfolio than to just going all out in one of them. Results will be more robust that way
 
Thinking about this chart also raises an important observation

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That the US inflation rate is not manipulated anywhere near as much as conspiracy theorists think. If gold follows inflation long-term, then the 0.7% real return would be the 'understatement' factor of US inflation indices. The actual return of gold is more like 0% but that 0.7% would represent that the US inflation is being under reported so it shows up as a real return for gold. 0.7% is a lot less than what the Shadow Stats conspiracies claim of the difference between reported inflation and actual inflation (IIRC, they like to throw the 10%+ figure around liberally, which would put the spread at 7%-8%+)
And this assumes gold has no long-term trend, one could make the case that long-term gold goes up because industrial uses + monetary uses makes it an special kind of commodity. I dont know if it would be an accurate case to make, but if it were true, it would mean the government is not lying about inflation at all.
They probably are lying, but probably not by much, maybe 0.5%, maybe 1%. It certainly nothing of significance because markets see through this kind of tactic and reprice assets

citizens are not being robbed blind, all you got to do is to own some assets and you will beat inflation over long periods.
 

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I think El-Erian is one of the few pundits around that has been analyzing US markets pretty well for quite a while. I'm in the process of re-reading his book now (the lastest one) and he raises a variety of good points that are not commonly known.

Right now he is talking about how there was a disconnect between fundamentals and market prices (mostly in stocks but also in bonds) and how Trump, if he implements his policies well, he could close that gap and make the market be 'justified' to trade at these levels.
I agree, if the Trump policies do create economic efficiencies that reverse part of the New Normal/Secular Stagnation, then quickly this stock market not only becomes justified but even go as far as to become undervalued. Even as little as a permanent rise of 0.25% in GDP growth can be quite significant in terms of making this market be worth more. I run the numbers in this journal shortly after the US election.
El-Erian is one of the few around that, even though he supported Hillary, is still atuned to what is going on and is not being an 'angry hack'. Folks like Krugman and Summers called for stimulus for years, now, they are in uncomfortable position of maybe getting that stimulus but from a Republican. They dont like it and they bring up their chicanery to say how that stimulus (which they dont know the contents of) will be no good. El-erien is one of the few that is being consistent
 
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El-Erian is being fair, he says 'if this then that' 'if that then this', Krugman, Summers and other folks are just phobic about admiting anything could work, so they just talk about the risks, downside, potential mistakes. Their analysis is not being fair at all, its more politics than economics
 
jj90 said:
I've said it before, Trump is a game changer.

But in the short term, long VIX Feb/short VIX Jun this morning.
More...
I thought about using VIX futures but I'm not really familiar with them, the settlement procedure sounds weird as hell
 
I read another Buffett study today
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=806246

But that got me thinking about that previous study that said that Buffett is levered 1.4-1.6-1. I think they overstated Buffett's leverage. A lot of his leverage is from 'deferred tax liabilities', essentially, capital gains from stocks he bought ages ago that he is up huge on. I really dont think its fair to call this 'leverage'. Leverage makes it sounds risky, but if the US were to go into a depression, a lot of those gains would turn into losses (or smaller gains) and the liabilities would dissapear (or decrease). This is one of the few forms of 'leverage' that actually DECREASES during bad times, investors deposits would be the opposite, it gets called in bad times. Bonds are static and do nothing, but you still got to pay them back one day so a depression will hurt your ability to pay them back. But deferred tax liabilities are counter-cyclical, they rise a lot in good times and collapse in bad times. The worse things are, the less you owe. Buffett's true leverage (from a risk perspective) is probably a lot less than 1.5-1. IMO, one should should only consider the insurance float and the bonds he issues when assesing his risks
 
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With regards to those deferred taxes

"
Say you owned $1,000,000 worth of PepsiCo built up over decades. Your cost basis is $100,000. That means $900,000 represents an unrealized capital gain. In your case, $189,000 in deferred taxes would be carried as an offsetting liability on your balance sheet. Your PepsiCo shares are trading at 20x earnings, or a 5% earnings yield. That means your cut of Pepsi's profit each year is $50,000.

Now imagine Coca-Cola trades at only 17x earnings with the same projected growth rate and dividend payout. That is an earnings yield of 5.88%, which is 17.6% more than PepsiCo is offering in relative terms, 0.88% more in absolute terms. If your entire $1,000,000 were invested in Coke, your share of the net profits would be $58,800. An extra $8,800 in underlying earnings is not insignificant.

As you know by now, it's not that simple! Let's run the math to see what would happen if you made the switch. You sell your PepsiCo shares and see $1,000,000 in cash in your brokerage account. You immediately trigger a $189,000 Federal and state tax bill, leaving you with $811,000. You put this $811,000 to work in Coca-Cola shares at a 5.88% earnings yield, meaning your share of the earnings is $47,687 per year. As odd as it sounds, you lost $2,313 in net earnings, or 4.6% of what you had been indirectly generating each year, despite buying an asset with a higher look-through yield."

https://www.thebalance.com/using-deferred-taxes-to-increase-your-investment-returns-357395

This is an important consideration when deciding whether to switch investments
 
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