Chances of losing (and winning!) are close to zero.

[frugal]

My Permanent Portfolio is for the capital that I protect in a diversified portfolio. Chances of losing (and winning!) are close to zero.

http://europeanpermanentportfolio.blogs ... folio.html

What do you think of this sentence?

Do you feel that PP will just pay inflation?


Thank you and best regards.

[MediumTex]

Marc has made this point in his past writings, and unfortunately he is simply wrong.

The PP has consistently provided a 4% or so inflation-adjusted return over four decades.

Maybe melveyr will post one of his graphs showing how stable these inflation-adjusted returns really are.

[Marc De Mesel]

The PP has consistently provided a 4% or so inflation-adjusted return over four decades.

Hi MediumTex

It has been years ago that we talked at the Boglehead thread. First I want to thank you for the help you gave me in understanding the PP and setting it up. It has protected me very well and I have been able to spread the word in Europe. Thank you also for the many interested PP investors you send over


I agree with you that the PP has consistently provided a real return after inflation. Our numbers however differ. From my calculations it is only 2% annually.

For example from 2000 to 2011 the USA PP has returned on average 7.5% and official inflation has been 2.5% so indeed you get 5% real return on first sight. However in my opinion true inflation in the USA has been 5.5% since 2000, not 2.5%, giving a whole different result of only 2% after inflation. I think the underestimation of inflation is true in all other decades too. I have made an overview with my estimated yearly true inflation as well as amount of dollars printed since 1972 here:

Returns Permanent Portfolio After Inflation.


After this one needs to deduct costs. Brokerage fees, buy/sell spread, storage fees and ETF management fees I estimate in total at 0.6% annually. Taxes I estimate also at 0.6%. My calculation gives 2% - 1.2% = 0.8% annual real return after inflation and transaction costs.  However, like any other activity with a financial balance where you want to calculate a real return (profit) one needs to deduct the own work one puts into it. For the PP this is the big initial time investment one spends in studying and understanding it, setting it up and the yearly monitoring and fine tuning. The 0.8% covers that and so you get paid a fee for being an asset manager but after that no money is left. I think I am correct in stating that the real return (=profit) after inflation and costs is close to zero, meaning: negligible.

However, the PP still stands as the best protector of your capital in all the different economic climates known to humanity. No small accomplishment.


I don't want to spread untruths about the PP so if I am wrong in my analyses I value you help me see.

[Pointedstick]

Marc, I can understand why you'd come to that conclusion if you believe inflation is 3% higher than official figures show, and you subtract another 1.2% (!!!) for fees and taxes.

It might be better to ask whether those assumptions are reasonable. For example, the yearly fees and expenses on my PP are 0.16%, and nearly all of it is tax-sheltered and therefore incurs no tax costs. I would not call my situation atypical at all, and many have fully-tax-sheltered portfolios. The PP is a very, very inexpensive investment portfolio given how well it lends itself to low-cost ETF usage, the fact that three out of the four assets can be held directly for no recurring costs at all, and how strongly they benefit from tax sheltering.

I'm sympathetic to the belief that inflation is higher than governments report, but how do you reach this conclusion or the 5.5% figure? I saw a post on your site that shows the amount of money printed contrasted with the reported inflation figures, but how is that relevant? Inflation is a measurement of  the movement of prices, not the money supply.

[AdamA]

However in my opinion true inflation in the USA has been 5.5% since 2000, not 2.5%, giving a whole different result of only 2% after inflation.

Why do you think it's been 5.5%?

[Gumby]

Whether or not you believe the government figures, calculating true inflation is extremely difficult. BLS numbers (right or wrong) are simply the best data we have. There are some websites that claim to calculate true inflation, for a fee, (ShadowStats for instance) but I tend to not believe those websites since even they haven't increased their subscription prices over the past six years through all this supposed inflation we are experiencing. In "real" terms, their subscription prices are experiencing deflation! 

[Marc De Mesel]

Why do you think it's been 5.5%?

I have given several arguments in my latest interview:

How high do you estimate true inflation in the USA since 2000 ?

[MediumTex]

Marc,

I appreciate you joining us here.

I understand the argument you are making, but I think that the reported inflation figures are probably about right.  When you look at the long term changes in the prices of big ticket items like cars and appliances and compare them to the reported CPI figures over that period, it matches up pretty closely.

I agree, though, that if inflation is significantly under-reported, your management costs are high and you are paying a lot of taxes along the way, your inflation-adjusted PP returns may not be all that impressive.

