I do not undestand the theory behind international PP at all

[ArthurPooh]

I have read the Permanent Portfolio book and I have been reading the forum for some time, specifically scouring threads related to international versions of the PP.

However, I still cannot understand why exactly wouldn't a standard US-based PP work for any person anywhere in the world provided they have a convenient way to invest in US securities and the local currency is freely and legally convertible. If the portfolio generates real returns, is it really important where those returns are to be spent, or whether the investor's local economy is in tune with the American economy?

Suppose an investor living in Ireland creates a standard US-based PP. Suppose the US is currently in the prosperity phase and US stocks are going up, while Ireland is in a deflationary recession. Why should this hypothetical investor care at all? He or she just does the exact same thing US-based PP investors do - rebalancing into the other three assets and enjoying the stability. Why does it matter whether the investor resides in the US, Ireland, Australia, Japan, Greenland, Antarctica, international waters or the Moon, as long as there's an access to American financial system and as long as the four asset categories perform as they are supposed to do?

I do understand the argument for keeping some cash in local currency as an emergency fund (although one might create an emergency fund separate from the PP, Boglehead-style). I also do think that depending on local circumstances, keeping all cash in short-term Treasuries might be not an optimal strategy for a non-US investor.

In fact, I believe the non-US PP portfolio wouldn't hold up as well as the classic one. The "equivalent" assets just aren't so.

For example, long term Treasury is not just another developing government bond. It is THE safe asset for the entire world. Even governments that somewhat defy American hegemony, such as Russia and China, still hold large amounts of Treasuries, because there's simply no alternative. Interest rate on US treasuries - not gilts, not JGBs, certainly not euro-denominated bonds - is considered THE risk free interest rate. Dollar is the reserve currency, the unit of account everyone else thinks in. Swiss bonds might be a slight exception (a justification for PRPFX franc allocation?), there is some flight into them every time European investors realize the euro doesn't make any sense, but nowhere near the same league.

In the same vein, US stocks aren't really a local market - they comprise more than a half of global public equities, including truly global companies that operate in the entire US-subservient world, which is most of it. In comparison, even most developed country markets just do not track the total market that well. What's the difference between an investor living in Alabama buying exclusively stock of companies headquartered in that state and an Australian investor investing exclusively on ASX? Both are buying a tiny sliver of global equity market based on arbitrary criteria.

Then there's gold. The way I see it, it's not really an "inflation hedge", it's an alternative reserve currency. As Harry Browne has said, it's the world's second favorite. Americans can get away with not understanding that difference, because they buy their groceries with the incumbent reserve currency. For everyone else it just doesn't work that way. Sure, if there's a sustained inflation in some non-dollar currency, the nominal price of gold will go up - but so will the price of silver, commodities, artworks, real estate, vehicles and everything else. For gold to produce real returns, dollar's global reserve status must be perceived as threatened in some way. This is why central banks overwhelmingly hold USD and gold - there are no other real contenders.

If, say, euro was to crash, most of it's value would go to the dollar, with maybe modest real gains for gold (and CHF, vindicating Mr. Cuggino's approach?). An European investor holding a suggested "EU-PP" would lose between 50% and 75% of his investment in that scenario, because real return from gold wouldn't compensate the losses on euro-denominated cash and bonds at all. It would just keep its purchasing power, which is not enough if the portfolio is supposed to be permanent. Gold only makes sense in PP context as a counterweight to dollar-denominated bonds and bills, in other words as a hedge against the collapse of American empire.

I hope my post is not too long, and that it didn't come off as confrontational. The Permanent Portfolio book is very good and I've enjoyed it a great deal. It's just that one aspect of it that made no sense to me and that seems to originate from some kind of American un-exceptionalism. I'd be happy to be proven wrong, or at least to start an interesting discussion.

[Hal]

However, I still cannot understand why exactly wouldn't a standard US-based PP work for any person anywhere in the world provided they have a convenient way to invest in US securities and the local currency is freely and legally convertible. If the portfolio generates real returns, is it really important where those returns are to be spent, or whether the investor's local economy is in tune with the American economy?

Good morning ArthurPooh,

In my view you are basically correct!

However a couple of points worth raising...
1. There is the currency issue between the USD and the local currency. Myself I just use a hedged bond fund.

2. You are correct regarding Gold. If there was a currency collapse in the AUD with a strictly Australian PP, Gold would not increase in value to offset the losses in other assets. But... Gold still has a zero/slightly negative correlation to AUD assets, hence worth holding.

3. The simplest (not the optimal) solution I find is to simply hold a globally diversified Vanguard fund and physical gold.

If you want some further reading, search out an article on how the PP did in Iceland during the GFC. From memory, it got wiped out excepting the gold. Definitely worth having international exposure in my opinion.

Edit: found the article

<snip>
Since the euro dropped 10% in value versus the dollar in 2008 it's even worse in dollar land. You lost 76% purchasing power in America and versus all trading partners that want to get payed in US dollars. Because obviously trading partners want dollars or euros all imports skyrocketed in price by a modest 200%.

https://web.archive.org/web/20120729164 ... eland.html

[boglerdude]

I'm tilted ex-US cuz my day job depends on US economy. More concerned abt return of capital than return on. It'll be the reserve currency until it isnt.

"The Global Market Index (GMI) is an unmanaged benchmark (maintained by CapitalSpectator.com) that holds all the major asset classes (except cash) in market-value weights" https://www.capitalspectator.com/major- ... ce-review/

[blue_ruin17]

However, I still cannot understand why exactly wouldn't a standard US-based PP work for any person anywhere in the world provided they have a convenient way to invest in US securities and the local currency is freely and legally convertible. If the portfolio generates real returns, is it really important where those returns are to be spent, or whether the investor's local economy is in tune with the American economy?

