I know PP is popular here and I do think its historical return is really impressive. I was going to invest heavily in PP this summer, but stayed away--which is pretty good, as it hasn't done too well lately.
My question is this: what if the four asset classes decouple from each other and from the economic conditions they are supposed to track? I'm thinking in particular of gold. There's no exact mechanism that ties gold to inflation--it's a tradition (admittedly a long-standing one), but there's no reason why we couldn't have a long period of gold falling and inflation rising.
Do PP investors worry about this kind of decoupling and its implications for PP?
If decoupling, what then?
If there's one thing I've learned about investment, it's that it's all about psychology. There is nothing physical tying gold to inflation, although it's immune to the effect. Rather, it's people's expectations of inflation that drive the gold price. Whenever the term "QE" pops up in a Fed Minutes transcript, the price of gold spikes, and when the talk is "no QE" then it slumps. Economic reality plays no role in 'coupling'.
When things get screwy, then naturally previously linked assets become 'decoupled'. People are too busy panic selling and covering their positions (to put it nicely) to worry about what things are 'supposed' to be correlated. Usually some investment magazine will pick some absurd correlation, then the investor hoard jumps on it, then they use that as confirmation of the original prediction/correlation. It's a very stupid process, and it only gets stupider when misleading hearsay from inconsistent regulators is factored in.
Gold and silver are even worse, since the big banks can get away with naked shorting them until the futures market is 90% unsubstantiated paper. That's why people who use gold/silver as a long term inflation hedge tend to buy physical, it's the only thing that doesn't come with counterparty risk.
If you invest 'PP' based on the fundamentals, you're less likely to be affected by market stupidity. However, there is no absolute protection from stupidity, I'm afraid.
When things get screwy, then naturally previously linked assets become 'decoupled'. People are too busy panic selling and covering their positions (to put it nicely) to worry about what things are 'supposed' to be correlated. Usually some investment magazine will pick some absurd correlation, then the investor hoard jumps on it, then they use that as confirmation of the original prediction/correlation. It's a very stupid process, and it only gets stupider when misleading hearsay from inconsistent regulators is factored in.
Gold and silver are even worse, since the big banks can get away with naked shorting them until the futures market is 90% unsubstantiated paper. That's why people who use gold/silver as a long term inflation hedge tend to buy physical, it's the only thing that doesn't come with counterparty risk.
If you invest 'PP' based on the fundamentals, you're less likely to be affected by market stupidity. However, there is no absolute protection from stupidity, I'm afraid.
Personally I have always had a bit of a love affair with silver...something about the physical metal itself.
However a lot of what I do have is in everyday items used for personal use...think cutlery and dishes....
At least as time has gone on the premium I paid for the fabrication has been "earned" back as the price of the metal has escalated...meaning I could at least sell it for what I paid for it.
But I have had and will continue to enjoy using it instead of just looking at it.
However a lot of what I do have is in everyday items used for personal use...think cutlery and dishes....
At least as time has gone on the premium I paid for the fabrication has been "earned" back as the price of the metal has escalated...meaning I could at least sell it for what I paid for it.
But I have had and will continue to enjoy using it instead of just looking at it.
I think with the PP you have to ask yourself if there is a better alternative. Circumstances where the PP went horribly wrong could happen, but they would likely devastate any portfolio.
Not to say there arn't other good investment portfolios, but for stable growth it's track record is pretty incredible.
Not to say there arn't other good investment portfolios, but for stable growth it's track record is pretty incredible.
What chenda said... Anything that breaks the PP is likely to devastate a more traditional allocation.
I could see the decouple, but I think it would take many generations to blackhole the concept of gold as money. If anything I think it is getting much less likely. People who think of gold as an investment must be up thousands of percent since the 90s.
If you're uncomfortable with this component of the PP, perhaps something like the Talmud portfolio would be a better fit for you?
http://seekingalpha.com/article/293665- ... allocation
I could see the decouple, but I think it would take many generations to blackhole the concept of gold as money. If anything I think it is getting much less likely. People who think of gold as an investment must be up thousands of percent since the 90s.