Whatever we decide on this particular matter, though, I really appreciate you joining us here and I hope you stay a while.

[MediumTex]

Why do you think it's been 5.5%?

I have given several arguments in my latest interview:

How high do you estimate true inflation in the USA since 2000 ?

With falling interest rates, the actual cost of ownership of many goods that are financed has fallen significantly.

For someone who has purchased a house in the last few years, their overall inflation may have been WAY less than 0% because the cost of housing in many parts of the country has fallen a LOT more than the price of milk and gas has risen.

[Marc De Mesel]

the yearly fees and expenses on my PP are 0.16%, and nearly all of it is tax-sheltered and therefore incurs no tax costs.

Congratulations on keeping your expenses and taxes so low. I think though that such low expenses and taxes are not representable to the average investor as I think it requires a serious amount of time, comparable to what professionals invest in it, to get to such an optimized low expense situation.

What would you take as an estimate for average expenses and taxes for a US PP for the average investor?

I'm sympathetic to the belief that inflation is higher than governments report, but how do you reach this conclusion or the 5.5% figure? I saw a post on your site that shows the amount of money printed contrasted with the reported inflation figures, but how is that relevant? Inflation is a measurement of  the movement of prices, not the money supply.

In my interview linked above I go into why I estimate inflation around 5%.

How high do you estimate true inflation in the USA since 2000?

[Marc De Mesel]

I think that the reported inflation figures are probably about right. 

Hi MediumTex

If you believe the official ones are right then ofcourse your returns for the PP are 3% more than my estimate. A lot depends on that.

What do you think of shadowstatistics his inflation estimates?

According to his measurements using 1990 way of calculating by government it is around 5% since 2000 and based on 1980 way of calculating by government it is even higher, around 8% since 2000. However, I have never studied his calculations in detail as to trust them enough but they do confirm my estimates.

I'm not sure that a discussion about true inflation can be resolved though. I can bring a dozen arguments in favor of my estimate and you can to the contrary. Nobody is able to measure it exactly as I explain in my interview so I think each individual needs to make up his own mind. My question to each individual is: do you experience inflation since 2000 indeed at 2.5% per year, or would you say that it is more around 5% per year?

[Marc De Mesel]

With falling interest rates, the actual cost of ownership of many goods that are financed has fallen significantly.

The falling interest rates are due to money printing, ie: stealing. Sure if I can borrow money at 0% interest due to manipulation of the interest rates via theft than borrowing money is cheap. However, the price of the purchased good still goes up and only that is what matters when we talk about 'estimated true inflation'. The cost of borrowing is not an item that should be included in our estimation of inflation I would say.

For someone who has purchased a house in the last few years, their overall inflation may have been WAY less than 0% because the cost of housing in many parts of the country has fallen a LOT more than the price of milk and gas has risen.

If I am correct real estate prices in the US have fallen 30% on average since 2006. However, they are still considerably more expensive then in 2000. Your inflation estimate of 2.5% still applies to real estate, even after the correction. However, for milk and gas they are way above the 2.5% bringing the average of real estate, gas and milk easily at 5%. Would you agree, taking only these 3 items? 

Thanks for welcoming me

[Marc De Mesel]

There are some websites that claim to calculate true inflation, for a fee, (ShadowStats for instance) but I tend to not believe those websites since even they haven't increased their subscription prices over the past six years through all this supposed inflation we are experiencing. In "real" terms, their subscription prices are experiencing deflation! 

I don't think his price of subscription remaining the same is a strong argument against his inflation estimates.  What is BLS? What is your estimate of true inflation?

[Marc De Mesel]

I saw a post on your site that shows the amount of money printed contrasted with the reported inflation figures, but how is that relevant? Inflation is a measurement of  the movement of prices, not the money supply.

Agreed that inflation is a measurement of prices, not of money supply. However, logic dictates that prices will follow the amount of money in circulation (if all else stays the same). And as you can see in my tables the amount of money printed in the US has been 9% since 1972. And since you can deduct -2% per year from the money supply growth as the economy grows by 2% per year, you get a 'theoretical' inflation of 7% due to money printing. Which is about the same number I get for my estimated inflation (7.5% since 1972), which I get by simply deducting -2% per year from the PP returns.