2. You are correct regarding Gold. If there was a currency collapse in the AUD with a strictly Australian PP, Gold would not increase in value to offset the losses in other assets.

I'm not sure I follow, can you expand upon this?

For instance, in Argentina gold is up 20,000% in the last 10 years, and their TSM is up 17,000%; writing off cash and bonds, gold was the best preforming asset for the Argentine PP during a protracted currency crisis, exactly as PP theory would predict. I can't find a 10y stat for accumulated inflation to determine how those nominal returns translate into real returns, but the point is that gold did its job in Argentina.

An interesting point for ArthurPooh: the USD is "only" up 11,000% against the ARS on the 10y, so replacing gold with the USD would have been a major misstep.





Of course, this example seems only to prove Arthur's point: the Argentinian PPer would have been much better off side-stepping the domestic PP altogether and going with the US-based one. But does that invalid all non-US PPs? I don't think so.

The PP requires a first world economy to work. As someone else here put it a long time ago (MediumTex?), the Zimbabwean PP should be 90% gold and 10% airline tickets to GTFO.

50+ years of history demonstrate that domestic (i.e. non-U.S.) PPs work in first world countries. Look up the track records on Portfolio Charts; many foreign PPs actually performed better than the U.S. PP over the last half century. Given that, are the added frictional costs, withholdings tax, layers of complexity, heightened counter-party risk, tracking error etc. of adopting a U.S. PP worth it for a Brit, Canadian, Aussie, German, etc.? As a Canadian, I say no.

Welcome to the forum, Arthur. I know I have not addressed all your specific points, and I am not dismissing them. You make an exceptionally well articulated argument. I look forward to seeing how this discussion unfolds.

EDIT: fixed image size

[Hal]

However, I still cannot understand why exactly wouldn't a standard US-based PP work for any person anywhere in the world provided they have a convenient way to invest in US securities and the local currency is freely and legally convertible. If the portfolio generates real returns, is it really important where those returns are to be spent, or whether the investor's local economy is in tune with the American economy?

2. You are correct regarding Gold. If there was a currency collapse in the AUD with a strictly Australian PP, Gold would not increase in value to offset the losses in other assets.

I'm not sure I follow, can you expand upon this?

Hi Blue Ruin,
Arthur raised an interesting topic.

The US PP theory is that if confidence is lost in the USD, funds will flow into the next most popular currency, Gold, bidding it's price up such that it covers losses in the other asset classes.

For an Australian PP. If confidence is lost in the AUD, it is most likely Australian funds will flow into the USD which is currently considered the safest and most popular currency. Hence gold will not be bid up and unfortunately most likely not cover losses in the other Australian asset classes.

However, due to the low/negative correlation gold has with other asset classes, it is still worth holding (as a non-US PP) since it can reduce portfolio volatility.

Have a look at what happened with the Iceland PP. Gold allowed them to maintain some purchasing power (about 25% ? in USD) but unfortunately did not compensate them for the loss in value of the other asset classes.

[whatchamacallit]

I expect total world stock and bond funds are more popular in other countries outside of USA.

Total world options are almost non existent in the US.

If I was outside of the US and wanted to stay there I think I would hold some local cash and then split in thirds total world stock, total world bonds and gold.

I expect these would be mainstream options and maybe even more popular than a local only fund. Is this the case?

[ArthurPooh]

Good morning ArthurPooh,

In my view you are basically correct!

However a couple of points worth raising...
1. There is the currency issue between the USD and the local currency. Myself I just use a hedged bond fund.

Good evening Hal. To be honest, I haven't considered that issue. However, does it matter long term? Even if local currency would appreciate against the USD, wouldn't it also lower local prices in relative terms?

I'm tilted ex-US cuz my day job depends on US economy. More concerned abt return of capital than return on. It'll be the reserve currency until it isnt.

This would further support an US PP for an average non-US investor who is mostly invested within local economy, right? My job/business, real estate, pension fund, inheritances, entitlements to government welfare etc. are already connected to my country, so why all my savings should be invested there?

And when USD no longer is the reserve currency, gold should skyrocket, compensating losses on dollar assets.

For instance, in Argentina gold is up 20,000% in the last 10 years, and their TSM is up 17,000%; writing off cash and bonds, gold was the best preforming asset for the Argentine PP during a protracted currency crisis, exactly as PP theory would predict. I can't find a 10y stat for accumulated inflation to determine how those nominal returns translate into real returns, but the point is that gold did its job in Argentina.

An interesting point for ArthurPooh: the USD is "only" up 11,000% against the ARS on the 10y, so replacing gold with the USD would have been a major misstep.

I would not replace gold with the USD. I would, if possible, replace Argentinian bonds and bills with American ones, and Argentinian TSM fund with American or global one. And if impossible, dollar banknotes would still be better investment than peso-denominated debt.

The PP requires a first world economy to work. As someone else here put it a long time ago (MediumTex?), the Zimbabwean PP should be 90% gold and 10% airline tickets to GTFO.

50+ years of history demonstrate that domestic (i.e. non-U.S.) PPs work in first world countries. Look up the track records on Portfolio Charts; many foreign PPs actually performed better than the U.S. PP over the last half century. Given that, are the added frictional costs, withholdings tax, layers of complexity, heightened counter-party risk, tracking error etc. of adopting a U.S. PP worth it for a Brit, Canadian, Aussie, German, etc.? As a Canadian, I say no.

Welcome to the forum, Arthur. I know I have not addressed all your specific points, and I am not dismissing them. You make an exceptionally well articulated argument. I look forward to seeing how this discussion unfolds.