If you're uncomfortable with this component of the PP, perhaps something like the Talmud portfolio would be a better fit for you?
http://seekingalpha.com/article/293665- ... allocation
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jennypenny
- Posts: 6861
- Joined: Sun Jul 03, 2011 2:20 pm
@SW--When I seriously looked at the PP last year, I struggled with the gold allocation. Here's an article that everyone recommended... http://www.ritholtz.com/blog/2011/09/your-gold-teeth/
"Gold and silver are even worse, since the big banks can get away with naked shorting them until the futures market is 90% unsubstantiated paper. That's why people who use gold/silver as a long term inflation hedge tend to buy physical, it's the only thing that doesn't come with counterparty risk."
I see this as the real decoupling--physical gold vs. paper gold. Trouble is, I can't really say how a downturn in paper (leveraged) gold would affect physical gold demand or prices.
An interesting attempt to track the supply of physical gold, concluding that much of it has to be coming from western central banks:
http://sprottasset.com/markets-at-a-gla ... gold-left/
Otherwise, I would be more concerned with the bond component; people are buying bonds like . . . tulips
I see this as the real decoupling--physical gold vs. paper gold. Trouble is, I can't really say how a downturn in paper (leveraged) gold would affect physical gold demand or prices.
An interesting attempt to track the supply of physical gold, concluding that much of it has to be coming from western central banks:
http://sprottasset.com/markets-at-a-gla ... gold-left/
Otherwise, I would be more concerned with the bond component; people are buying bonds like . . . tulips
The thing I worry about with the Permanent Portfolio is whether I chose to invest that way because it is sound principles, or because it is a fad now** since it has had good past performance. It's ironic here because you have Harry Browne, who to me seems to be very very reasonable, and is warning against fads or chosing investments based off past performance, and also warns that if you do that, as soon as you invest you're just as likely as any other fad to lose your money.
** I'm pretty sure i'm wrong in thinking of the PP as a fad - likely by the fact that such a high number of people here either use it or consider it... I'd probably be right in guessing that 99% of the world has never heard of the Permanent Portfolio. But again, when you hear Harry's warnings of selecting funds or advice based mostly on past performance, I find myself wondering how much of my decision was sound vs. expecting past results to continue.
** I'm pretty sure i'm wrong in thinking of the PP as a fad - likely by the fact that such a high number of people here either use it or consider it... I'd probably be right in guessing that 99% of the world has never heard of the Permanent Portfolio. But again, when you hear Harry's warnings of selecting funds or advice based mostly on past performance, I find myself wondering how much of my decision was sound vs. expecting past results to continue.
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RealPerson
- Posts: 875
- Joined: Thu Nov 22, 2012 4:33 pm
The PP formula has done very well in recent years: the stock market has performed well, the bond market is unusually high because of dropped interest rates and gold is at a staggering level. The only weak point is the almost zero return on cash, but at least you have a protected position.
Looking forward, I am very worried about the bond market, especially long term bonds. Interest rates really can only go north, especially when inflation picks up. The stock market is anybody's guess, but the budget talks in Washington are not terribly comforting for those receiving dividends and capital gains. If the taxes on these really go up that much, one would assume capital fleeing the market with a resulting drop in stock prices. From a purely logical perspective, inflation should go up given the monetary policy of the Fed. That should help gold, but it is already at such an incredible historical peak. Look at a 30 year chart of the price per ounce and you'll see what I mean. Inflation is also a big issue for those who are in cash, as the value of your investment gets eroded.
All in all, it is anybody's guess what will happen, but reasonable people can make assumptions that point in the direction of a less positive result of PP in the near future. I am expanding my cash position because I want to see what happens to the budget talks. Without a solution, the market is bound to drop. To be honest, I have been surprised that it has not dropped more as of yet. Just my perspective
Looking forward, I am very worried about the bond market, especially long term bonds. Interest rates really can only go north, especially when inflation picks up. The stock market is anybody's guess, but the budget talks in Washington are not terribly comforting for those receiving dividends and capital gains. If the taxes on these really go up that much, one would assume capital fleeing the market with a resulting drop in stock prices. From a purely logical perspective, inflation should go up given the monetary policy of the Fed. That should help gold, but it is already at such an incredible historical peak. Look at a 30 year chart of the price per ounce and you'll see what I mean. Inflation is also a big issue for those who are in cash, as the value of your investment gets eroded.
