HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
texasfight
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by texasfight »

I think IVOL is a great add for those that don't want to hold anything but QQQ. Could also look at adding PFIX.

But I am of the opinion everyone is chasing the macro of the past decade, and inflation is the biggest risk to equities (via real returns). ​

Even then I would still see QQQ being the best performing of equity asset classes, but what if that is not enough?

Still think we get a deflationary correction (I was selling broad commodities when oil hit $85 and everyone in my industry was calling for $100), but I think commodity price inflation (and inflation itself) is going to be much stickier than people realize (barring a deflationary bust that also takes down QQQ)

Coming from a petroleum engineer - We are barreling towards an energy crisis over the next decade. People really don't understand how cheap energy costs were the past decade and the degree that they subsidized the consumer. Heck I'm not even that bullish XLE because of how high inventory replacement costs are - because all the rock is drilled up and we are dealing with cost inflation. We are running out of cheap hydrocarbons.

When people say CPI is a bad gauge because it is just tied to oil/gas prices, what they really miss is that oil + nat gas is used as an input cost in literally everything. Chemical feedstock, manufacturing, mining, shipping, agriculture, not just transportation, etc. And I believe we ARE going to all be driving electric cars eventually, the issue is what $/Kwh you will paying to charge the thing.

Cheap energy is what has made the world grow the way it has for 100 years. Our markets and reversion to the mean investing strategy thinks the planet is infinite. The earth does not give a you know what about how much it will destroy real growth when energy invested stops being greater than energy produced.
Robot Monster
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Robot Monster »

texasfight wrote: Thu Dec 02, 2021 6:07 pm (I was selling broad commodities when oil hit $85 and everyone in my industry was calling for $100)
Of possible interest,

"Jeff Currie: Get Long Oil on 'Enormous' Upside Potential"

Jeff Currie, global head of commodities research at Goldman Sachs, discusses the decision by OPEC+ to proceed with an oil-production hike in January, the omicron variant's impact on the global oil market, and his risk outlook for 2022. He speaks on "Bloomberg Markets."
link
Z33
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Z33 »

great post by texasfight!

I agree...think energy prices going to stay elevated for a long time. Plus the ESG narrative isn't helping at all - you force supply of fossil fuel down, guess what happens next?
kbourgu
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kbourgu »

Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because in the long run, a faster taper and higher short-term interest rates mean slower growth and/or lower inflation.

My personal opinion - and this is just opinion and not actionable in any way - is that the FED may be boxing itself into a corner. Powell's recent comments seemed to suggest that a worsening of the pandemic is a risk to the supply chain and therefore an inflation risk and could actually accelerate the taper. This seems contrary to recent experience that while the pandemic disrupts both supply and demand, it primarily disrupts demand and leads to slower growth and employment (as seen by the reduced consumer spending and millions of job losses in 2020). Somehow negative economic news is making Powell more hawkish. It may not be coincidental that his stance changed after his renomination. If the FED does taper in response to short term supply chain disruptions, it should come with ample assurnces that rates will likely remain low for an extended period and that the criteria for lift-off is higher than the criteria for taper. Right now the market is penciling in two rate increases in 2022 which seems excessive given there is about 3 million workers of slack in the labor market (current employment is 2M less than pre-pandemic, plus 1M+ in population growth). I'd prefer to see a more dovish FED - especially on the long-term trajectory of policy.
Last edited by skierincolorado on Fri Dec 03, 2021 5:45 pm, edited 2 times in total.
michaeljc70
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by michaeljc70 »

I am contemplating putting a small portion of my portfolio in this. If you were to start this now, how would you do it timing wise? I am talking x% in now, and y% added every z months/quarters. Obviously I know this is an educated guess at best.

If I were answering my own question, given where the market is at, inflation worries, interest rates, etc. I would probably put in 1/12th every month for the next year.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

skierincolorado wrote: Fri Dec 03, 2021 5:34 pm
kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because in the long run, a faster taper and higher short-term interest rates mean slower growth and/or lower inflation.

I'd prefer to see a more dovish FED - especially on the long-term trajectory of policy.
December 15th new dot plot comes out from the Fed. I can't wait, it's going to be a banger.
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cflannagan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because markets aren't that simple.

What makes you think the markets hasn't priced in that expectation already?
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

michaeljc70 wrote: Fri Dec 03, 2021 5:44 pm I am contemplating putting a small portion of my portfolio in this. If you were to start this now, how would you do it timing wise? I am talking x% in now, and y% added every z months/quarters. Obviously I know this is an educated guess at best.

If I were answering my own question, given where the market is at, inflation worries, interest rates, etc. I would probably put in 1/12th every month for the next year.
There will always be uncertainties in the market, that's why you are compensated, to take on those risks. 1 year is a long time to get your full capital allocation in, a lot of expected return lost. Time in market beats timing the market.
michaeljc70
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by michaeljc70 »

Afrofreak wrote: Fri Dec 03, 2021 6:03 pm
michaeljc70 wrote: Fri Dec 03, 2021 5:44 pm I am contemplating putting a small portion of my portfolio in this. If you were to start this now, how would you do it timing wise? I am talking x% in now, and y% added every z months/quarters. Obviously I know this is an educated guess at best.

