Permanent Portfolio in this environment?

[jacob]

@Fish - The purpose of the PP is not to generate cash or even to grow capital or much less supply some kind of ~<4% SWR. It's to preserve capital under the presumption that the capital is created by work. IOW, the goal of the PP is _0%_ SWR(*) but do so even if TSHTF to put it very crudely.

(*) But in a way that's vastly most robust than the Trinity study.

I guess SWR has been used rather frivolously as of late ... but even if it's 0%, it's still good until it runs out. I get the impression that a rather large number of humans now use SWR in the sense that "as long as you don't exceed this percentage, it's going to last forever". We might be reaching peak-faith in the wisdom of efficiency soon enough.

[KevinW]

Right, the PP is not designed to generate income, rather its goal is total return.

In addition to yield, some returns come from capital appreciation. Stocks are expected to produce a real return through capital appreciation. Gold is expected to appreciate at the rate of inflation over long time frames, with lots of noise over short time frames.

Modern portfolio theory predicts that the PP will generate some additional returns from a "rebalancing bonus" (Google it). Basically, the mechanical rebalancing rule forces the portfolio to buy assets low and sell them high. It works particularly well with volatile assets such as long term bonds and gold. As @bryan alluded, it's a matter of semantics whether this is "market timing" or not.

[Lucky C]

Equities: overvalued in pretty much every developed market, but may have further to run.

If you're willing to invest in smaller markets, there are a half dozen or so "developed" countries with CAPE < 15.

We might be reaching peak-faith in the wisdom of efficiency soon enough.

Indeed. http://redditmetrics.com/r/leanfire

[Fish]

Thanks all for the additional context. My intuitive, simplistic concept of FI is infinite-horizon (passive income = expenses) although it really is a finite-horizon problem as pointed out here and in the ERE book. I see how PP works as an investment choice with controlled capital depletion being a worst-case scenario if it works as designed.

Speaking of SWR, I discovered some recent FIRE engineering on that subject at EarlyRetirementNow after clicking around Lucky C's link:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Sorry if this is derailing the topic too much, but there's also another post on his site that had the intriguing premise of treating post-ER expenses as a negative bond, which gave me another perspective on what it means to be FI.
https://earlyretirementnow.com/2016/09/ ... -maneuver/

(It feels a little spammy posting multiple external bloglinks, but I thought there would be value in sharing... I'll edit this stuff out if it's not pertinent to the discussion here.)

[JohnnyH]

I still think it's a pretty bulletproof capital preservation portfolio, but performance depends too much on gold performance. Last 5 years gold down, avg return 3%, the 5 years before that gold up, avg 9% return... Might just be a function of real inflation, however.

Now that we're approaching a period where fed rates are likely going up, I'm probably not going to keep much in PP.

[bryan]

Seems a little strange to divest of the Au/Ag/Cu/BTC/etc portion of the portfolio now, of all times (w/ Trump, China, Russia, EU, etc).

[stayhigh]

Maybe it would be instructive to measure investment performance in units of gold? The idea is to measure it using invariant units (is gold being accumulated over time?) to avoid being tricked by fluctuations in the money supply.

This is super interesting topic. Just take a look:

[George the original one]

Be very careful of cherry-picking with a chart like that! Gold was just emerging from a period of immense national divesture and prices were -70% from the highs of 1980.

[Dragline]

Yes, it would be interesting to see the same chart from 1983-2000.

[jennypenny]

Yes, it would be interesting to see the same chart from 1983-2000.

"This interactive chart tracks the ratio of the S&P 500 market index to the price of gold. The number tells you how many ounces of gold it would take to buy the S&P 500 on any given month."




The whole chart ...

[userqname]

This is S&P adjusted to CPI. @jennypenny's second chart above indicates that the ~1979 and ~1929 dips were similar. But they aren't when measured against COL in household staples, or a day's wage averaged across the population.

[jennypenny]

Real Vision has an interview out this morning with Jeffery Gundlach. In it, he recommends the PP as a way to get through the current environment.

One of the most interesting aspects of 2020 to me is watching worlds collide.

[Mister Imperceptible]

It was probably the best interview on RV since Deden, alongside the Hendry, Cohodes, and Green interviews. Maybe only Spitznagel would would make for a better one.

He noted that the PP especially gained notoriety because of the 2008 performance which I think was anomalous because of the capital gains on long term treasuries into 2008 year end. His pro-PP view was inconsistent with his other opinion expressed in the interview that bonds no longer offer good risk/reward.

On a personal note, if I have to wait for someone like Gundlach to say publicly what I already believe, I am probably in the wrong line of work.

[jennypenny]

The interview with Jeff Booth recently was also good. It makes me feel better about the GB-ish allocation as long as the LCV and SCV portions are tech heavy. I'm not a techno-optimist or fatalist, but either way tech is destined to consume the world like Andreesson said. I guess that makes me a techno-dominionist.