All in all, it is anybody's guess what will happen, but reasonable people can make assumptions that point in the direction of a less positive result of PP in the near future. I am expanding my cash position because I want to see what happens to the budget talks. Without a solution, the market is bound to drop. To be honest, I have been surprised that it has not dropped more as of yet. Just my perspective
"I'm pretty sure i'm wrong in thinking of the PP as a fad - likely by the fact that such a high number of people here either use it or consider it"
LOL, who says ERE isn't a fad?
Anyways, I am also most worried about gold. Sure, I expect interest rates will rise, and bonds will go down, but at least that performance will adhere to standard models. What worries me about gold is that it might start behaving erratically compared to what HB expected when he devised the PP.
LOL, who says ERE isn't a fad?
Anyways, I am also most worried about gold. Sure, I expect interest rates will rise, and bonds will go down, but at least that performance will adhere to standard models. What worries me about gold is that it might start behaving erratically compared to what HB expected when he devised the PP.
I see this as the real decoupling--physical gold vs. paper gold. Trouble is, I can't really say how a downturn in paper (leveraged) gold would affect physical gold demand or prices.
Paper gold is worth zero dollars and zero cents without the hard and shiny stuff that it's supposed to be directly exchangeable for. The only reason the futures market affects the spot market at all is because most people uncritically assume that all paper gold is backed.
A good example of what really happens is the (somewhat) recent crash in silver that happened after the fed QE disappointment last year. Paper silver dropped to under $30/oz, and overnight bullion dealers were either out of stock in silver or unwilling to sell at those prices. Silver isn't a company; it can't rack up a huge debt and run itself into the ground. Unless the US suddenly decides to reform their monetary and fiscal policy to be responsible, which they won't (and can't), then physical gold and silver are in no danger of any long-term price depressions.
The PP formula has done very well in recent years: the stock market has performed well
What reality do you live in? o.0 There have been repeated crashes; first in 2008, then in 2010 with the euro-disaster, then in 2011 because Bernanke declined to 'rescue' the market with an official QE3. The market has barely recovered pre-2008 levels, not counting the difference due to inflation, and has more or less flatlined just waiting for the next disaster to come along. The market turbulence is so bad you're basically forced to adopt Nassim Taleb's strategy or go broke/bankrupt like all those mutual funds did last year.
When inflation finally really hits the markets, even Taleb's strategy will become useless.
Paper gold is worth zero dollars and zero cents without the hard and shiny stuff that it's supposed to be directly exchangeable for. The only reason the futures market affects the spot market at all is because most people uncritically assume that all paper gold is backed.
A good example of what really happens is the (somewhat) recent crash in silver that happened after the fed QE disappointment last year. Paper silver dropped to under $30/oz, and overnight bullion dealers were either out of stock in silver or unwilling to sell at those prices. Silver isn't a company; it can't rack up a huge debt and run itself into the ground. Unless the US suddenly decides to reform their monetary and fiscal policy to be responsible, which they won't (and can't), then physical gold and silver are in no danger of any long-term price depressions.
The PP formula has done very well in recent years: the stock market has performed well
What reality do you live in? o.0 There have been repeated crashes; first in 2008, then in 2010 with the euro-disaster, then in 2011 because Bernanke declined to 'rescue' the market with an official QE3. The market has barely recovered pre-2008 levels, not counting the difference due to inflation, and has more or less flatlined just waiting for the next disaster to come along. The market turbulence is so bad you're basically forced to adopt Nassim Taleb's strategy or go broke/bankrupt like all those mutual funds did last year.
When inflation finally really hits the markets, even Taleb's strategy will become useless.
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George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
There can be inflation and deflation at the same time... Definitely seeing inflation in food and energy, for example.
In September 2011 gold was down over 20% in 3 weeks!... My PP was perfectly flat during this time (bonds spiked). This didn't trigger a rebalance for me, but if it did it would have bought gold and sold bonds, exactly what turned out to be the right call.
In September 2011 gold was down over 20% in 3 weeks!... My PP was perfectly flat during this time (bonds spiked). This didn't trigger a rebalance for me, but if it did it would have bought gold and sold bonds, exactly what turned out to be the right call.
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George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
You're seeing inflation in energy? Even though gasoline has gone from $4/gal down to $3.20/gal in the past 4 months? Barrel of oil has come down to $85 from $100?