If I were answering my own question, given where the market is at, inflation worries, interest rates, etc. I would probably put in 1/12th every month for the next year.
There will always be uncertainties in the market, that's why you are compensated, to take on those risks. 1 year is a long time to get your full capital allocation in, a lot of expected return lost. Time in market beats timing the market.
Thanks for the response. I know that is normally true, but drawdowns on this portfolio are much higher than typical.
zie
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zie »

michaeljc70 wrote: Fri Dec 03, 2021 6:06 pm
Afrofreak wrote: Fri Dec 03, 2021 6:03 pm
michaeljc70 wrote: Fri Dec 03, 2021 5:44 pm I am contemplating putting a small portion of my portfolio in this. If you were to start this now, how would you do it timing wise? I am talking x% in now, and y% added every z months/quarters. Obviously I know this is an educated guess at best.

If I were answering my own question, given where the market is at, inflation worries, interest rates, etc. I would probably put in 1/12th every month for the next year.
There will always be uncertainties in the market, that's why you are compensated, to take on those risks. 1 year is a long time to get your full capital allocation in, a lot of expected return lost. Time in market beats timing the market.
Thanks for the response. I know that is normally true, but drawdowns on this portfolio are much higher than typical.
The drawdowns of very high proportions are basically guaranteed with this portfolio. It's basically only a matter of WHEN they will drop to near 0, not IF they will drop. This is expected. That is basically the entire point of TMF, to help protect you a little WHEN it happens, not IF it happens.

i.e. If you can't handle UPRO being down near 0, or TMF showing nearly consistent RED/negative #'s you should not even contemplate this strategy, it's guaranteed not for you. The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

zie wrote: Fri Dec 03, 2021 8:34 pmThe drawdowns of very high proportions are basically guaranteed with this portfolio. It's basically only a matter of WHEN they will drop to near 0, not IF they will drop. This is expected. That is basically the entire point of TMF, to help protect you a little WHEN it happens, not IF it happens.

i.e. If you can't handle UPRO being down near 0, or TMF showing nearly consistent RED/negative #'s you should not even contemplate this strategy, it's guaranteed not for you. The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
Strongly agreed with all this, and to add to that last point - the demise of TMF and UPRO together might not even be a "big crash," i.e. fast and hard. It could very well be slow, long, and painful.
Booglie
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Booglie »

zie wrote: Fri Dec 03, 2021 8:34 pm For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
2020 (until the FED stepped in, of course) says hello.
zie
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zie »

DMoogle wrote: Fri Dec 03, 2021 10:42 pm
zie wrote: Fri Dec 03, 2021 8:34 pmThe drawdowns of very high proportions are basically guaranteed with this portfolio. It's basically only a matter of WHEN they will drop to near 0, not IF they will drop. This is expected. That is basically the entire point of TMF, to help protect you a little WHEN it happens, not IF it happens.

i.e. If you can't handle UPRO being down near 0, or TMF showing nearly consistent RED/negative #'s you should not even contemplate this strategy, it's guaranteed not for you. The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
Strongly agreed with all this, and to add to that last point - the demise of TMF and UPRO together might not even be a "big crash," i.e. fast and hard. It could very well be slow, long, and painful.
+1, Good point!
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

cflannagan wrote: Fri Dec 03, 2021 5:49 pm
kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because markets aren't that simple.

What makes you think the markets hasn't priced in that expectation already?
There are times when the market expectation clearly changes though. Like Powell's recent testimony before Congress which was somewhat surprising and caused some significant market moves. Short term rates increased while longer rates decreased. A surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

skierincolorado wrote: Sat Dec 04, 2021 12:48 pmA surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Better for LTT than for ITT?
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cflannagan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

skierincolorado wrote: Sat Dec 04, 2021 12:48 pm
cflannagan wrote: Fri Dec 03, 2021 5:49 pm
kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because markets aren't that simple.

What makes you think the markets hasn't priced in that expectation already?
There are times when the market expectation clearly changes though. Like Powell's recent testimony before Congress which was somewhat surprising and caused some significant market moves. Short term rates increased while longer rates decreased. A surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Well, that means the expectations has changed though. So markets react accordingly right?

I'm just trying to explain to the other person that it isn't really that surprising that we would still see TLT, TMF, etc rise every now and then even when we feel like we are facing rising interest rates for the next year or two. Those expectations are most likely already priced in, so any "changing" expectation that suggests better news (ie: 2 interest rates instead of 3), would probably see TLT/TMF be bumped slightly.

Bottom line is, we really shouldn't think of price movements as simplistically as the other commenter I replied to think things should.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

cflannagan wrote: Sat Dec 04, 2021 2:06 pm
skierincolorado wrote: Sat Dec 04, 2021 12:48 pm
cflannagan wrote: Fri Dec 03, 2021 5:49 pm
kbourgu wrote: Fri Dec 03, 2021 4:31 pm Why does TLT/TMF go up in price when there is a lot of talks that the fed will taper?
Because markets aren't that simple.

What makes you think the markets hasn't priced in that expectation already?
There are times when the market expectation clearly changes though. Like Powell's recent testimony before Congress which was somewhat surprising and caused some significant market moves. Short term rates increased while longer rates decreased. A surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Well, that means the expectations has changed though. So markets react accordingly right?

I'm just trying to explain to the other person that it isn't really that surprising that we would still see TLT, TMF, etc rise every now and then even when we feel like we are facing rising interest rates for the next year or two. Those expectations are most likely already priced in, so any "changing" expectation that suggests better news (ie: 2 interest rates instead of 3), would probably see TLT/TMF be bumped slightly.