First of all, why? Assuming a Zimbabwean investor can access first world markets, and assuming there isn't a threat of expropriation (if there is, MT's suggestion is likely better), US-based PP will work as well as it does for an American.

Second of all, isn't hedging for a government failure, the idea that even "hard" fiat currencies might go belly up, or at least experience sustained high inflation, part of PP's intention and at least a partial justification for the high gold allocation in the portfolio? I'm not arguing that a foreign PP cannot work at all. I'm arguing that it's just not that Permanent, it only looks like the original.

In my first post I've assumed a relative ease and safety of investment. I cannot speak of Canada or Australia, but I do know that for European investors it's literally a matter of picking a different Irish-domiciled ETF. Sure, if you live in Russia or Belarus, better stick to MOEX and the ruble. Then again, I would argue a Russian investor should pick a different asset allocation altogether rather than constructing a cargo cult "Russian PP" that only looks like the original one but cannot deliver the same benefits.

Thanks for the welcome, it's nice to hear you appreciate my argument.

[D1984]

However, I still cannot understand why exactly wouldn't a standard US-based PP work for any person anywhere in the world provided they have a convenient way to invest in US securities and the local currency is freely and legally convertible. If the portfolio generates real returns, is it really important where those returns are to be spent, or whether the investor's local economy is in tune with the American economy?

2. You are correct regarding Gold. If there was a currency collapse in the AUD with a strictly Australian PP, Gold would not increase in value to offset the losses in other assets.

I'm not sure I follow, can you expand upon this?

Hi Blue Ruin,
Arthur raised an interesting topic.

The US PP theory is that if confidence is lost in the USD, funds will flow into the next most popular currency, Gold, bidding it's price up such that it covers losses in the other asset classes.

For an Australian PP. If confidence is lost in the AUD, it is most likely Australian funds will flow into the USD which is currently considered the safest and most popular currency. Hence gold will not be bid up and unfortunately most likely not cover losses in the other Australian asset classes.

However, due to the low/negative correlation gold has with other asset classes, it is still worth holding (as a non-US PP) since it can reduce portfolio volatility.

Have a look at what happened with the Iceland PP. Gold allowed them to maintain some purchasing power (about 25% ? in USD) but unfortunately did not compensate them for the loss in value of the other asset classes.

Not quite.

Marc De Mesel (the guy that did the Iceland PP post) based the "inflation rate" (to calculate the loss of purchasing power) on the Icelandic Krona vs other currencies (i.e. he assumed a loss of 50% in the Krona vs, say, the USD would result in exactly a 50% loss in purchasing power). This is inaccurate because as an Icelander a huge proportion of what you buy would be directly or indirectly priced in Icelandic Krona (a lot of the prices of any good or service in a developed country reflect the price of labor--almost all of which is local--and land/buildings/rent--pretty much all of which is local).

Using actual Icelandic CPI (which came out at around 19% for 2008), the Icelandic PP was up around 22.6% or 22.7% in real terms at the end of 2008 vs the end of 2007. The Iceland 25x4 PP was up 46% in nominal terms in 2008; 146/119 = 1.2268; 1.2268-1 = 22.68.

Also, Iceland was--and is--a tiny part of the world's GDP; any sane Icelander would've held much of his/her stocks in a world market cap weighted index.

Finally, I should point out that almost 87% of Iceland's stock market cap at the start of 2008 was in just six stocks (all of them banks or financial companies). The main reason Iceland's stock index did so crappy in 2008--IIRC it was down 89 or 90% in nominal terms--was due to this huge concentration in financials (four of which failed outright/went under/had to be bailed out and shareholders lost everything); this was also the cause of its 77% drop in one day in October 2008.

Any other weighting scheme rather than a price-weighted or cap-weighted index (say, equal weighting, or even market cap weighting but with limits on how much a stock or sector could be weighted; 30 or 40% is fairly typical when an index provider like S&P or Nasdaq creates a cap-weighted index with such concentration limits) would have produced much less of a horrible result in 2008. Granted, it would've still been bad--hey, this was 2008--but probably more like a 65 or 70% loss on the stock sleeve of the PP vs an almost 90% loss.

[blue_ruin17]

I would not replace gold with the USD. I would, if possible, replace Argentinian bonds and bills with American ones, and Argentinian TSM fund with American or global one. And if impossible, dollar banknotes would still be better investment than peso-denominated debt.

Ahh, I follow. In the case of Argentina, I think your idea of using a U.S. PP makes a lot of sense. I would have a tough time holding government debt in a country where hyperinflation seems to occur every decade or two. Of course, on a long enough time scale this is how the story ends for all sovereign debt (but that's why we hold gold).

First of all, why? Assuming a Zimbabwean investor can access first world markets, and assuming there isn't a threat of expropriation (if there is, MT's suggestion is likely better), US-based PP will work as well as it does for an American.

That's why I used Zimbabwe as an example: any assets held in the country are liable to expropriation (just ask the white farmers), including U.S. stocks and bonds. In a country like that, you can't operate a PP. But you are assuming this as a given, as you clarified in your first post.

I cannot speak of Canada or Australia, but I do know that for European investors it's literally a matter of picking a different Irish-domiciled ETF. Sure, if you live in Russia or Belarus, better stick to MOEX and the ruble. Then again, I would argue a Russian investor should pick a different asset allocation altogether rather than constructing a cargo cult "Russian PP" that only looks like the original one but cannot deliver the same benefits.

"Cargo cult Russian PP" -- I almost spit my coffee onto the computer screen when I read this

As for the Eurozone, I agree. For many of the smaller countries it makes sense to use a Euro TSM and a broad basket of Euro denominated sovereign bonds. It is the same currency system, so there is no currency risk.