Coincidence? I don't think so. As you can see in my tables the same formula applies to Japan. The amount of money they have printed, 7% per year, deducted by -2%, gives 'theoretical' inflation of 5%, which is about the same as my 'estimated true inflation' (4.2%) that I got by simply deducting -2% from the Japanese PP.

[frugal]

Dear PP users,

This is a good discussion but as we can't control inflation, we have to work with what we control.

I am still searching strategies, and up to now, I couldn't find a better risk/performance asset alocation.

I think I will mix European Permanent Portfolio + US lazy portfolio as variable.

Marc De Mesel: I tried to understand and search about your VARIABLE portfolio but I couldn't find about it. Can you please help?



With my very best regards.

[Gumby]

There are some websites that claim to calculate true inflation, for a fee, (ShadowStats for instance) but I tend to not believe those websites since even they haven't increased their subscription prices over the past six years through all this supposed inflation we are experiencing. In "real" terms, their subscription prices are experiencing deflation! 

I don't think his price of subscription remaining the same is a strong argument against his inflation estimates.  What is BLS? What is your estimate of true inflation?

What is BLS? If someone is going to claim that the official figures are wrong, I'd hope they would know what BLS is. BLS is the Bureau of Labor and Statistics. They are the department that publishes the official inflation reports.

I don't know what true inflation has been, but I doubt it's been as high as you suggest. Salaries have been pretty stagnant for most Americans over the past decade. My guess is that inflation has been pretty close to the official numbers.

Of course, if you are unaware of what the BLS is, then you are probably unaware that the BLS publishes a LOT of different inflation reports. Some of these inflation reports are higher than core inflation for instance. In the US we tend to look more at "Core" inflation and Europeans (or at least the ECB) tend to look more at "Headline" inflation. Consumers bitch and moan about Headline inflation, while investors tend to focus on Core. And there are official inflation reports that include energy, food, etc. One isn't necessarily more correct than the other, but it just depends on what kind of data you are looking for.

See: The Bond Market Does Not Care About Headline Inflation

[sophie]

The MIT Billion Prices Project is a fairly objective look at price increases that correlates quite well with the CPI:

http://bpp.mit.edu/usa/

They do say they can't account for costs of services, but they have most of the rest of the CPI covered.  If there was such a huge gap between actual inflation and the CPI, would you not expect it to show up here?

[clacy]

The MIT Billion Prices Project is a fairly objective look at price increases that correlates quite well with the CPI:

http://bpp.mit.edu/usa/

They do say they can't account for costs of services, but they have most of the rest of the CPI covered.  If there was such a huge gap between actual inflation and the CPI, would you not expect it to show up here?

If inflation were as bad as the "inflationists" always claimed, we would see such a huge standard of living decline that it would be very noticeable in just a few years.  Some of these folks claim the real inflation figure is 8%+. 

If you compound that over 4 years, think about what your standard of living would be like.  Especially in light of our flat earnings over that time period in the US.  That just doesn't match reality, IMO.

[MediumTex]

Marc is not in the U.S. so not knowing about the BLS is forgivable.  I have no idea who tracks inflation in the EU.

To me, the strongest indicator that there hasn't been significant overall inflation in the U.S. is the fact that there hasn't been significant inflation in the single most important price of all: WAGES.  Without wage inflation, there can't be significant across the board inflation in other prices because people simply won't have the money to pay the higher prices.

If all you spent money on was health care, concert tickets and college tuition you would have experienced very serious inflation, but if you also buy houses, computers and flat screen TVs what you have seen, on balance, is pretty tame inflation.

The price of cars is also a pretty good barometer of inflation because so many different types of materials, products and services go into building a car.  The price of an average car hasn't gone up much at all in recent years, and in some cases has even gone down.  When you consider that you can finance many cars today at 0% interest, the actual cost of purchasing a car for most people has probably declined.

I bought my house 11 years ago in a pretty typical suburban neighborhood in a pretty typical part of the country and it is basically worth today exactly what I paid for it in 2001.  However, I refinanced several times during that period, so my actual cost of purchasing the house has declined over this 11 year period by several hundred dollars a month.  That's just my own experience, but there is nothing unusual about it.

[Pointedstick]

the yearly fees and expenses on my PP are 0.16%, and nearly all of it is tax-sheltered and therefore incurs no tax costs.

Congratulations on keeping your expenses and taxes so low. I think though that such low expenses and taxes are not representable to the average investor as I think it requires a serious amount of time, comparable to what professionals invest in it, to get to such an optimized low expense situation.