[Mister Imperceptible]

I guess it depends on whether the Technocracy can maintain the post-WW2 globalist order. Booth keeps repeating what we know (tech and globalization are deflationary) and I think Raoul now has his reputation invested in Bitcoin and so is forced to find crypto-evangelists. (Hendry and Gundlach scoffed at the bitcoin narrative, and I suspect this might be one of the reasons Williams left RV.) If you only look at the performance of megacap tech maybe one might think it is a new paradigm, but the former US middle class is now a dried up husk and judging by all the social unrest, they better come up with deadlier plandemics/viruses, Frankfurt School-inspired self-loathing and race suicide, and other forms of population control to keep that going. Historically once the inflation gets out of assets and into things like food, the stock market gets crushed. They have to give “unessential personnel” free money so those people can buy iPhones and things on Amazon, otherwise the stock prices of those companies would collapse. Interested to see how long they can keep the ball in the air, but Gundlach did say that if you must invest in US stocks (which he recommends against) buy the Big 6 and have your finger on the sell button.

[jennypenny]

Consumer products won't drive those companies much longer. Data is the product so they'll just start giving that stuff away. Most big companies with any money left are putting everything up on the cloud and the military is throwing huge amounts of money into tech (since they realize that demographics are going to trim their numbers as well). Once military money is behind something, it'll have a stable source of income. Look into tech companies that service the military. IMO they are a better bet than the more common names.

btw ... Pal's notes have revealed that he's got half his money in bitcoin. He also hedged in the last note, saying that he could be wrong and lose all of it and still be ok. I think he's less certain than he was before about crypto.

[Mister Imperceptible]

Thiel and Palantir have lost money for something like 16 years in a row but they are still managing to IPO. Everything that goes up seems to require some massive government subsidy but people are making money on it anyway. Brown Tech is here.

This past Friday Pal said they need regulation in the crypto space to get institutional buyers in for price appreciation. Which seems to completely defeat the purpose of cryptos in the first place.

Tech and cryptos seem to have the same strategy.

Williams has been doing a new podcast with Fleckenstein and Pomboy(<3 <3 <3) and I think you would like it. They had Marc Faber on last and it was very humorous.

[CS]

Ohhh, I feel so stylish! In vogue finally.

[bedon]

Yes, it would be interesting to see the same chart from 1983-2000.

Here you go:

It peaked in 2000 and it has been down ever since then. If you had bought gold in 2000 you have outperformed the market so far.

[white belt]

The Dragon Portfolio has been making the rounds on many macro/finance podcasts I listen to. It has a lot of similarities to the Permanent Portfolio so I thought some folks might find it of interest. The author ran many simulations of institutional portfolios, trying to find out what asset allocation would maximize returns from the period of 1929-2019. First off, read the paper here (need to provide email, or just google it and you can find the PDF): https://docsend.com/view/taygkbn

TLDR: The Dragon Portfolio operates on similar principles as the Permanent Portfolio and its purpose is to weather any economic conditions over 90 years. The Dragon Portfolio might be capable of providing better returns than a traditional PP because it allocates a portion of assets to active strategies that profit during periods of secular change.

The Dragon Portfolio looks like this:
24% Stocks
18% Bonds
19% Gold
18% Commodity Trend Following
21% Active Long Volatility

The purpose of the first 3 asset classes should be familiar to those who know the Permanent Portfolio. Then things get a little different. I’ll start with Commodity trend following:

Commodity Trend Following is an active strategy that seeks to monetize the tendency for raw goods prices (e.g., crude oil, natural gas) to break higher or lower from an established price range due to supply and demand. Commodities trend higher in periods of extreme inflation (the 1970s) and lower in deflation (1930s, 2008), and a strategy that profits from those trends have shown non-correlation to Stocks and Bonds.

See here for implementing CTF as a retail investor: https://www.youtube.com/watch?v=tac8sWPZW0w


Next there is Active Long Volatility:

“The primary value-add of Long Volatility is anti-correlation to the growth cycle and explosive performance during market crises. The strategy is differentiated from Portfolio Insurance (“Tail Risk Hedging”) because it forgoes continuous protection for more dynamic hedging to lower costs. Long Volatility is intended to profit from melt-ups (the late 1990s, late-1950s, 1970s) or melt-downs (1930s, 2008) in markets and requires volatility to trend to perform”

See here for implementing Long Vol as a retail investor: https://www.youtube.com/watch?v=pvX5_rkm5x0


Caveats
• This focuses on an institutional portfolio, not retail investor portfolio
• This assumes the goal is wealth preservation, not some SWR, just like the PP does as Jacob explained above
• Long vol and CTF strategies will require some active investing and basic knowledge of the options market*

*For Long vol, this active trading could be as simple as rolling an options spread once a quarter (~10 min on a broker platform). For CTF, this could be as simple as automating an email notification for your preferred trend that you’ll receive a few times in a year, then executing the appropriate trade at that time (again ~10 min on broker platform). If we include time spent rebalancing annually, then I’d say total time spent “actively” managing this portfolio would be as little as a few hours a year.


The principles of the portfolio make sense to me. However, I am still working through lots of reading material on CTF and Long Vol strategies, and will not commit to any sort of investment strategy without more research. It’s even given me motivation to finally crack open Reilly and Brown’s Investment Analysis and Portfolio Management. Just like PP, I do like that this strategy is relatively set-and-forget. I’d rather spend most of my time on other things in my web of goals.

One challenge I’m encountering is figuring out which accounts would be most appropriate for each asset, because I do not believe CTF (because it requires shorts) or Long Vol (need more research on types of spreads) can be done in an IRA. For me, my 401k would have to house all the stock and bond allocations because I only have 5 fund choices.