However, this gets back to your original thesis: why not a U.S. PP for everyone, since the USD is the world reserve currency.

My answer: it boils down to currency risk, which is an uncompensated form of risk. The PP is custom-tailored to serve the spending needs of a retiree or to provide cash in an emergency via the stable T-Bill allocation. That cash needs to be denominated in the currency you use to buy groceries and pay tax.

No problem! Just hold currency hedged ETFs. But...then we aren't really exposed to USD assets anymore; performance is again subject to the currency of your national currency. If the S&P500 moves 3% higher but your currency falls against the USD by 3%, you made 0% due to the hedging. But if a Canadian buys the unhedged S&P500 ETF and the CAD strengthens 20-30% against the USD (this tends to happen when oil prices are rapidly rising) then 20-30% of the S&P500 gains are lost. Again, this is an uncompensated risk, so no additional return is expected for bearing it.

If you believe that exposure to the U.S. dollar carries only a small risk, read the following carefully: between 2001 and 2007, the greenback shed 41% of its value against the loonie. And during this time, the U.S. stock market significantly underperformed the Canadian stock market. At that point, the risk that investors had to watch out for was that of losing patience with their U.S. stocks due to this setback. We know what happened next: U.S. stocks and the greenback both subsequently enjoyed a golden era. In short, if a hedge—even a partial one—on the exchange risk can help you hold on to your U.S. stocks, you should seriously consider it.

Cited study: https://www.pwlcapital.com/sp-500-etfs- ... -question/

Holy tracking error! Thanks, but no thanks. I only want exposure to foreign currency if there is a strategic reason internal to my own asset allocation, i.e. 25% exposure to gold. If the PP works perfectly fine within my first-world, economically diversified country, I would rather side-step this form of uncompensated risk altogether.

Also, I never looked into how currency hedging works for ETFs before. I looked into it just now. I don't like it. All I see is added complexity, frictional costs, and a 'black box' element that I do not like:
https://www.theglobeandmail.com/feature ... dged-etfs/

Consider tax implications, as well: for instance, in Canada we pay an additional withholding tax on foreign income.

In summary: if you live in a first world nation with a reasonably sized economy (Canada, Australia, France, Germany, etc.) a domestic PP is simple, cheap to implement, and is proven to work as advertised. 100% exposure to a foreign currency would add uncompensated risk to a portfolio that I depend upon for income that, of necessity, must be denominated in my domestic currency. Hedging that currency risk away is simply reverting back to exposure to your domestic economy/currency -- so why not just implement the domestic PP in the first place?

If I lived in Argentina, Turkey, Algeria, Egypt, South Africa, that's a different story. In that case, I may very well see currency risk as a one way street.

[ArthurPooh]

As for the Eurozone, I agree. For many of the smaller countries it makes sense to use a Euro TSM and a broad basket of Euro denominated sovereign bonds. It is the same currency system, so there is no currency risk.

I did not mention it in my original post, but the euro introduces another set of problems altogether. Sovereign bonds denominated in the issuer's currency are assumed to be free of credit risk, since the issuer always cannot run out of the monetary unit it creates. However, no eurozone country has direct control over EUR money supply, and thus, in essence, all eurozone countries borrow in a foreign currency. Due to that I would look at their bonds like bonds of an American state or a Canadian province - sure, it's still pretty safe, the respective federal government would probably prevent a default, the issuers are robust... but still, it's not equivalent of an US Treasury or a British gilt.

If you believe that exposure to the U.S. dollar carries only a small risk, read the following carefully: between 2001 and 2007, the greenback shed 41% of its value against the loonie. And during this time, the U.S. stock market significantly underperformed the Canadian stock market. At that point, the risk that investors had to watch out for was that of losing patience with their U.S. stocks due to this setback. We know what happened next: U.S. stocks and the greenback both subsequently enjoyed a golden era. In short, if a hedge—even a partial one—on the exchange risk can help you hold on to your U.S. stocks, you should seriously consider it.

Cited study: https://www.pwlcapital.com/sp-500-etfs- ... -question/

This is certainly surprising to me, for some reason I've assumed developed country currencies do not move so wildly against each other. Something to consider.

In summary: if you live in a first world nation with a reasonably sized economy (Canada, Australia, France, Germany, etc.) a domestic PP is simple, cheap to implement, and is proven to work as advertised. 100% exposure to a foreign currency would add uncompensated risk to a portfolio that I depend upon for income that, of necessity, must be denominated in my domestic currency. Hedging that currency risk away is simply reverting back to exposure to your domestic economy/currency -- so why not just implement the domestic PP in the first place?

I understand your arguments. And to be clear: I'm not saying owning only Canadian stocks is a bad investment, or that Canadian government bonds aren't quality assets. And I see that a "Canadian PP" might even perform better in some periods; but a completely different portfolio (like standard 60-40 allocation) may do so at times as well. What I'm trying to say is that it doesn't seem to be really robust in all possible economic conditions like the original PP is supposed to be. For example, what purpose does gold allocation serve in a Canadian PP? It doesn't protect against CAD inflation (it might preserve purchasing power, but it will not provide sufficient returns to compensate for losses in other assets) and it's correlated with American and not Canadian economic conditions, thus making a persistent drawdown a possibility. Still, it might be a good portfolio, it just doesn't seem to be the same thing (like a hypothetical Russian PP).

If I lived in Argentina, Turkey, Algeria, Egypt, South Africa, that's a different story. In that case, I may very well see currency risk as a one way street.