Won't disagree with food inflation, but that seems to be related more to weather and things like the reduction in herds last year due to the drought increasing the cost of feed. As I recall, we've had 18 months of drought in the USA midwest with no end in sight, so one can expect food prices to continue to climb.
Also, food & energy are known to be volatile when it comes to inflation. That's why they're left out of the "core" inflation figures. Housing and clothing and durable goods seem to have mild inflation after the 2008-2009 deflationary period (remember those clothing sales?).
Won't disagree with food inflation, but that seems to be related more to weather and things like the reduction in herds last year due to the drought increasing the cost of feed. As I recall, we've had 18 months of drought in the USA midwest with no end in sight, so one can expect food prices to continue to climb.
Also, food & energy are known to be volatile when it comes to inflation. That's why they're left out of the "core" inflation figures. Housing and clothing and durable goods seem to have mild inflation after the 2008-2009 deflationary period (remember those clothing sales?).
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
"Definitely seeing inflation in food and energy, for example."
...where do you shop? Natural gas has been falling and food went up 0.8% in 2010 and 3.8% in 2011: http://www.bls.gov/cpi/#tables
...where do you shop? Natural gas has been falling and food went up 0.8% in 2010 and 3.8% in 2011: http://www.bls.gov/cpi/#tables
I'd rather not spiral off into the [IMO alleged] validity of CPI and govt inflation calcs... I do not know what the government defines as "food" and but I'd wager I'm not going to eat it, whatever it is.
I went here (first google) and entered things I buy:
http://data.bls.gov/cgi-bin/surveymost?ap
These results are only thru Oct, please don't accuse me cherry picking or such nonsense... If a month lag makes that big of a difference to the no inflation argument, I could much more accurately turn the tables!
gasoline: 2011 +6.1%, 2012 YTD +3.9%
ground chuck: 2011 +9.2%, 2012 YTD +6.7%
chicken: 2011 +8%, 2012 YTD +14.7%
eggs: 2011 +3.8%, 2012 YTD +1.1%
milk: 2011 +8%, 2012 YTD -1.6%
apples: 2011 +2%, 2012 YTD +16.3%
oranges: 2011 -6.7%, 2012 YTD +35%
tomatoes: 2011 -6.5%, 2012 YTD -3.7%
coffee: 2011 +23.1%, 2012 YTD +7.1%
bananas and electricity: pretty flat... In my defense my local electric has increased 20.4%.
For those 11 things:
2011: avg= +4.3%, median = +3.8%
2012: avg= +7.2%, median = +3.9%
Also, because I'm a lousy accountant none of those above figures even include gains between Dec and Jan... And don't even get me started on the beer increases!
Inflation is there... Can we get back to the PP now? This 5th condition that Jacob talks about is worth pondering.
I have a feeling the PP will "break" in my lifetime... Which, I'm fine with. I'm in it because it will keep me from losing it all... I think I might be sold on the idea of band re balancing however.
I went here (first google) and entered things I buy:
http://data.bls.gov/cgi-bin/surveymost?ap
These results are only thru Oct, please don't accuse me cherry picking or such nonsense... If a month lag makes that big of a difference to the no inflation argument, I could much more accurately turn the tables!
gasoline: 2011 +6.1%, 2012 YTD +3.9%
ground chuck: 2011 +9.2%, 2012 YTD +6.7%
chicken: 2011 +8%, 2012 YTD +14.7%
eggs: 2011 +3.8%, 2012 YTD +1.1%
milk: 2011 +8%, 2012 YTD -1.6%
apples: 2011 +2%, 2012 YTD +16.3%
oranges: 2011 -6.7%, 2012 YTD +35%
tomatoes: 2011 -6.5%, 2012 YTD -3.7%
coffee: 2011 +23.1%, 2012 YTD +7.1%
bananas and electricity: pretty flat... In my defense my local electric has increased 20.4%.
For those 11 things:
2011: avg= +4.3%, median = +3.8%
2012: avg= +7.2%, median = +3.9%
Also, because I'm a lousy accountant none of those above figures even include gains between Dec and Jan... And don't even get me started on the beer increases!
Inflation is there... Can we get back to the PP now? This 5th condition that Jacob talks about is worth pondering.
I have a feeling the PP will "break" in my lifetime... Which, I'm fine with. I'm in it because it will keep me from losing it all... I think I might be sold on the idea of band re balancing however.