When all asset classes are overvalued

General Discussion on the Permanent Portfolio Strategy

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Kevin K.
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When all asset classes are overvalued

Post by Kevin K. » Mon Feb 26, 2018 10:49 am

I thought about adding this link to the long "Is the PP Going to Hold Up?" thread but feared it would get lost in the mix:

https://financialmentor.com/investment- ... here/21479

I think this article does an excellent job of showing both just how dangerously overvalued stocks and bonds are AND of getting at the real root causes of the Bitcoin/Cryptocurrency mania. His disdain for fiat currencies and government manipulation is rather Harry Browne-esque, I must say!

Of course having made a compelling case that the sky is falling he offers only a few vague hints at solutions while offering a course sometime in future (hopefully before the crash?) to those who want to learn more. Still I can't fault his analysis and am impressed with his lengthy track record of calling (and avoiding) market bubbles bursting. Wonder if he has heard of the Golden Butterfly? :)
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Re: When all asset classes are overvalued

Post by Kriegsspiel » Mon Feb 26, 2018 11:07 am

Reminds me of this quote,

Too many accumulations of money are seeking ways to grow exponentially in a world in which the physical scale of the economy is already so large relative to the ecosystem that there is not much room left for growth of anything that has physical dimensions

-Daly
Kevin K.
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Re: When all asset classes are overvalued

Post by Kevin K. » Mon Feb 26, 2018 2:31 pm

Yes.

Here's Mr. Tresider's partial list of possible alternative investments and strategies:

"While I can’t explain all the risk management strategies that are possible a few actionable ideas include:

“Deep diversification” (where you diversify by strategy and source of return, not just asset class, by identifying sources of return that inversely correlate with the stock market)
Diversify into certain business and real estate assets where the outcome is driven by a micro-economy
Diversify into alternative assets
Switch to an investment process that includes an exit discipline
Increase allocation to cash
Switch from high volatility, high beta assets to low volatility assets
Diversify into favorably valued assets that might include domestic value plays, certain emerging markets, commodities, and commodity producers
And much, much more"

Obviously there's a huge range of "actionability" here depending on the individual. Personally I think his second suggestion, which could take the form of something as simple as owning one or more rental properties or getting into the Airbnb business might make sense for many as a partial alternative to having most or all of one's nest egg tied up in overvalued stocks and bonds.

Increasing allocation to cash makes all kinds of sense and the author makes a pretty compelling case that cash or near-cash such as short-term CD's are a far better choice than bonds of any sort in a related article that I posted the link to in the Bonds forum here.

Lastly I take "exit discipline" to be stop orders and that also seems to make sense.

I don't think the PP offers much protection from the market conditions he describes. 25% cash is about the only viable part from what I can see.
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Re: When all asset classes are overvalued

Post by glennds » Mon Feb 26, 2018 4:42 pm

Sorry to be a cynic, but I have trust issues with people who write about how they called previous market corrections (after the fact), and use as a confirming source -themselves. I would find it more credible if he could point to an article or video where he can be quoted calling the bubble before it happened. Do you know if he ever went on record with a prediction before it happened? Other than the written warnings he says he gave to his subscribers?

As for the list of actionable strategies, I see a lot of wordy suggestions that could mean anything and nothing, at the same time. So when quoting hindsight he is very specific, when predicting the future, not so much.

In his book Harry Browne would characterize this person as a "fortune teller". He would also tell you there's no way to predict the future. People who believe in the Permanent Portfolio, All Weather Portfolio, or any other risk parity strategy believe that except for a temporary tight money recession where no one is making money, one or more of the four asset classes will pull the load under whatever economic conditions are present. At the very least, the downside is blunted.
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Re: When all asset classes are overvalued

Post by Kevin K. » Mon Feb 26, 2018 5:37 pm

glennds wrote:Sorry to be a cynic, but I have trust issues with people who write about how they called previous market corrections (after the fact), and use as a confirming source -themselves. I would find it more credible if he could point to an article or video where he can be quoted calling the bubble before it happened. Do you know if he ever went on record with a prediction before it happened? Other than the written warnings he says he gave to his subscribers?

