Not Even Harry Browne Thought It Was Going To Be This Bad

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bronsuchecki
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Not Even Harry Browne Thought It Was Going To Be This Bad

Post by bronsuchecki » Wed Jul 03, 2013 3:25 am

Craig, any comments on this http://www.tfmetalsreport.com/blog/4809 ... en-lantern

"However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio.  For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.

...

It's unlikely that Browne or for that matter anybody in the alternative investment world back in the early 2000's, could have realized what we do know about the extent of the manipulation in the metals. Nor is it likely that Browne imagined the federal debt could exceed the size of the total economy nor the capability of Central Banks to counterfeit on such a large scale.

Could anybody have envisioned the scale of fraud in the market before LIBOR, rehypothecation and MF Global, the 2008 bailouts, the derivatives bubble or the number of interventions in currency markets including the Swiss pegging the Swiss Franc to the Euro? The Permanent Portfolio Fund has always regarded the Swiss Franc as the currency with a high safe haven status but the Swiss taught us that all fiat currencies are subject to manipulation.

Browne saw a world where long term bonds performed well in a deflationary period and gold outperformed in an inflationary period. Well, here we are well into QE3 as The Fed continues to fortify the monetary base, gold and silver has been volatile with excessive short term risk. No longer can they be confident that gold and bonds will behave in a predictable fashion. Good ole Harry must be turning over in his grave.
"
Disclosure: I work for the Perth Mint. What I say is done in a personal capacity and is not endorsed by the Mint.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Hal » Wed Jul 03, 2013 5:07 am

Hello Bron,

I was reading that article as well today.  Had a look at the PRPFX as mentioned in the text and found (if I am reading it correctly) that their average bond duration is only 4.09 years. Not the 30 year bond and Cash barbell.

http://www.permanentportfoliofunds.com/ ... /PRPFX.pdf

Also another Australian newsletter that spoke very highly of the PP recommended their subscribers sell all their bond holdings as the asset classes are too correlated now.

Some more food for thought....
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 8:31 am

It doesn't surprise me that after 10+ years of outperformance, at the first sign of underperformance(-5% ytd), there's panic in the air and a rush to exit gates. This is exactly what Richard Bernstein predicted about the strategy and its weak followers and its happening right before our eyes. When stock heavy portfolios drop by 50%, the risk of equities gets justified but a mere 5% drop in the pp after 10 years of outperformance and the world is upside down. How predictable are we? Best of luck to all the performance chasers, I will be here when you return...its just a matter of time.

Quote from Richard Bernstein:
"And therein lies the real problem with the TPP: because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There?s nothing wrong with Harry?s portfolio?nothing at all?but there?s everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars."
Last edited by george on Wed Jul 03, 2013 8:48 am, edited 1 time in total.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by technovelist » Wed Jul 03, 2013 9:13 am

I agree that this is a situation that not even HB could foresee, and that US T-Bonds are no longer safe. I'm sure he would be the first to say that when the world changes in such fundamental ways as we have seen in the past few years, you have to re-examine your assumptions to make sure they are still valid. This is a far cry from switching strategies every time there is a hiccup in the markets.

For example, suppose that a way was discovered to synthesize gold at low cost, or a gigantic deposit was found and mined, maybe from an asteroid, increasing the supply by hundreds of percent. Would you say that we should still maintain a 25% allocation to gold? If not, then obviously there are events that can change your mind about the correct strategy.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 9:17 am

Why are T-bonds no longer safe? The low rates, or your fear of default or hyperinflation or something?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Benko » Wed Jul 03, 2013 9:20 am

technovelist wrote: I agree that this is a situation that not even HB could foresee, and that US T-Bonds are no longer safe. I'm sure he would be the first to say that when the world changes in such fundamental ways as we have seen in the past few years, you have to re-examine your assumptions to make sure they are still valid.
But the basic idea i.e. picking volatile but uncorrelated assets to cover the different possible economic scenarios still sounds like a reasonable one (from my limited knowledge).  Do people agree?  Are there more suitable assets/asset classes?  If not, staying the course sounds like the best idea.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by technovelist » Wed Jul 03, 2013 9:30 am

Pointedstick wrote: Why are T-bonds no longer safe? The low rates, or your fear of default or hyperinflation or something?
Unlike any time in the past 50 years (at least), the Federal Reserve is monetizing an amount of debt greater than the entire net issuance of T-Bonds (including the MBS which are also an obligation of the US government). Obviously this cannot continue indefinitely. There are only two ways for it to end:
1. They stop the monetization, in which case interest rates go to the moon, as there are no other end buyers at rates anything like these rates, thus causing the price of existing bonds to plummet; or
2. They destroy the dollar.

In either of these scenarios, long T-Bonds are a disaster for investors.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 9:37 am

Who is to say that any asset will be safe and that is why the pp has 4 different assets to protect you in the event something unforseen occurs. Many folks were invested in equities in 2007 while they seemed safe and look what happened the very next year.

Bill Gross called for the end of the bond rally over 3 years ago. Wow, don't we have short term memories?

My favorite saying by Keynes: "The markets can stay irrational far longer than you can stay solvent"

 
Last edited by george on Wed Jul 03, 2013 9:42 am, edited 1 time in total.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by technovelist » Wed Jul 03, 2013 9:43 am

george wrote: Who is to say that any asset will be safe and that is why the pp has 4 different assets to protect you in the event something unforseen occurs. Many folks were invested in equities in 2007 while they seemed safe and look what happened the very next year.
Equities are never safe, and anyone who thinks they are is highly delusional, to put it politely.

T-Bonds used to be relatively safe, until the government decided it could spend any amount it wished and the Fed would buy all their net issuance.

Of course, nothing is perfectly safe, but it is possible for something that appeared safe to become obviously very unsafe. Should we ignore that?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 9:52 am

I'm not sure I follow your logic, technovelist. Are you saying that without Fed interference, interest rates would be much higher? I'm not sure I see much evidence that the real economy can support high interest rates right now. The Fed could artificially raise interest rates of course, but I see no reason why they would benefit from doing that. I think there's much evidence that interest rates--especially at the long end of the yield curve--are controlled much more by market forces than by Fed policy.

And why would they have to "destroy the dollar?" By this I assume you mean hyperinflate it… why is that a foregone conclusion? Japan has been doing everything we've been doing recently for two decades--their central bank can explicitly monetize their national debt and their debt-to-GDP ratio is far higher than ours. They've even been trying to create some inflation, and it hasn't worked. Not saying we're Japan now, but we clearly have a template for central bank impotence in the face of economic issues that the entire developed world is beginning to face en masse.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 10:14 am

Even if you are right and rates skyrocket, only if it happens in a straight line, will the pp really suffer because the pp may have you rebalance several times into and out of TLT, along the way as the market stair steps its way to higher rates. This way the impact of higher rates will be muted. In the event of skyrocketing rates, the only good investment will be TBT or TBF and I'm not sure I would want to be in such a volatile etf.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 10:22 am

Also, if rates rise, we have 25% of our money in an short-term bonds--an asset type that quickly adjusts to rising rates and will give us nice fat interest payments. Almost as if it was all planned out that way…  ;)
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