Full disclosure: I do live in a country like that. Investment in foreign assets is legal and easy, mass expropriation is currently highly unlikely (although eventually expected from a historical and anthropological perspective), local currency suffers from slow, but inexorable secular decline in relation to those of donor countries, and hyperinflation, while not as regular as in Argentina, has occurred several times in the last century. Thus, my perspective may be heavily skewed towards the opinion I argue for.

[blue_ruin17]

I did not mention it in my original post, but the euro introduces another set of problems altogether. Sovereign bonds denominated in the issuer's currency are assumed to be free of credit risk, since the issuer always cannot run out of the monetary unit it creates. However, no eurozone country has direct control over EUR money supply, and thus, in essence, all eurozone countries borrow in a foreign currency. Due to that I would look at their bonds like bonds of an American state or a Canadian province - sure, it's still pretty safe, the respective federal government would probably prevent a default, the issuers are robust... but still, it's not equivalent of an US Treasury or a British gilt.

This is a critically important point that you make. Just ask anyone in Greece during the debt crisis. If I lived in any country that did not have sovereign control over their currency I would seriously consider a U.S., or E.U. PP.

What I'm trying to say is that it doesn't seem to be really robust in all possible economic conditions like the original PP is supposed to be. For example, what purpose does gold allocation serve in a Canadian PP? It doesn't protect against CAD inflation (it might preserve purchasing power, but it will not provide sufficient returns to compensate for losses in other assets) and it's correlated with American and not Canadian economic conditions, thus making a persistent drawdown a possibility. Still, it might be a good portfolio, it just doesn't seem to be the same thing (like a hypothetical Russian PP).

Ah, okay. I think I understand where you and Hal are coming from, now. You're saying that gold will only spike in real terms in response to a world reserve currency crisis of faith (or, perhaps, another major player, like the Euro); any domestic currency will fall against gold if it is being devalued, but so will commodities, used cars, toilet paper, etc. Gold isn't going parabolic in real terms because because the global gold market doesn't care about Argentina's currency crisis (sorry, Argentina!). The peso is rising 20,000% in nominal terms because it is being devalued against all real assets, not just gold. But on an inflation adjusted basis it may only be breaking even against the peso. It takes a world reserve currency crisis for gold to go parabolic due not only to devaluation, but to a global demand shock as everyone stampedes for the exits.

So why hold gold? Or rather, as you and Hal articulated the argument, why hold a domestic (non U.S. or, perhaps, E.U.) PP? Hold the gold, yes, but as a hedge against the USD faltering in the context of a U.S. PP.

Two responses:

(1). I suppose you aren't wrong, as long as you are willing to deal with currency risk. That's the rub. Because if your currency strengthens against the dollar, possibly for a lengthy period (years? a decade?), you'll be on the wrong side of that trade. Worst of all, currency risk is uncompensated by improved returns, so I don't even get paid for bearing this additional risk. I want all the free risk/reward trade offs I can get by managing taxes, keeping fees low, etc. I don't want to do the opposite by adding currency risk. That risk hangs like the sword of Damocles for anyone relying on the portfolio for current income/liquidity (as I do). As someone who lives in an oil exporting nation I am very sensitive to this risk.

Counter-point: if you don't rely on the portfolio for current income, I suppose there would be no problem with running a U.S. PP and riding out the currency fluctuations over the long-term. But when do you convert to a domestic PP? 5 years before retirement? 10 years? I don't like these kind of decision points.

(2). Gold in a non-U.S. PP seems to work just fine, according to the data. I get the argument about gold just being another commodity that the currency devalues against, as outlined above. Yet that appears to be perfectly fine, the PP still works as advertised. Think of it as holding 25% in commodities instead of gold. It's an inflation hedge, and it works without requiring a global demand shock driven by the collapse of the world reserve currency. Here are some examples:

In India gold served as an effective inflation hedge since 1975, and the PP as a whole was reliable, consistently preserving purchasing power.

https://web.archive.org/web/20130720020 ... n-investor

For a 25 year duration the average CAGR is 11.2%. There are a total of nine 25 periods between 1979-2012. The highest CAGR is 11.48% and the lowest is 10.7%

The author estimates that the inflation adjusted pre-tax CAGR for that period is about 2-4%, which checks out with the long-term expected real returns for the PP.

Eurozone, UK, Japan, and Iceland.

https://web.archive.org/web/20131228021 ... folio.html

I especially like this data because the Marc puts the PP on trial by adding 3% to the official inflation stats. Again, it appears that the PP effectively preserves purchasing power and gold does its job irrespective of world reserve currency status or not.

Counter-point: the Japanese and Iceland data seems to suggest the value of a small tilt toward U.S./int stocks. But then again, both of these investors would have been mechanically re-balancing out of their insane stock gains and into cheap gold during those bull markets...

Note: looking at this data, it really makes me wonder about prosperity tilting the PP...40% equity can really crush you in the wrong environment. Perhaps an alternative to the Golden Butterfly for non-U.S. investors would be a 20% international equity slice? Just a thought.

This thread is making me consider cutting my domestic equity exposure to 20% and adding 5% to international. Something I'll ponder for a while (i.e. months).

Full disclosure: I do live in a country like that. Investment in foreign assets is legal and easy, mass expropriation is currently highly unlikely (although eventually expected from a historical and anthropological perspective), local currency suffers from slow, but inexorable secular decline in relation to those of donor countries, and hyperinflation, while not as regular as in Argentina, has occurred several times in the last century. Thus, my perspective may be heavily skewed towards the opinion I argue for.

Out of curiosity, are you invested in the PP or just kicking the tires?

[ArthurPooh]

This is a critically important point that you make. Just ask anyone in Greece during the debt crisis. If I lived in any country that did not have sovereign control over their currency I would seriously consider a U.S., or E.U. PP.