Bottom line is, we really shouldn't think of price movements as simplistically as the other commenter I replied to think things should.
That's the thing though - you've got the direction of the effect reversed and the original poster was correctly observing that, counterintuitively, when expectations shift to more hawkish policy (3 hikes instead of 2), TMF rises. A more hawkish FED that does 3 hikes instead of 2 based on the same economic data, actually bumps TMF because it likely means lower long-term growth and inflation.

When Powell made the comments of an accelerated taper the market immediately and sharply reacted with higher short term intrest rates and lower long-term rates. Look at what happened during Powell's testimony on Tuesday. The 2 year interest rate spiked dramatically while the 30y rate decreased slightly. 30y rates have continued to slide *lower* throughout the week as the market digested Powell's testimony and other comments from Fed officials suggesting growing concern over recent inflation and intent to use *higher* short-term interest rates and accelerated taper to fight it.

The shift in market expectatiosn and market interest rates this week was quite noticeable. The 2 year jumped from under .5% to over .6%. And the 30 year, after holding between 1.8 and 2% for months, fell from 1.87% to 1.68%. Doesn't sound like much, but these are pretty significant moves in opposite directions.

In my opinion, it's unfortunate. Over the last 6-9 months the market has been getting gradually less and less concerned about long-term inflation and shifting to a lower growth outlook. This is indicated by the gradual drift lower in in long-term interest rates from 2.4% to 1.68%. Meanwhile, first politicians, and now the Fed, are becoming increasingly concerned over inflation. The market is telling the Fed not to worry about inflation and that the long-term outlook for growth and inflation is weak. Until this week I thought the Fed was doing a pretty good job of ignoring a chorus of politicians and WSJ articles about inflation fears.A supportive monetary policy is likely warranted for several more years. We remain about 3M jobs below full-employment and 2M below pre-pandemic levels, meaning plenty of slack in the labor market as people return to work. We've had over a decade of persistently low inflation and growth. I don't see the rush to taper or raise rates. This is all just personal opinion though, the Fed has been very supportive overall, and it will be interesting to see how things play out.
Last edited by skierincolorado on Sat Dec 04, 2021 3:52 pm, edited 8 times in total.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Hfearless wrote: Sat Dec 04, 2021 1:18 pm
skierincolorado wrote: Sat Dec 04, 2021 12:48 pmA surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Better for LTT than for ITT?
Yes exactly. LTT go up on hawkish short-term comments from Powell, while ITT go down. It's not actionable though because who knows what he will say next, there's relatively little room for the curve to flatten beyond 5 years anyways, and any shifts in policy thinking are likely very subtle.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

skierincolorado wrote: Sat Dec 04, 2021 3:05 pm That's the thing though - you've got the direction of the effect reversed and the original poster was correctly observing that, counterintuitively, when expectations shift to more hawkish policy (3 hikes instead of 2), TMF rises. A more hawkish FED that does 3 hikes instead of 2 based on the same economic data, actually bumps TMF because it likely means lower long-term growth and inflation.

When Powell made the comments of an accelerated taper the market immediately and sharply reacted with higher short term intrest rates and lower long-term rates. Look at what happened during Powell's testimony on Tuesday. The 2 year interest rate spiked dramatically while the 30y rate decreased slightly. 30y rates have continued to slide *lower* throughout the week as the market digested Powell's testimony and other comments from Fed officials suggesting growing concern over recent inflation and intent to use *higher* short-term interest rates and accelerated taper to fight it.

The shift in market expectatiosn and market interest rates this week was quite noticeable. The 2 year jumped from under .5% to over .6%. And the 30 year, after holding between 1.8 and 2% for months, fell from 1.87% to 1.68%.
I'm not so sure about this. To me, it seems far more likely that TMF is spiking in response to investors going from risk-on to risk-off mode, hence the diversion in ITT and LTT. The correlation between TMF and TQQQ has been almost perfectly negative this week, down to even the smallest intervals. One drops, the other spikes. I mean, ultimately it probably is a mixture of both, but I would expect that the threat of inflation is much worse for equities than LTTs, but from what we've seen this week the more hawkish Fed has been an overall net negative for equities across the board, particularly for high P/E stocks. Evidently, the raising of interest rates earlier is a larger threat than inflation forcing the Fed's hand.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Sat Dec 04, 2021 3:52 pm
skierincolorado wrote: Sat Dec 04, 2021 3:05 pm That's the thing though - you've got the direction of the effect reversed and the original poster was correctly observing that, counterintuitively, when expectations shift to more hawkish policy (3 hikes instead of 2), TMF rises. A more hawkish FED that does 3 hikes instead of 2 based on the same economic data, actually bumps TMF because it likely means lower long-term growth and inflation.

When Powell made the comments of an accelerated taper the market immediately and sharply reacted with higher short term intrest rates and lower long-term rates. Look at what happened during Powell's testimony on Tuesday. The 2 year interest rate spiked dramatically while the 30y rate decreased slightly. 30y rates have continued to slide *lower* throughout the week as the market digested Powell's testimony and other comments from Fed officials suggesting growing concern over recent inflation and intent to use *higher* short-term interest rates and accelerated taper to fight it.

