ERE and the Four Horsemen
Posted: Sat Feb 08, 2014 2:07 pm
William Bernstein in his book “Deep Risk: How History Informs Portfolio Design” distinguishes between two classes of risks: (1) shallow risks – risk of temporary fluctuations in wealth and (2) deep risks – risk of permanent loss of wealth. Deep risks are those that arise over time periods of greater than twenty years.
Deep Risks – permanent loss of wealth:
(1) Inflation
(2) Deflation
(3) Confiscation
(4) Devastation
I think it would be useful to discuss whether ERE is resilient in the face of deep risks.
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Devastation:
World War II made a shambles of most normal businesses; however, business carried on. A globally diversified portfolio should be sufficient to weather a future world war (assuming it doesn’t go nuclear). ERE’s emphasis on skills should also be helpful in the event one’s own country is invaded.
I know a lady whom at the time of World War II was a young teenager. She was a member of the League of German Girls and her unit was posted to Poland. Being mechanically inclined she repaired the units bicycles. One day a man came to their unit and said the Russian’s were invading and they would be needed to assist in the evacuations. After the evacuations were completed they were informed their unit was disbanded and they were now on their own. She used one of the repaired bicycles to cycle out of Poland to Germany and later surrendered to the Allied forces. Her bicycle repair skills were very handy in deed.
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Deflation:
I define deflation to be where output declines and not just merely falling prices. The 1930’s deflation was very damaging to business, but recovery eventually ensued. A globally diversified portfolio should be sufficient to weather a 1930’s style deflation. Of more concern would be if the deflation were to be of a long term nature. Long term decline has happened before. There was the Bronze Age collapse, Iron Age collapse, and the fall of the Roman Empire. While historians debate the reasons for the decline I believe climate change was a principal factor. ERE’s emphasis on skills should be most helpful in dealing with this type of long term decline.
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Inflation:
The most likely long term risk and one where there are many options available. ERE doesn’t seem to add anything to one’s toolbox for dealing with this scenario.
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Confiscation:
http://en.wikipedia.org/wiki/Japanese_A ... internment
http://www.politico.com/story/2014/02/a ... 03079.html
In time of war, the laws fall silent.
When your country considers you an enemy of the state, what are you to do? In such a scenario the traditional career-job consumerist lifestyle is a disaster. ERE, with its emphasis on passive income, creates options. He can just leave the country. Hopefully, he has already obtained a second passport or maybe refugee status could be easily obtained in such a situation.
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Summary
I think ERE is resilient in the face of deep risks. It does well in creating options for three out of four of the above scenarios. For the fourth scenario – inflation – ERE doesn’t help, but it doesn’t hurt either.
Deep Risks – permanent loss of wealth:
(1) Inflation
(2) Deflation
(3) Confiscation
(4) Devastation
I think it would be useful to discuss whether ERE is resilient in the face of deep risks.
-----------------------------
Devastation:
World War II made a shambles of most normal businesses; however, business carried on. A globally diversified portfolio should be sufficient to weather a future world war (assuming it doesn’t go nuclear). ERE’s emphasis on skills should also be helpful in the event one’s own country is invaded.
I know a lady whom at the time of World War II was a young teenager. She was a member of the League of German Girls and her unit was posted to Poland. Being mechanically inclined she repaired the units bicycles. One day a man came to their unit and said the Russian’s were invading and they would be needed to assist in the evacuations. After the evacuations were completed they were informed their unit was disbanded and they were now on their own. She used one of the repaired bicycles to cycle out of Poland to Germany and later surrendered to the Allied forces. Her bicycle repair skills were very handy in deed.
---------------------------------------------
Deflation:
I define deflation to be where output declines and not just merely falling prices. The 1930’s deflation was very damaging to business, but recovery eventually ensued. A globally diversified portfolio should be sufficient to weather a 1930’s style deflation. Of more concern would be if the deflation were to be of a long term nature. Long term decline has happened before. There was the Bronze Age collapse, Iron Age collapse, and the fall of the Roman Empire. While historians debate the reasons for the decline I believe climate change was a principal factor. ERE’s emphasis on skills should be most helpful in dealing with this type of long term decline.
---------------------------------------------
Inflation:
The most likely long term risk and one where there are many options available. ERE doesn’t seem to add anything to one’s toolbox for dealing with this scenario.
------------------------------
Confiscation:
http://en.wikipedia.org/wiki/Japanese_A ... internment
http://www.politico.com/story/2014/02/a ... 03079.html
In time of war, the laws fall silent.
When your country considers you an enemy of the state, what are you to do? In such a scenario the traditional career-job consumerist lifestyle is a disaster. ERE, with its emphasis on passive income, creates options. He can just leave the country. Hopefully, he has already obtained a second passport or maybe refugee status could be easily obtained in such a situation.
---------------------------------
Summary
I think ERE is resilient in the face of deep risks. It does well in creating options for three out of four of the above scenarios. For the fourth scenario – inflation – ERE doesn’t help, but it doesn’t hurt either.