How Would The PP Perform In A Global Depression?

[Reub]

I've been reading one blogger's opinion on an upcoming global depression involving massive sovereign debt default, the US bond bubble bursting, and the US dollar rising and then collapsing. The blogger also sees gold falling. In your opinion, how would the PP perform in this type of a scenario?

http://armstrongeconomics.com/armstrong ... og/page/2/

"This is a interesting parallel to the events that set in motion the Great Depression. We could be at the 1927 phase when capital flows shifted into the USA. This may result in the US share market high coming in 2017 and the bond bubble for 2015. Rates will most likely begin to rise after 2015.75 as confidence in government declines."

From "The Coming Dollar Rally" blog by Martin Armstrong posted on Jan 22, 2015.

[MachineGhost]

One thing I know is triple A corporate bonds held up very well during the Great Depression, so that is probably what we'll see when faith in the U.S. government erodes.  The PP could require some adjustment; the question is will people do it before or during or after the fact such an adjustment is needed?  And will we have enough time to see the signs to do so?

How did Wellesly do during the 1930s?

[stpeter]

One thing I know is triple A corporate bonds held up very well during the Great Depression, so that is probably what we'll see when faith in the U.S. government erodes.

My recollection is that there was some survivorship bias there: for corporations that didn't go bust, their bonds held up OK. But not all corporations survived (even those that were AAA rated). I can't put my finger on the right book about it right now, though.

[Stewardship]

I've been reading one blogger's opinion on an upcoming global depression involving massive sovereign debt default, the US bond bubble bursting, and the US dollar rising and then collapsing. The blogger also sees gold falling. In your opinion, how would the PP perform in this type of a scenario?

Not sure I understand.  Are you asking how would the PP perform in a scenario in which all four of its asset classes crash?  Poorly, I surmise. 

[MachineGhost]

Not sure I understand.  Are you asking how would the PP perform in a scenario in which all four of its asset classes crash?  Poorly, I surmise. 

I can't see it happening all at the same time though.  Where would capital go?  Moon rocks?  Bitcoins?  Adult diapers?

Maybe we ought to study Iceland in more detail as to the timing of things.

[coinstar]

Not sure I understand.  Are you asking how would the PP perform in a scenario in which all four of its asset classes crash?  Poorly, I surmise. 

I can't see it happening all at the same time though.  Where would capital go?  Moon rocks?  Bitcoins?  Adult diapers?

Maybe we ought to study Iceland in more detail as to the timing of things.

Great questions!! It's my understanding although it could be incorrect that in a massive depression, capital is destroyed. Sure, maybe the total number of dollars is the same, but if people aren't working, and stuff isn't being made, then those dollars aren't worth the same. And since all of those dollars are compounded leveraged debt in a fiat economic system, once people at the lowest level stop paying their interest on their short-term debt, then it leads to a string of defaults.

The home owner loses his job and stops paying his mortgage. The mortgage owner entity stops receiving mortgage payments and can't pay the debt he took out to buy the mortgages. And so on.

So I think money can be destroyed in a leveraged economy like we have now. As opposed to gold where there's a fixed amount of gold that paper money can be redeemed for. Now we just digitally make money out of nothing so it can also be digitally reduced to nothing.

As far as AAA Bonds, that's an interesting idea for part of the VP. Hand picking several companies that will likely do well in a global depression and buying individual bonds from them. Ideally ones that aren't callable and are 30 year duration. I think they'd need to not be callable to work for this purpose. I'm thinking companies like Disney will be very bad in a global depression whereas companies like Monsanto would be good. People need to eat! Energy companies would do bad because depression means less industrial stuff and less energy usage. Costco would do great because people would need to scrimp and save and buy in bulk when they can.

Maybe pick 5 to 10 companies that you expect to do good in a depression, find non-callable 20+ year bonds from them and invest in your VP.

[Lowe]

If I can pick bonds that will do well in a depression, why can't I pick bonds that will do well now?

If I wanted corporate bonds, I'd buy an index of the best grade.  Those shouldn't come from companies that will die quickly in a panic.  I'll let the people running the index do my analysis for me.  I don't know how to do it anyway.

[Libertarian666]

Not sure I understand.  Are you asking how would the PP perform in a scenario in which all four of its asset classes crash?  Poorly, I surmise. 