The shift in market expectatiosn and market interest rates this week was quite noticeable. The 2 year jumped from under .5% to over .6%. And the 30 year, after holding between 1.8 and 2% for months, fell from 1.87% to 1.68%.
I'm not so sure about this. To me, it seems far more likely that TMF is spiking in response to investors going from risk-on to risk-off mode, hence the diversion in ITT and LTT. The correlation between TMF and TQQQ has been almost perfectly negative this week, down to even the smallest intervals. One drops, the other spikes. I mean, ultimately it probably is a mixture of both, but I would expect that the threat of inflation is much worse for equities than LTTs, but from what we've seen this week the more hawkish Fed has been an overall net negative for equities across the board, particularly for high P/E stocks. Evidently, the raising of interest rates earlier is a larger threat than inflation forcing the Fed's hand.


Risk off is very intertwined with lower growth and lower inflation expectations*. We're saying similar things. I'd also point out that if it was as simple as "risk-off" we'd see all bonds rally including long TIPS. Instead, the rally in TIPS was much smaller than non-TIPS. Long-term TIPS didn't rally nearly as much indicating that the rally in LTT was largely based on a reduced long-term inflation outlook. The breakeven 10-yr inflation rate fell from 2.54 to 2.43 this week. If inflation wasn't a big part of this, we would have seen *all* long-term bonds rally hard including TIPS - instead of just nominal LTT. TIPS still rallied a little - probably due to the lower growth / risk-off (due to secondary affects of lower inflation). But the much larger rally in non-TIPS was a pure lower inflation move.

*In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zkn »

skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

zkn wrote: Sat Dec 04, 2021 6:17 pm
skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

skierincolorado wrote: Sat Dec 04, 2021 6:30 pm
zkn wrote: Sat Dec 04, 2021 6:17 pm
skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
Last edited by comeinvest on Sat Dec 04, 2021 9:00 pm, edited 3 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

skierincolorado wrote: Sat Dec 04, 2021 3:07 pm
Hfearless wrote: Sat Dec 04, 2021 1:18 pm
skierincolorado wrote: Sat Dec 04, 2021 12:48 pmA surprisingly fast taper / hawkish FED in the short term is good for TMF because it reduces long-term inflation and growth.
Better for LTT than for ITT?
Yes exactly. LTT go up on hawkish short-term comments from Powell, while ITT go down. It's not actionable though because who knows what he will say next, there's relatively little room for the curve to flatten beyond 5 years anyways, and any shifts in policy thinking are likely very subtle.
wish there were a 5x or 10x STT ETF I could buy next time the yield curve inverts!
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

comeinvest wrote: Sat Dec 04, 2021 7:52 pm
skierincolorado wrote: Sat Dec 04, 2021 6:30 pm
zkn wrote: Sat Dec 04, 2021 6:17 pm
skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
zkn
Posts: 67
Joined: Thu Oct 14, 2021 12:45 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zkn »

skierincolorado wrote: Sat Dec 04, 2021 9:37 pm
comeinvest wrote: Sat Dec 04, 2021 7:52 pm
skierincolorado wrote: Sat Dec 04, 2021 6:30 pm
zkn wrote: Sat Dec 04, 2021 6:17 pm
skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
When you say all else equal, are you holding nominal rates constant or real rates constant?
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

zkn wrote: Sat Dec 04, 2021 10:48 pm
skierincolorado wrote: Sat Dec 04, 2021 9:37 pm
comeinvest wrote: Sat Dec 04, 2021 7:52 pm
skierincolorado wrote: Sat Dec 04, 2021 6:30 pm
zkn wrote: Sat Dec 04, 2021 6:17 pm

Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
When you say all else equal, are you holding nominal rates constant or real rates constant?
Nominal, because the discount factor is nominal.
comeinvest
Posts: 2709
Joined: Mon Mar 12, 2012 6:57 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

skierincolorado wrote: Sat Dec 04, 2021 9:37 pm
comeinvest wrote: Sat Dec 04, 2021 7:52 pm
skierincolorado wrote: Sat Dec 04, 2021 6:30 pm
zkn wrote: Sat Dec 04, 2021 6:17 pm
skierincolorado wrote: Sat Dec 04, 2021 3:58 pm *In addition to the negative macro effects on growth and growth companies, lower inflation also hurts growth companies more. If your valuation is based on being a 10x larger company 10 years from now (in part based on inflation), you'll be more affected than a company whose value is based more on the earnings they will generate this year and in the near future. Companies that hold debt are more affected. Etc.
Is this the case? My expectation is that as valuations (e.g., P/E) are real numbers a growth company with earnings that move with inflation would not be affected as E and therefore P will float with inflation, all else equal.

Great explanation on the bond rates, I agree 100%. Accelerated taper signals the end of "lower for longer" rate policy, so rate hikes are priced in to the short end of the curve and lower growth and inflation expectations are priced in to the long end. Curiously, the FED ending their bond-buying program leads to higher bond prices, go figure. I also think inflation is becoming a hot political issue which is spilling over.
At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
Are you sure that there is no fallacy in your logic? Or help me resolve this conundrum. The value of a company that sells goods or services and that has no (fixed-income) debt, should be agnostic of any measures of money (inflation, interest rates); in fact, it should be agnostic of any currency at all, shouldn't it? It could theoretically exist and operate without currency, by trading their supply chain purchases for salable items. The value of the goods or services sold typically rises with inflation, so that the "real income" stays constant (all other things being equal). Currency is just needed for accounting purposes. Think of it, many companies are dual-listed in more than one currency. If their value were to depend on inflation numbers or the interest rate policy of any particular currency, which currency would it be? I think the measure "present value" introduces a currency preference; could that be the fallacy?

