How does the permanent portfolio survive a hyperinflation scenario ?

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Frosti85
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Joined: Thu May 11, 2017 3:27 am

How does the permanent portfolio survive a hyperinflation scenario ?

Post by Frosti85 »

.. or any other fixed allocation rebalancing strategy that contains cash?

As I see it:

in hyperinflation, you would rebalance heavily into the cash position (selling all the others assets).

the price of the other assets measured in currency would move towards infinity in the end of the hyperinflation, forcing you to constantly sell more of the other assets.

at what point would you stop selling ?

I think the strategy just stops working if cash goes to zero (because other assets would then go to infinity.. which makes no sense)

ThisDinosaur
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by ThisDinosaur »

Probably better than anything else except 100% gold and/or maybe being invested in another country/currency. I'd imagine in most cases of hyperinflation, you'd see the writing on the wall and be very reluctant to rebalance into cash.

Dragline
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Dragline »

You can read "When Money Dies" for a blow-by-blow account of how the German hyperinflation went. Basically, it causes people to hoard hard assets of all kinds, especially gold and foreign currencies. The stock market also gyrates wildly, but basically goes up. You are better of in companies that deal in hard assets than financials. Bonds and cash go to zero.

Sovereign debt in the country's own currency is wiped out. Sovereign debt in a foreign currency causes the country to go bankrupt and have to restructure its debt.

It ends when the currency gets rebooted. Some people who used to be rich are poor. Some people who used to be poor are rich. But although misery can be high, the country and the people do not go poof. Blame is assigned and life goes on.

Frosti85
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Frosti85 »

Ok so I will just use a bound for the maximum inflation %, if it goes above that value I will stop rebalancing.

I guess ~10% should be a good value (or maybe lower ?)

vexed87
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by vexed87 »

@Frosti85, When to stop re-balancing in a hyper-inflationary environment is an interesting question. I'm not sure what Harry Brown's thoughts were, nor do I recall Craig Rowland's book going into detail on that matter either. Maybe they have no specific plans, primarily because there was no precedent in their investing careers.

Are you talking about timing the market to become over weighted in some allocations (presumably gold) or are you talking about abandoning the PP entirely?

I do recall Rowland's book saying that the PP will work in any market based economy. At some point it won't be worth selling your gold in exchange for a dying fiat currency or bonds denominated in that currency, those allocations of your portfolio might get wiped out when the currency finally cops it. I imagine at that point, even if only for a fleeting moment the market economy breaks during transition between currencies and the PP technically breaks with it.

Intuitively there are two courses of action, do nothing and keep re-balancing as normal, you'll still have your 25% allocation of gold no matter what and come out the other side of the birth of a new currency better than most of everyone else. Or, stop re-balancing when you think the death of the currency is imminent, and liquidate all your cash/bonds to buy hard assets, i.e. arable land, means of production etc. Timing will be tricky here to maximise your returns.

Sadly I lent my copy of Rowland's book to a friend who hasn't returned it yet, so I'm unable to go back to the book and check for their thoughts.

I wonder if "When Money Dies" will give some insight on timing abandonment of the PP specifically, haven't read it yet so going to add it to my reading list. I am interested in @Tyler9000's thoughts on this as he seems quite knowledgeable in the PP subject. No doubt he'll be chiming in soon :)
Last edited by vexed87 on Wed Jul 19, 2017 4:44 am, edited 1 time in total.

vexed87
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by vexed87 »

Frosti85 wrote:
Wed Jul 19, 2017 3:23 am
I guess ~10% should be a good value (or maybe lower ?)
Also, the problem with this is, where are you getting your figures? Are the figures being manipulated? Is inflation working in your favour? Or working against you?! :roll:

It's important to remember that inflation doesn't effect all goods equally, we can see some really strange things happening with asset prices.

ThisDinosaur
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by ThisDinosaur »

Frosti85, are you concerned that, if hyperinflation occurs, you will keep selling gold and buying trillion dollar bills until they dismantle the Treasury? That's how I'm reading your OP.

There is a continuum between passive investing and active investing. Some people in the crisis you are describing will horard their gold assuming the end is near. Others will see opportunity and rebalance, waiting for a profitable rebound. One of those two groups will be right and the other will be wrong. There is a continuum there too, though. If you have 25% of your NW in gold, you can decide how much to hoard and how much to risk on buying the other three assets. You either reap a nice profit, or you are left as the least-poor man in a very poor country.

Dragline
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Dragline »

10% per year is not hyperinflation. 10% a day or a week is hyperinflation. This scenario tends to happen when a country or its citizens have a lot of debt in some other country's currency and they try to pay it by printing more of their own.

It only happens during the reign of Queen Dick in a country that holds the world's reserve currency. You only get ordinary inflation in that scenario.

Frosti85
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Frosti85 »

The point I was trying to make:

At some point you have to deviate from the static rebalance strategy (and if you would follow the PP strategy to heart, you would never do that, because that would be an active decision to change the strategy) or you would have to sell more and more assets to get worthless cash.

And it's probably a good idea to define that point before it actually happens, to not make panic decisions when the time comes.

So at what point would you guys consider inflation to be hyper inflation ?

10% per month ?

Maybe other indicators ?
A government trying to solve its problems with the printing press ? (but how would you quantify that ?)

Frosti85
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Joined: Thu May 11, 2017 3:27 am

Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Frosti85 »

ThisDinosaur wrote:
Wed Jul 19, 2017 8:18 am
Frosti85, are you concerned that, if hyperinflation occurs, you will keep selling gold and buying trillion dollar bills until they dismantle the Treasury? That's how I'm reading your OP.
Yes this.
If you blindly follow the strategy, you would keep selling gold and stocks to buy more worthless bonds and cash.

Frosti85
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Joined: Thu May 11, 2017 3:27 am

Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Frosti85 »

vexed87 wrote:
Wed Jul 19, 2017 4:33 am
Also, the problem with this is, where are you getting your figures? Are the figures being manipulated? Is inflation working in your favour? Or working against you?! :roll:

It's important to remember that inflation doesn't effect all goods equally, we can see some really strange things happening with asset prices.
Since starting with ERE, I'm actually keeping a log of every financial transaction I do.

So I know how much I spend on food, rent, ... down to the cent.

But what I also want to do in the near future, create my own inflation index.

So I will track the prices of all the stuff I buy in some excel sheet and in a few years I will be able to calculate my personal inflation from it.

Dragline
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Re: How does the permanent portfolio survive a hyperinflation scenario ?

Post by Dragline »

Frosti85 wrote:
Thu Jul 20, 2017 2:08 am

So at what point would you guys consider inflation to be hyper inflation ?

10% per month ?
This is hyperinflation: https://www.bloomberg.com/news/articles ... -inflation

What you really need to get there is inflation accelerating in an exponential curve.

If you wanted a benchmark for when to stop rebalancing into your own currency and bonds, I would say it's when your currency is no longer freely convertible into the world's reserve currency, whatever that happens to be at the time. But then I would re-balance into the currency and bonds of the country holding the world's reserve currency.

As a practical matter, if I lived in a country with an historically weak currency like Mexico or a fixed exchange/non-floating currency like China or Belize, I would probably hold a lot of my cash and bond holdings in a variety of foreign instruments, which is what wealthy people in such countries do routinely.

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