What would you take as an estimate for average expenses and taxes for a US PP for the average investor?

It's not really that hard. Here's an example of the expenses for a pure HBPP:

Stocks: VTI 0.06% ER
Bonds: 30-year Treasuries 0% ER
Gold: Bullion in a safe in your house 0% ER
Cash: T-bills or 1 year T-bonds 0% ER

That's a 0.015% ER for your whole portfolio. It's barely any worse with all ETFs:

Stocks: VTI 0.06% ER
Bonds: EDV 0.13% ER
Gold: IAU 0.25% ER
Cash: SCHO 0.08% ER

That's 0.13% total.

[AdamA]

How high do you estimate true inflation in the USA since 2000 ?

Somewhere between 2.5 and 5.5%. 

I don't really know enough about the topic to comment in a meaningful way.

Thanks for the link.

[Gumby]

Marc is not in the U.S. so not knowing about the BLS is forgivable.  I have no idea who tracks inflation in the EU.

Yeah, but you don't go around making videos about how wrong the EU is about reported inflation. I suspect if you did go around making such claims you'd know who publishes the reports.

I was also just having some fun. I'm sure Marc is very knowledgable.

[Marc De Mesel]

This is a good discussion but as we can't control inflation, we have to work with what we control.

I am still searching strategies, and up to now, I couldn't find a better risk/performance asset alocation.

Marc De Mesel: I tried to understand and search about your VARIABLE portfolio but I couldn't find about it. Can you please help?

Hi Frugal, thanks for starting this thread. I agree we have no control on what true inflation is. As investors I do think it is crucial to estimate inflation as correct as possible as estimating it wrong has a big influence on how you interpret your results. Underestimating true inflation is disastrous as you think you make more profit then you do in reality and risk burning your capital slowly. If you wake up to it only after a decade you might have lost 30% of your purchasing power, if you are living from your returns like I do. Overestimating true inflation is also not desired as you think you make less then you actually do and might lead you to take unnecessary risks in a Variable portfolio, as I am doing maybe. Therefore I value people's opinion on true inflation as to get a more refined and more correct opinion myself.

At the moment my Variable Portfolio is also on automatic pilot as I follow mainly Roland Vandamme his portfolio, as published in his payed dutch newsletter. His portfolio consist mostly of physical gold (70%) and some physical silver (13%), some stocks (8%) and some cash in Canadian dollar (9%) which he plans to use to buy precious metals stocks when he thinks it becomes opportune. Indeed, I wrote on my dutch website a lot more about him, such as his track record. Obviously this is a very concentrated and very high risk portfolio, chances of winning  - and losing - are high.

[Marc De Mesel]

The MIT Billion Prices Project is a fairly objective look at price increases that correlates quite well with the CPI:

http://bpp.mit.edu/usa/

They do say they can't account for costs of services, but they have most of the rest of the CPI covered.  If there was such a huge gap between actual inflation and the CPI, would you not expect it to show up here?

You can hardly say that most of the CPI is covered if they exclude the prices of services and assets. Services such as utilities are crucial to include and assets such as housing and gold too. Also what about commodities?

If you only take products from online retailers as they do then I also believe that inflation is only 2.5% like the official inflation, especially since 2008, as they do. We are in a consumer tightening cycle. Retailers are lowering profit margins to get rid of their products. In products you have a a serious globalization, deflationary effect of third world low labor costs as well as tight competition.

This does not convince me that true inflation in the US is indeed only 2.5% since 2000.

[AdamA]

I think that the reported inflation figures are probably about right. 

Hi MediumTex

If you believe the official ones are right then ofcourse your returns for the PP are 3% more than my estimate. A lot depends on that.

What do you think of shadowstatistics his inflation estimates?

According to his measurements using 1990 way of calculating by government it is around 5% since 2000 and based on 1980 way of calculating by government it is even higher, around 8% since 2000. However, I have never studied his calculations in detail as to trust them enough but they do confirm my estimates.

I'm not sure that a discussion about true inflation can be resolved though. I can bring a dozen arguments in favor of my estimate and you can to the contrary. Nobody is able to measure it exactly as I explain in my interview so I think each individual needs to make up his own mind. My question to each individual is: do you experience inflation since 2000 indeed at 2.5% per year, or would you say that it is more around 5% per year?

Marc--

But what do you make of the fact that the bond market hasn't responded to any of this?  It seems unlikely to me that the the yields could remain so low for 12 years if inflation was truly 5.5%.