P/E is a good valuation measure of a company (all other things being equal). P/E is the same regardless in which currency you express it. Of course, lower inflation affects companies with debt negatively, as the debt will be inflated away more slowly. But that's not an effect you were describing, I think.
zkn
Posts: 67
Joined: Thu Oct 14, 2021 12:45 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zkn »

skierincolorado wrote: Sat Dec 04, 2021 11:28 pm
zkn wrote: Sat Dec 04, 2021 10:48 pm
skierincolorado wrote: Sat Dec 04, 2021 9:37 pm
comeinvest wrote: Sat Dec 04, 2021 7:52 pm
skierincolorado wrote: Sat Dec 04, 2021 6:30 pm

At first I wasn't sure if the part you quoted was true either, but I think it is. If inflation is lower, the nominal E is also lower. Unless the discount factor is lower, the present value is also lower. Normally if inflation is lower, the discount factor would be also. But a more hawkish Fed means lower inflation and higher discount factors which both lower present values of growth companies whose value is based on expected earnings farther in the future. Companies with earnings weighted closer to present would be less affected.
I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
When you say all else equal, are you holding nominal rates constant or real rates constant?
Nominal, because the discount factor is nominal.
OK, I think I know where you are coming from now. Lower inflation holding nominal rates constant and higher nominal rates holding inflation constant both imply higher real rates which is bad for growth or "high duration" stocks. I was thinking that a change in inflation holding real rates constant (implying a chance in nominal rates) would not necessarily impact growth stocks, as P/E does not need to be adjusted for inflation like comeinvest may also be getting at.
km91
Posts: 1388
Joined: Wed Oct 13, 2021 12:32 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by km91 »

If I want to replace UPRO with MES, to get the right leverage on the futures I would buy ~$10k of VOO per MES contract, is that right?
comeinvest
Posts: 2709
Joined: Mon Mar 12, 2012 6:57 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

zkn wrote: Sun Dec 05, 2021 6:44 am
skierincolorado wrote: Sat Dec 04, 2021 11:28 pm
zkn wrote: Sat Dec 04, 2021 10:48 pm
skierincolorado wrote: Sat Dec 04, 2021 9:37 pm
comeinvest wrote: Sat Dec 04, 2021 7:52 pm

I'm following this conversation with interest, and I'm always confused. Growth companies are supposed to be more affected by interest rate changes, as skier explained. Value companies with lower current P/E less so. But then again, I think value companies are generally more leveraged, so they are effectively maybe more sensitive to interest rates (think of utilities or REITs - they say they are bond substitutes in a way)?

High inflation per se does not negatively affect either bonds or stocks. Increasing interest rates do. But inflation and interest rates are correlated - not he mathematical instant correlation, but with a lag either way - i.e. in the long run they are correlated - so sooner or later one will catch up with the other. That's my understanding.
So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
When you say all else equal, are you holding nominal rates constant or real rates constant?
Nominal, because the discount factor is nominal.
OK, I think I know where you are coming from now. Lower inflation holding nominal rates constant and higher nominal rates holding inflation constant both imply higher real rates which is bad for growth or "high duration" stocks. I was thinking that a change in inflation holding real rates constant (implying a chance in nominal rates) would not necessarily impact growth stocks, as P/E does not need to be adjusted for inflation like comeinvest may also be getting at.
I came to the same conclusion that the *real* risk-free rate can be used as a discount rate, i.e. as a rate to compare the return of the risky assets to. Higher *real* risk-free rates would justify lower P/E, i.e. higher *real* expected returns from equities, assuming the ERP (equity risk premium) is constant. But as I said in my previous post, I can't wrap my head around the currency preference of the discount rate, that I would think shouldn't exist.
investor.was.here
Posts: 88
Joined: Thu Oct 08, 2020 2:52 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

zie wrote: Fri Dec 03, 2021 8:34 pm The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
We could hedge against this possibility, no? I'm thinking downside convexity using CYA.

I know it's a zero-sum game and will drag on performance but if the extra security it provides enables us to take on more risk, I think it'd still be worth it, no?
zie
Posts: 1094
Joined: Sun Mar 22, 2020 4:35 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zie »

investor.was.here wrote: Mon Dec 06, 2021 11:47 am
zie wrote: Fri Dec 03, 2021 8:34 pm The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
We could hedge against this possibility, no? I'm thinking downside convexity using CYA.

I know it's a zero-sum game and will drag on performance but if the extra security it provides enables us to take on more risk, I think it'd still be worth it, no?
If you get paid for taking risk, and are mitigating every possible risk, the chance of any excess return should in theory be 0, unless an arbitrage opportunity exists.

Specifically about CYA.. It is brand spanking new, and I haven't found a similar fund that's been around past any sort of crash, so who knows how it works out in reality. Since all the risks are unknown, I'm pretty sure this is mostly there to make someone feel better prior to the risk showing up, but in practice tend to not do so well in mitigating the actual risk(s) that show up. I'm definitely not an expert in this stuff though.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
jarjarM
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Joined: Mon Jul 16, 2018 1:21 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

investor.was.here wrote: Mon Dec 06, 2021 11:47 am
zie wrote: Fri Dec 03, 2021 8:34 pm The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
We could hedge against this possibility, no? I'm thinking downside convexity using CYA.