But then, what do you exactly mean by EU PP? Ultimately, Germany or France don't control the euro either, they might have more informal pull over the ECB than Greece, but I still wouldn't want to invest in debt guaranteed by "pull". And all productive economies in the EU except for Denmark and Sweden use the euro, if I recall correctly.

(1). I suppose you aren't wrong, as long as you are willing to deal with currency risk. That's the rub. Because if your currency strengthens against the dollar, possibly for a lengthy period (years? a decade?), you'll be on the wrong side of that trade. Worst of all, currency risk is uncompensated by improved returns, so I don't even get paid for bearing this additional risk. I want all the free risk/reward trade offs I can get by managing taxes, keeping fees low, etc. I don't want to do the opposite by adding currency risk. That risk hangs like the sword of Damocles for anyone relying on the portfolio for current income/liquidity (as I do). As someone who lives in an oil exporting nation I am very sensitive to this risk.

Counter-point: if you don't rely on the portfolio for current income, I suppose there would be no problem with running a U.S. PP and riding out the currency fluctuations over the long-term. But when do you convert to a domestic PP? 5 years before retirement? 10 years? I don't like these kind of decision points.

I get that reasoning, and I do not have the answer right away. Although I'd assume that for stocks, at least, currency risk doesn't matter that much. I'd guess it also depends on how globalized the local economy exactly is. If my thinking is correct, currency appreciation against the dollar should make imported goods (and local goods that depend on imported inputs) cheaper, while not doing much for labor, rent and such. I guess it would have to be decided on a case by case basis.

For a quick solution, wouldn't keeping just cash in local currency while leaving the rest unchanged be somewhat of a compromise? You could raid it for current expenses and periodically rebalance from other assets.

Your posts also made me notice a tacit, unarticulated assumption I had: that in the event of the dollar losing its reserve currency status all the other fiat currencies are doomed too. Of course, this is almost certain for any country/economy dependent on Western aid, or in other words most countries that exist. But I'd assume the Swiss franc would massively gain from such a transition. What would happen to the CAD, AUD, DKK, JPY or RUB?

Maybe a non-US, non-EU portfolio would perform better in some conditions, which compensates for inferior performance in others? Or maybe gold really does respond to prospect of any respectable fiat currency being substantially inflated, not just the dollar (although there is some data suggesting that's not the case, and I think Hal has talked in another thread how it didn't work for him that way)? These questions might be a bit above my mental capacity.

Out of curiosity, are you invested in the PP or just kicking the tires?

Kicking the tires, looking to invest. When reading the PP book I had constructed a version of it suitable to my needs before finishing, and then came the chapter telling me to invest locally instead; I also read all the warnings not to tinker with it and got unsure if I've even understood the theory underpinning it in the first place.

[blue_ruin17]

But then, what do you exactly mean by EU PP? Ultimately, Germany or France don't control the euro either, they might have more informal pull over the ECB than Greece, but I still wouldn't want to invest in debt guaranteed by "pull". And all productive economies in the EU except for Denmark and Sweden use the euro, if I recall correctly.

My intuition is that the euro closely tracks the economic trajectory of Germany, in particular. If Germany were to plunge into deflation, the ECB would almost certainly slash interest rates. But when Greece faced a depression the ECB did not accommodate, making a Greek PP problematic because the long term bonds didn't react like they were supposed to.

This is speculation, I'm not too knowledgeable concerning EU economics. The EU is such a large economic block that pan-European PP makes a lot of sense for the smaller nations. In fact, it might even be a necessity, as the case of Greece demonstrates.

For a quick solution, wouldn't keeping just cash in local currency while leaving the rest unchanged be somewhat of a compromise? You could raid it for current expenses and periodically rebalance from other assets.

That occurred to me, too. The problem would be if U.S. treasuries crash because of rising rates while your national currency rates are doing their own thing. I took a big hit on bonds in 2022, but at least I get to enjoy 5% on my T-Bills now as a consolation prize. Mixing currencies in the fixed income portion of the portfolio could (will) introduce some strange dynamics that are impossible to predict.

One solution would be to just run the U.S. PP and then keep a 6 month (or whatever, more or less depending on your situation) emergency fund in your local currency. This is simple and clean cut, it avoids complication and introducing known and unknown risks into the portfolio construction. As long as you don't depend on drawing income from the portfolio for the foreseeable future I don't see why this wouldn't be fine?

Your posts also made me notice a tacit, unarticulated assumption I had: that in the event of the dollar losing its reserve currency status all the other fiat currencies are doomed too. Of course, this is almost certain for any country/economy dependent on Western aid, or in other words most countries that exist. But I'd assume the Swiss franc would massively gain from such a transition. What would happen to the CAD, AUD, DKK, JPY or RUB?

In that event I'm not wanting exposure to any national currency, the Swiss franc included. I'll be hiding in a bunker with gold and emerge after the dust has settled.

Maybe a non-US, non-EU portfolio would perform better in some conditions, which compensates for inferior performance in others? Or maybe gold really does respond to prospect of any respectable fiat currency being substantially inflated, not just the dollar (although there is some data suggesting that's not the case, and I think Hal has talked in another thread how it didn't work for him that way)? These questions might be a bit above my mental capacity.

My view is that gold doesn't have to do anything to respond to a currency crisis. It is the currency devaluation that does all the work on its own. I've explained above why I believe this is "enough", even without a corresponding demand shock that produces a spike in the real value of gold, so I won't bore you with a rehash of that.