I can't see it happening all at the same time though.  Where would capital go?  Moon rocks?  Bitcoins?  Adult diapers?

Maybe we ought to study Iceland in more detail as to the timing of things.

Great questions!! It's my understanding although it could be incorrect that in a massive depression, capital is destroyed. Sure, maybe the total number of dollars is the same, but if people aren't working, and stuff isn't being made, then those dollars aren't worth the same. And since all of those dollars are compounded leveraged debt in a fiat economic system, once people at the lowest level stop paying their interest on their short-term debt, then it leads to a string of defaults.

The home owner loses his job and stops paying his mortgage. The mortgage owner entity stops receiving mortgage payments and can't pay the debt he took out to buy the mortgages. And so on.

So I think money can be destroyed in a leveraged economy like we have now. As opposed to gold where there's a fixed amount of gold that paper money can be redeemed for. Now we just digitally make money out of nothing so it can also be digitally reduced to nothing.

As far as AAA Bonds, that's an interesting idea for part of the VP. Hand picking several companies that will likely do well in a global depression and buying individual bonds from them. Ideally ones that aren't callable and are 30 year duration. I think they'd need to not be callable to work for this purpose. I'm thinking companies like Disney will be very bad in a global depression whereas companies like Monsanto would be good. People need to eat! Energy companies would do bad because depression means less industrial stuff and less energy usage. Costco would do great because people would need to scrimp and save and buy in bulk when they can.

Maybe pick 5 to 10 companies that you expect to do good in a depression, find non-callable 20+ year bonds from them and invest in your VP.

Agree on Disney, disagree on Monsanto. No one needs the products of either of them. One of them is just useless, but the other is tremendously hazardous to the health of everyone whose products it touches.
I'll let you guess which is which. :-)

[mukramesh]

If the US government defaults on it's debt, wouldn't that make the dollar worthless? I'd assume if the entity that can print it's own money defaults, corporate bonds would fair much worse. Besides, if the US government defaults, dollar goes down (hyperinflation), wouldn't gold (priced in dollars) save the day?

[glennds]

I'm not sure I understand how it would be possible that all the asset classes would collapse, including the dollar and gold simultaneously. Regardless, I would raise two questions in response:

1. What strategy would preserve capital better than the Permanent Portfolio under the circumstances you're describing?

2. If an across-the-board global catastrophe happens where basically all asset classes are demolished, then in effect nothing has happened because each investor's position relative to everyone else has stayed the same. This may sound abstract, but think about it. If we all go up or down together, then your position has stayed constant in relative terms. There may be an adjustment period if the change were radical but I would not bet that it would be very long.

[Libertarian666]

I'm not sure I understand how it would be possible that all the asset classes would collapse, including the dollar and gold simultaneously. Regardless, I would raise two questions in response:

1. What strategy would preserve capital better than the Permanent Portfolio under the circumstances you're describing?

2. If an across-the-board global catastrophe happens where basically all asset classes are demolished, then in effect nothing has happened because each investor's position relative to everyone else has stayed the same. This may sound abstract, but think about it. If we all go up or down together, then your position has stayed constant in relative terms. There may be an adjustment period if the change were radical but I would not bet that it would be very long.

1. A portfolio very heavy in physical gold.
2. Maybe, but it would obviously be better to gain massively in purchasing power than to stay even. As to how to do that, see answer to #1.

[dragoncar]

2. If an across-the-board global catastrophe happens where basically all asset classes are demolished, then in effect nothing has happened because each investor's position relative to everyone else has stayed the same. This may sound abstract, but think about it. If we all go up or down together, then your position has stayed constant in relative terms. There may be an adjustment period if the change were radical but I would not bet that it would be very long.

Well except you might have lost an important asset: your job

[glennds]

2. Maybe, but it would obviously be better to gain massively in purchasing power than to stay even. As to how to do that, see answer to #1.

Gaining massively in purchasing power sounds really, really good. Capital preservation and risk reduction is very appealing (to me) also. What do you feel is the best strategy for doing both at the same time, and under unpredictable future conditions?