I know it's a zero-sum game and will drag on performance but if the extra security it provides enables us to take on more risk, I think it'd still be worth it, no?
But if you buy enough insurances to reduce the risk, that'll also erode too much of the potential outperformance. There's no free lunch, diving into this strategy means you're taking more risk than a normal portfolio. But if you want to reduce the risk, then maybe lower leverage should be the answer and not buying more insurances and pay more fees. Just my 2 cents
majasan
Posts: 38
Joined: Mon Oct 12, 2020 12:09 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by majasan »

I am a 55-45 upro-tmf guy for a x% of my portfolio that I can afford to lose.
However, I am planning to start a weekly periodic X$ contribution in addition to the existing portfolio.
So I wonder if instead of 55-45 upro-tmf, I buy 100% upro every week. Immediately place an automatic sell 50% order at 2x the price of entry. In other words - 'sell half on double'. Once the price of UPRO moves cross 2x of the wkly lot's price it is of 'Zero Cost'.

Darryl Guppy has a variation of this in old times named " Zero Cost".
Jeffrey Hirsch's 'https://www.fidelity.com/learning-cente ... -positions' sell 20% on 40% up' may be able to buy the 'insurance' protection that TMF offers?
While I understand that TMF is for insurance especially for lump sum contributions, its presence may not be that much needed for 'periodic' contributions?
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

comeinvest wrote: Sun Dec 05, 2021 9:12 pm
zkn wrote: Sun Dec 05, 2021 6:44 am
skierincolorado wrote: Sat Dec 04, 2021 11:28 pm
zkn wrote: Sat Dec 04, 2021 10:48 pm
skierincolorado wrote: Sat Dec 04, 2021 9:37 pm

So inflation on its own, or interest rates on their own, could both affect growth companies disproportionately. Or they could affect in tandem. All else equal, lower inflation would lower present value of growth stocks. All else equal, higher interest rates would lower present value of growth stocks. Often lower inflation expectations would spell lower interest rates. But this week the FED talk both lowered inflation expectations, and also increased intererest rates (except for long rates - which are past the horizon of most stock valuation models).
When you say all else equal, are you holding nominal rates constant or real rates constant?
Nominal, because the discount factor is nominal.
OK, I think I know where you are coming from now. Lower inflation holding nominal rates constant and higher nominal rates holding inflation constant both imply higher real rates which is bad for growth or "high duration" stocks. I was thinking that a change in inflation holding real rates constant (implying a chance in nominal rates) would not necessarily impact growth stocks, as P/E does not need to be adjusted for inflation like comeinvest may also be getting at.
I came to the same conclusion that the *real* risk-free rate can be used as a discount rate, i.e. as a rate to compare the return of the risky assets to. Higher *real* risk-free rates would justify lower P/E, i.e. higher *real* expected returns from equities, assuming the ERP (equity risk premium) is constant. But as I said in my previous post, I can't wrap my head around the currency preference of the discount rate, that I would think shouldn't exist.
If the nominal rate is unchanged, and inflation is higher, the real rate is lower. Therefore, higher inflation is good for growth stocks if nominal rates are unchanged (which happens when the Fed talk is dovish).
Hfearless
Posts: 135
Joined: Sat Aug 14, 2021 9:53 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

majasan wrote: Mon Dec 06, 2021 3:20 pm So I wonder if instead of 55-45 upro-tmf, I buy 100% upro every week. Immediately place an automatic sell 50% order at 2x the price of entry. In other words - 'sell half on double'. Once the price of UPRO moves cross 2x of the wkly lot's price it is of 'Zero Cost'.
That’s essentially gradual deleveraging. Which is not a bad idea, but why do it with such a huge step instead of defining a smooth glideslope and rebalancing quarterly to adhere to it?

UPRO won’t double for years so this method certainly does nothing against a crisis in, say, 2022.
taojaxx
Posts: 311
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

For those running HFEA through futures contracts, do you weigh the respective allocation between ES on the one hand and ZN/ZB on the other according to volatility? If so, what is the length of the look back period and how often do you adjust?
TIA
Better lucky than smart.
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

taojaxx wrote: Mon Dec 06, 2021 6:44 pm For those running HFEA through futures contracts, do you weigh the respective allocation between ES on the one hand and ZN/ZB on the other according to volatility? If so, what is the length of the look back period and how often do you adjust?
TIA
See this thread: viewtopic.php?f=10&t=357281&sid=4c93660 ... ae237247f9

It's basically advanced HFEA for anyone willing to do it with futures.
User avatar
ltdshred
Posts: 68
Joined: Sun Jul 07, 2019 9:41 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ltdshred »

Not to derail the current discussion right now, but does anyone know of 3x levered TIPs funds out there? ProShares + Direxion do not have these products and I can't do inflation swaps for being a retail investor.
rchmx1
Posts: 523
Joined: Sat Oct 26, 2019 6:38 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

If a leveraged TIPS fund had been released I'm sure there would have been tons of talk about it here. I haven't searched myself, but current consensus is that there is no such fund.
jarjarM
Posts: 2511
Joined: Mon Jul 16, 2018 1:21 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

There's no such fund as far as we know and since SEC banned additional 3x funds, there likely won't be one. That's why there's a whole other thread on discussion of using ITT futures to reduce interest rate risk.
kbourgu
Posts: 23
Joined: Tue Sep 28, 2021 10:05 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kbourgu »

jarjarM wrote: Mon Dec 06, 2021 1:38 pm
investor.was.here wrote: Mon Dec 06, 2021 11:47 am
zie wrote: Fri Dec 03, 2021 8:34 pm The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
We could hedge against this possibility, no? I'm thinking downside convexity using CYA.