However, allow me to introduce a new argument: physical gold held locally and in your possession does benefit from a fear premium that is local to that nation alone. As the national currency melts away local demand for gold skyrockets. It becomes impossible to get your hands on a gold coin without paying a substantial premium over spot. We see this dynamic play out in the black market exchange rates for USD notes compared to official exchange rates. I personally observed this dynamic in March of 2020. The only coin shop in my province sold out of all gold and silver. They literally closed shop for a few weeks. The spot price of gold is no longer the real price of gold. In this situation you can sell some of your physical to rebalance your portfolio and capture that real, inflation-adjusted fear premium. This only works with physical metals that you possess, not ETFs, Perth Mint certificates, etc.

[ArthurPooh]

My intuition is that the euro closely tracks the economic trajectory of Germany, in particular. If Germany were to plunge into deflation, the ECB would almost certainly slash interest rates. But when Greece faced a depression the ECB did not accommodate, making a Greek PP problematic because the long term bonds didn't react like they were supposed to.

This is speculation, I'm not too knowledgeable concerning EU economics. The EU is such a large economic block that pan-European PP makes a lot of sense for the smaller nations. In fact, it might even be a necessity, as the case of Greece demonstrates.

The problem here is that the eurozone isn't really an economic bloc, at least not to the extent of American states or Canadian provinces. What happens if there's inflation in France and deflation in Germany? Maybe it will work itself out. But I would sleep better with my money in US Treasuries.

That occurred to me, too. The problem would be if U.S. treasuries crash because of rising rates while your national currency rates are doing their own thing. I took a big hit on bonds in 2022, but at least I get to enjoy 5% on my T-Bills now as a consolation prize. Mixing currencies in the fixed income portion of the portfolio could (will) introduce some strange dynamics that are impossible to predict.

One solution would be to just run the U.S. PP and then keep a 6 month (or whatever, more or less depending on your situation) emergency fund in your local currency. This is simple and clean cut, it avoids complication and introducing known and unknown risks into the portfolio construction. As long as you don't depend on drawing income from the portfolio for the foreseeable future I don't see why this wouldn't be fine?

I guess you could do it that way. Although depending on the portfolio size, that might be somewhat of a drag (if it results in effectively much larger cash allocation). Still, it would be a great way to do it under many circumstances. This is what I'd do if I lived in an eurozone country (if I could resist buying at least some Swiss francs, lol).

In that event I'm not wanting exposure to any national currency, the Swiss franc included. I'll be hiding in a bunker with gold and emerge after the dust has settled.

Do you think it necessarily has to be a single, violent event? I imagine it more as an gradual process, that it might matter less and less until it's just another national currency. No zombies need apply.

However, allow me to introduce a new argument: physical gold held locally and in your possession does benefit from a fear premium that is local to that nation alone. As the national currency melts away local demand for gold skyrockets. It becomes impossible to get your hands on a gold coin without paying a substantial premium over spot. We see this dynamic play out in the black market exchange rates for USD notes compared to official exchange rates. I personally observed this dynamic in March of 2020. The only coin shop in my province sold out of all gold and silver. They literally closed shop for a few weeks. The spot price of gold is no longer the real price of gold. In this situation you can sell some of your physical to rebalance your portfolio and capture that real, inflation-adjusted fear premium. This only works with physical metals that you possess, not ETFs, Perth Mint certificates, etc.

This is fascinating. However, it depends on a tradition of precious metal ownership in a given economy. My country of residence had somewhat of a war scare a couple years ago, and the exact dynamic you describe has played out in currency exchange houses instead. Even weird stuff like Indian rupees got scooped up in a matter of days. Meanwhile places selling bullion were mostly unperturbed. Gold is just not on most people's radar. Nevertheless, thanks for calling my attention to this, it's a quite interesting phenomenon that I wouldn't have thought of.

[Ugly_Bird]

But I would sleep better with my money in US Treasuries.

Of the country with 30+ trillion$ debt?

[boglerdude]

For those living outside US, what is the situation with American companies being allowed to operate. Uber, Amazon, Google, Facebook, Walmart, Tesla.

Are they increasing or decreasing in exposure/market share? Might be related to speculation abt reserve currency status

[ArthurPooh]

But I would sleep better with my money in US Treasuries.

Of the country with 30+ trillion$ debt?

Still safer than any eurozone country.

[Hal]

Still safer than any eurozone country.

Just for fun, try substituting European domestic cash in a US permanent portfolio over on Portfolio Charts.

You may also find this interesting: https://www.youtube.com/watch?v=7uFPVjMC-IE

Visitors left today so will have to catch up on reading this thread!

[ArthurPooh]

Still safer than any eurozone country.

Just for fun, try substituting European domestic cash in a US permanent portfolio over on Portfolio Charts.

You may also find this interesting: https://www.youtube.com/watch?v=7uFPVjMC-IE

Visitors left today so will have to catch up on reading this thread!

Very interesting, thanks for this great resource. I think I should listen to more of these and maybe actually read Fail-Safe Investing.

It appears my understanding is at least partially correct - PP does rely on the interaction between gold and USD, and so it seems at least the bond part should consist of US Treasuries no matter where you live.

It's also interesting that HB didn't consider cash a true hedge for tight money recession - merely something that won't depreciate as much as the other three assets and will allow rebalancing into them. Then it appears the denomination of cash is not terribly relevant, and in a developed non-US economy it makes sense to keep it local, especially if a part of it also serves as the investor's emergency fund or a source of current income. There might be also tax considerations advantaging local savings accounts over short-term bills or a fund like SHV.

However, I've also encountered a notion in this forum that cash isn't just dead weight and that since in a tight-money recession interest rates go up Treasury bills will provide an increased return that would be missed by someone holding non-US cash. Maybe it's an unavoidable penalty for not living in the best country in the world.