[jason]

If the US government defaults on it's debt, wouldn't that make the dollar worthless? I'd assume if the entity that can print it's own money defaults, corporate bonds would fair much worse. Besides, if the US government defaults, dollar goes down (hyperinflation), wouldn't gold (priced in dollars) save the day?

Presumably, yes, gold would save the day. That's what happened when Iceland collapsed in 2008, as Craig pointed out here:
https://web.archive.org/web/20160324133 ... e-of-2008/

[barrett]

Alas, that Iceland link doesn't seem to be working anymore. Too bad. That was a great stress test for the PP.

[Stewardship]

https://web.archive.org/web/20160324133 ... e-of-2008/

Alas, that Iceland link doesn't seem to be working anymore. Too bad. That was a great stress test for the PP.

Link works for me.

[barrett]

The link gets me to the correct page but when I then click on 'Permanent Portfolio in Iceland', I get a notice that says "Blog has been removed."

[D1984]

The link gets me to the correct page but when I then click on 'Permanent Portfolio in Iceland', I get a notice that says "Blog has been removed."

Try this one: https://web.archive.org/web/20120415114 ... eland.html

[MachineGhost]

Try this one: https://web.archive.org/web/20120415114 ... eland.html

So from peak to trough in 2 months (bonds/cash).  That's not a lot of time to react.  But stocks did react first and for a lot longer.  So that's really good as far as an early warning sign is concerned.

So when T-Bonds goes up 100%+ in less than 2 weeks, we'll know The End is Near and can overweight or go all into gold.  That may be the only time it ever pays to break the PP. 

Are we going to see such a scenario before the U.S. dollar goes kaput or will it be a slow death by a thousand cuts?

[Kike Moreno]

Archive.org is our friend:

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

[barrett]

Thank you all for those links! It's really good to be able to read over that article again. As pointed out in the article, a rebalance at the beginning of 2009 caused a PP investor to sell off a huge portion of their gold holdings.

For those averse to paying taxes (almost everyone) that is a rare argument in favor of holding a significant amount of gold ETFs in tax-advantaged accounts, no?

[MachineGhost]

For those averse to paying taxes (almost everyone) that is a rare argument in favor of holding a significant amount of gold ETFs in tax-advantaged accounts, no?

Yep, or selling gold coins/bullion that aren't reportable.  Anyone know if Iceland put on gold resstrictions/reporting requirements during/after their collapse?

[Libertarian666]

2. Maybe, but it would obviously be better to gain massively in purchasing power than to stay even. As to how to do that, see answer to #1.

Gaining massively in purchasing power sounds really, really good. Capital preservation and risk reduction is very appealing (to me) also. What do you feel is the best strategy for doing both at the same time, and under unpredictable future conditions?

I'm weird, even here: I don't like stocks, T-bonds, or very much cash in the form of USD. So that leaves gold and sound foreign currencies (e.g., CHF).

[glennds]

I'm weird, even here: I don't like stocks, T-bonds, or very much cash in the form of USD. So that leaves gold and sound foreign currencies (e.g., CHF).

Libertarian666 - A few questions if you wouldn't mind sharing your thought process:

1. Have your feelings about CHF been affected or not by their decoupling from the EURO?
2. What other foreign currencies would you put on the sound list besides CHF?
3. In your view, why are any of these currencies more sound than USD, and/or what is it about them that makes you feel they would gain purchasing power in a depression situation?

I have been wondering what to read into the CHF decoupling from the EURO. I can't help but believe it's a sign of some kind, but I'm not quite sure what.
Thanks for sharing,

[Libertarian666]

I'm weird, even here: I don't like stocks, T-bonds, or very much cash in the form of USD. So that leaves gold and sound foreign currencies (e.g., CHF).

Libertarian666 - A few questions if you wouldn't mind sharing your thought process:

1. Have your feelings about CHF been affected or not by their decoupling from the EURO?
2. What other foreign currencies would you put on the sound list besides CHF?
3. In your view, why are any of these currencies more sound than USD, and/or what is it about them that makes you feel they would gain purchasing power in a depression situation?

I have been wondering what to read into the CHF decoupling from the EURO. I can't help but believe it's a sign of some kind, but I'm not quite sure what.
Thanks for sharing,

I'll reply privately to avoid getting the thread too far off-topic.