I know it's a zero-sum game and will drag on performance but if the extra security it provides enables us to take on more risk, I think it'd still be worth it, no?
But if you buy enough insurances to reduce the risk, that'll also erode too much of the potential outperformance. There's no free lunch, diving into this strategy means you're taking more risk than a normal portfolio. But if you want to reduce the risk, then maybe lower leverage should be the answer and not buying more insurances and pay more fees. Just my 2 cents
I think a good way to protect yourself on the downside is to pay attention to the s&p500's 200-day simple moving average. I think over long periods of time if hypothetically you had perfect trade execution and exited out of the UPRO any time the S&P500 drops below its 200-day SMA, the returns would be much higher under this system. I'll admit I haven't fully thought it out because I'm not sure if it would be best to stay in or exit TMF under this scenario. Also using M1 Finance, you would never have perfect trade execution. So this is just something to think about more than a concrete solution.
jarjarM
Posts: 2511
Joined: Mon Jul 16, 2018 1:21 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

kbourgu wrote: Wed Dec 08, 2021 8:02 pm
jarjarM wrote: Mon Dec 06, 2021 1:38 pm
investor.was.here wrote: Mon Dec 06, 2021 11:47 am
zie wrote: Fri Dec 03, 2021 8:34 pm The risks of losing every penny you put into this strategy while unlikely, is totally within the realm of possibility. If you can't afford to lose every $ you put into this, get out now while you can.

For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
We could hedge against this possibility, no? I'm thinking downside convexity using CYA.

I know it's a zero-sum game and will drag on performance but if the extra security it provides enables us to take on more risk, I think it'd still be worth it, no?
But if you buy enough insurances to reduce the risk, that'll also erode too much of the potential outperformance. There's no free lunch, diving into this strategy means you're taking more risk than a normal portfolio. But if you want to reduce the risk, then maybe lower leverage should be the answer and not buying more insurances and pay more fees. Just my 2 cents
I think a good way to protect yourself on the downside is to pay attention to the s&p500's 200-day simple moving average. I think over long periods of time if hypothetically you had perfect trade execution and exited out of the UPRO any time the S&P500 drops below its 200-day SMA, the returns would be much higher under this system. I'll admit I haven't fully thought it out because I'm not sure if it would be best to stay in or exit TMF under this scenario. Also using M1 Finance, you would never have perfect trade execution. So this is just something to think about more than a concrete solution.
There's a paper already written on this [url=https://papers.ssrn.com/sol3/papers.cfm ... id=2741701]Leverage for the Long Run ]/url], worth a read if you want to look into 200-day SMA. Also, there's a couple of long threads already discussed this strategy.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

jarjarM wrote: Wed Dec 08, 2021 8:33 pm There's a paper already written on this [url=https://papers.ssrn.com/sol3/papers.cfm ... id=2741701]Leverage for the Long Run ]/url], worth a read if you want to look into 200-day SMA. Also, there's a couple of long threads already discussed this strategy.
There's a post on Reddit outlining why this paper is largely nonsense mainly because it's not grounded in any generally accepted investing principles. A huge chunk of that outperformance from not being invested during drawdowns has come from only a handful of market crashes, certainly not enough to conclusively say that the method works. Though I haven't tested it out myself, someone mentioned how the 200SMA just so happens to perfectly skirt Black Monday while getting out almost near peak values. The same is true for the Dot-com bubble burst and GFC. It's easy to say in hindsight that getting out based on the 200SMA would've been ideal, but what's to say that the 175SMA won't be better next time? Or perhaps 250? At the end of the day, it's a completely arbitrary line that just so happened to be the best this time. That's all TA is in a nutshell, self-fulfilling prophecies, but there's not enough people that buy in to them for it to actually work just yet.

Then you also have the issue of actually implementing the theory. What happens if we keep bouncing above and below the 200SMA? What happens if we drop right through the 200SMA by 5/10/15% at open one day? Worst case scenario you're down 45% on UPRO from where you should've ideally sold. Now what?

And lastly, the paper isn't peer-reviewed or coming from a particularly credible source.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

I don't disagree, but I also think that considering trading is free, it's probably just a small underperformance that is risked using an SMA strategy. It would be good if people just understand going in that you're hoping to underperform for many years and then outperform bigly in a 30% drop. That is what it's really for. If that's surprising then my hope would be that a person interested in it would become unsurprised. If somebody reads the definition of "whipsaw" (which is not at all hard to understand) then anybody reasonable could download some S&P daily data into excel and in a few minutes show the trades going back years and years. FWIW.

It's a little less clear to me how this plays out with 3X leveraged funds. The volatility is amplified and the decay is amplified. That doesn't really turn me off to using SMA with 3X funds.

I don't do it. Not planning to start. I did do the data thing, though.
This time is the same
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tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Afrofreak wrote: Thu Dec 09, 2021 1:28 am It's easy to say in hindsight that getting out based on the 200SMA would've been ideal, but what's to say that the 175SMA won't be better next time? Or perhaps 250? At the end of the day, it's a completely arbitrary line that just so happened to be the best this time.
To be fair, quarterly rebalancing in HFEA (as opposed to weekly, monthly, yearly, etc) is also arbitrary, even HedgeFundie said so - it just provided the best result in backtests. Not that I have a better approach, I quarterly rebalance too. I have used a target volatility model in the past, which feels less arbitrary, but I didn't stick with it - it results in too many trades.
zie wrote: Fri Dec 03, 2021 8:34 pm For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
It's a scary thought and on at least a couple of days during the COVID crash they moved sharply down together. I believe the reason TMF moved down with UPRO on these days was due to epic Fed decisions on those days, which also didn't immediately allay fears in the market on the very same days (but did quickly turn the market around resulting in the fastest recovery ever). So I guess the point here is they can move together when bond investors and market investors digest the same news differently.