For residents of Zimgentistan such as myself a solution might be cobbling together a cash allocation from three components: 6-month emergency fund in local currency savings account, easily accessible (possibly even in literal paper cash) appropriate foreign currency in case of local hyperinflation and short-terms adverse moves in USD/local scrip pair, and the rest in US Treasury bills. Or maybe it's just me trying to justify all the Swiss francs I bought (and failed to realize any gains from yet) during last hyperinflation scare when I didn't know much about investing and was heavily influenced by Zero Hedge-type narrative of impending US collapse.

[Hal]

It's also interesting that HB didn't consider cash a true hedge for tight money recession - merely something that won't depreciate as much as the other three assets and will allow rebalancing into them. Then it appears the denomination of cash is not terribly relevant, and in a developed non-US economy it makes sense to keep it local, especially if a part of it also serves as the investor's emergency fund or a source of current income. There might be also tax considerations advantaging local savings accounts over short-term bills or a fund like SHV.

That would be a good starting point. From Portfolio Charts, if you had a US PP, 25% TSM, 25% LTT, 25% Gold, 15% STT and 10% local currency then that allocation is always in the best four Ulcer Index ratings regardless of what country you select.

I believe a US based PP makes more sense the smaller the economy of the country you live in.
Any comments from other forum members welcome!

Edit: Found this Marc DeMesel interview which covers Iceland. Start at 8:45 mark.
https://thevoluntarylife.com/investing- ... c-de-mesel

[ArthurPooh]

That would be a good starting point. From Portfolio Charts, if you had a US PP, 25% TSM, 25% LTT, 25% Gold, 15% STT and 10% local currency then that allocation is always in the best four Ulcer Index ratings regardless of what country you select.

I believe a US based PP makes more sense the smaller the economy of the country you live in.
Any comments from other forum members welcome!

Edit: Found this Marc DeMesel interview which covers Iceland. Start at 8:45 mark.
https://thevoluntarylife.com/investing- ... c-de-mesel

Thanks for the valuable info. Maybe I should just buy the exact allocation you posted. Interestingly enough, the 10% non-dollar currency allocation corresponds to 10% Swiss franc asset allocation in PRPFX (I swear Michael Cuggino doesn't pay me to post here). Although I would definitely use a global stock market allocation. I don't think readily foreign-investable equities are "local" in any meaningful sense.

Let me restate my claims for possible further discussion:

Major claim 1: Gold is not an inflation hedge, but an alternative reserve currency to the dollar. Therefore for the PP to work properly for all possible economic conditions, the bond allocation should consist of long term US Treasuries regardless of the investor's domicile.

Minor claim 1: Investable equity markets are mostly globalized, and the American stock market is the most globalized of all. Therefore, the stock component of non-US PPs should still contain a significant allocation to American equities and an American-only allocation would be superior to local-only.

Minor claim 2: Euro-denominated government bonds do not belong in the same asset class with US Treasuries and other sovereign debt due to euro issuance not being controlled by any single EU state. They should be considered akin to foreign currency-denominated sovereign debt, or to municipal bonds.

Major claim 2: If the investor cannot acquire either gold or long term US Treasuries, another investment strategy that uses available asset classes should be pursued instead. Cargo-cult PPs that substitute local, even very safe, bonds, cannot be expected to perform reliably in all possible environments.

Thanks to everyone who has participated so far. I've expanded my perspective a lot.

[boglerdude]

Emergency fund in local currency.

Bag of global stocks (VTWAX).

Bag of longest duration bonds you can find, from a stable enough issuer (prob US gov). Sell if rates near lower bound. (1.5%ish)

Maybe gold as hyperinflation insurance. Or even better, real estate you can improve.

Good enough for the women i date

[tarentola]

Hal:

I believe a US based PP makes more sense the smaller the economy of the country you live in.

Siamond on the Bogleheads blog would agree. https://www.bogleheads.org/blog/2020/03 ... ld-part-3/

In a three-part article, he concluded:

After playing with historical numbers for a while, the author hypothesized that splitting stocks 80% global world and 20% domestic would have displayed fairly good properties in the past 50 years (1970-2019), a sweet spot of sorts. It would certainly have helped a local investor in countries with the worst track record (e.g. Italy, Spain, Japan) to mitigate various types of risk.

For example (figures approximate) the EU is 11% of global market cap, while the US is 44%. An EU investor would invest as follows:
80% World
US 80% x 44%=35%
EU 80% x 11% = 9%

20% EU
giving a total of 35%US, 29% EU (and 25% other developed markets and 10% Emerging Markets)

Obviously the smaller the home market, the greater the proportion of US investment: an investor in a country with 1% of world market cap would be ~44% invested in the US. On this basis, US stocks would constitute 1/3 to 1/2 of any non-US resident's portfolio.

[Hal]

Obviously the smaller the home market, the greater the proportion of US investment: an investor in a country with 1% of world market cap would be ~44% invested in the US. On this basis, US stocks would constitute 1/3 to 1/2 of any non-US resident's portfolio.

Thanks Tarentola, will definitely read the link!

Suspect the Vanguard fund I use follows a similar methodology
https://fund-docs.vanguard.com/ETF-Vang ... S_VDCO.pdf

As an aside from being a small economy, Australia has de-industrialised since approximately 1980. Car industry is gone, we don't even manufacture a box of matches. So the link you provided makes sense.

[ArthurPooh]

As an aside from being a small economy, Australia has de-industrialised since approximately 1980. Car industry is gone, we don't even manufacture a box of matches. So the link you provided makes sense.

That's sad to hear about Australia. This is also something I would point out to any emerging market afficionado - many of these countries are Potemkin economies in which Western aid is a main, if not only, source of foreign exchange. I'm not sure how much actual diversification they can provide.