As I understand it, it would be extremely unlikely for SPY and TLT to lose 33% of their value together, either quickly or slowly. Can anyone provide some hypothetical scenarios where this could happen?
Last edited by tomphilly on Thu Dec 09, 2021 8:42 am, edited 4 times in total.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

Afrofreak wrote: Thu Dec 09, 2021 1:28 am
jarjarM wrote: Wed Dec 08, 2021 8:33 pm There's a paper already written on this [url=https://papers.ssrn.com/sol3/papers.cfm ... id=2741701]Leverage for the Long Run ]/url], worth a read if you want to look into 200-day SMA. Also, there's a couple of long threads already discussed this strategy.
There's a post on Reddit outlining why this paper is largely nonsense mainly because it's not grounded in any generally accepted investing principles. A huge chunk of that outperformance from not being invested during drawdowns has come from only a handful of market crashes, certainly not enough to conclusively say that the method works. Though I haven't tested it out myself, someone mentioned how the 200SMA just so happens to perfectly skirt Black Monday while getting out almost near peak values. The same is true for the Dot-com bubble burst and GFC. It's easy to say in hindsight that getting out based on the 200SMA would've been ideal, but what's to say that the 175SMA won't be better next time? Or perhaps 250? At the end of the day, it's a completely arbitrary line that just so happened to be the best this time. That's all TA is in a nutshell, self-fulfilling prophecies, but there's not enough people that buy in to them for it to actually work just yet.

Then you also have the issue of actually implementing the theory. What happens if we keep bouncing above and below the 200SMA? What happens if we drop right through the 200SMA by 5/10/15% at open one day? Worst case scenario you're down 45% on UPRO from where you should've ideally sold. Now what?

And lastly, the paper isn't peer-reviewed or coming from a particularly credible source.
You bring up some good points. Personally, I keep flipping back and forth on the validity of TA as a whole. However, I think all of your criticisms of the 200SMA strategy are addressed by this excellent series of posts: http://www.philosophicaleconomics.com/2 ... ngaverage/. It's a long read and fairly technical, but I think it addresses a LOT of the criticisms in a reasonably scientific way (albeit likely not peer-reviewed either). One of the main points is that 200 certainly isn't and doesn't need to be some golden number - it's just directionally correct, just like the 55/45 HFEA allocations and quarterly rebalancing are directionally correct.

Your points about it not being peer-reviewed and not coming from a credible source are extremely valid. I'd like to add one more that, IMO, breaks the author's entire backtesting: his simulating version of SSO/UPRO was WAY overly simplistic, and honestly, way to conservative with prior decade costs. In particular, there should've been an implied financing costs included in SSO/UPRO that have been mostly negligible since their actual inception, but would've made a MAJOR negative impact on performance in the past century. I think that point alone completely invalidates most of the whole paper, and is often overlooked.

I don't use TA, but I did plan on doing it for a few months with a small portion of my portfolio.
Last edited by DMoogle on Thu Dec 09, 2021 8:38 am, edited 1 time in total.
bgf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

tomphilly wrote: Thu Dec 09, 2021 8:29 am
Afrofreak wrote: Thu Dec 09, 2021 1:28 am It's easy to say in hindsight that getting out based on the 200SMA would've been ideal, but what's to say that the 175SMA won't be better next time? Or perhaps 250? At the end of the day, it's a completely arbitrary line that just so happened to be the best this time.
To be fair, quarterly rebalancing in HFEA (as opposed to weekly, monthly, yearly, etc) is also arbitrary, even HedgeFundie said so - it just provided the best result in backtests. Not that I have a better approach, I quarterly rebalance too. I have used a target volatility model in the past, which feels less arbitrary, but I didn't stick with it - it results in too many trades.
zie wrote: Fri Dec 03, 2021 8:34 pm For those that think going to 0 is not possible, all it would take is for the correlation of TMF and UPRO to go together during a big crash. The positive correlation has happened in the past, so we KNOW it's possible.
It's a scary thought and on at least a couple of days during the COVID crash they moved sharply down together. I believe the reason TMF moved down with UPRO on these days was due to epic Fed actions on those days, which also didn't immediately allay fears in the market on the very same days (but did quickly turn the market around resulting in the fastest recovery ever). So guess the point here is they can move together when bond investors and market investors digest the same news differently.

As I understand it, it would be extremely unlikely for for SPY and TLT to lose 33% of their value together, either quickly or slowly. Can anyone provide some hypothetical scenarios where this could happen?
the global long term trend of deflation would have to reverse such that we expected high inflation in the near term sufficient to tank the SP500 but long term inflation at a level sufficient to wreck long duration bonds.

this, like anything, is possible, but i think we're making a pretty decent bet that it won't happen until long after we've banked our outperformance. but even then, people with standard 60/40 portfolios would be hit very hard as well. over time they'd say that the rising rates would help their bond returns, but that would take years. it wouldn't be good for anyone, and high growth type stocks would get absolutely murdered. its difficult for profitable companies to make good returns on equity during periods of high inflation. companies that can't even make money and that are burning cash at any cost simply for growth would just vanish from existence.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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