As for the list of actionable strategies, I see a lot of wordy suggestions that could mean anything and nothing, at the same time. So when quoting hindsight he is very specific, when predicting the future, not so much.

In his book Harry Browne would characterize this person as a "fortune teller". He would also tell you there's no way to predict the future. People who believe in the Permanent Portfolio, All Weather Portfolio, or any other risk parity strategy believe that except for a temporary tight money recession where no one is making money, one or more of the four asset classes will pull the load under whatever economic conditions are present. At the very least, the downside is blunted.
I apologize for rather flippantly misrepresenting the authors views and achievements. He does have an excellent track record of getting out of bubble investments before they burst but very clearly states that he is not a market forecaster. Here's a relevant quote from the bond article:

"I’m not in the investment forecasting business.

I rarely write posts like this because forecasting financial markets is a fools game that has no place in sound investing. The future is unknowable and anybody who plays in forecasting the market is destined for humility.

What I’m sharing with you here isn’t a forecast. It’s a risk/reward analysis of a broad market sector based on mathematics.

There are rare times when valuations in specific markets reach such absurd levels that the risk vs. reward ratio allows you to make investment decisions without any specific forecast.

I’ve done this twice in the past (publicly), and I’m doing it a third time right now.

How did I know to sell all my investment real estate in 2006 right before the market top?
How did I know to sell my investment management company in 1997 and remove traditional equity allocations from my portfolio 3 years too early before the big top in stocks?
Actually, I never knew either market was at or near a top. That would be a forecast.

Forecasting financial markets is a fools game - stick to sound investing principles instead.

All I knew was the risk/reward analysis was extraordinarily unfavorable to where participating in that market no longer made sense. It was based entirely on business common sense and required no forecast."

Of course I agree with Browne about their being no way to forecast the future. I held the full PP myself for nearly 5 years starting in '08 and benefitted considerably but I don't think the purist version of the allocation is well-suited to current market conditions. No one can know, obviously, what Mr. Browne would have made of a world with interest rates at today's levels, with U.S. stock valuations where they are, with paper gold taking the place of real gold (with gold prices repeatedly suppressed through massive sales of unbacked gold futures contracts on the US Comex and London exchanges) and with the "full faith and credit" of the U.S. being something a political bargaining chip rather than a sacred trust. I suspect he'd be recommending a very different portfolio today to provide parity for very different risks.
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Re: When all asset classes are overvalued

Post by glennds » Mon Feb 26, 2018 8:36 pm

Kevin K. wrote:
Of course I agree with Browne about their being no way to forecast the future. I held the full PP myself for nearly 5 years starting in '08 and benefitted considerably but I don't think the purist version of the allocation is well-suited to current market conditions. No one can know, obviously, what Mr. Browne would have made of a world with interest rates at today's levels, with U.S. stock valuations where they are, with paper gold taking the place of real gold (with gold prices repeatedly suppressed through massive sales of unbacked gold futures contracts on the US Comex and London exchanges) and with the "full faith and credit" of the U.S. being something a political bargaining chip rather than a sacred trust. I suspect he'd be recommending a very different portfolio today to provide parity for very different risks.
Hello Kevin,
Your last paragraph above makes the case that things are different now than they were in Harry Browne's time, in other words the Permanent Portfolio may be antiquated. I don't know whether I agree or not, but I do think it's a question that any prudent Permanent Portfolio investor ought to consider.

As a person who clearly has given it a lot of thought, and who has been a PP investor in the past, what is your chosen capital preservation strategy appropriate to the current environment?
Thanks
glenn
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Re: When all asset classes are overvalued

Post by boglerdude » Tue Feb 27, 2018 1:35 am

https://www.bogleheads.org/forum/viewto ... 0&t=242812

The Bogleheads arent tearing him up quite as much as usual
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Re: When all asset classes are overvalued

Post by sophie » Tue Feb 27, 2018 8:48 am

Because maybe it's not worth the effort?

It looks like a typical fear-mongering article. I shouldn't have read it as that's 10 minutes of my life I'll never get back. No, he can't predict the future any more than you can, not to mention the inaccuracies such as the flattening bond yield curve being "unprecedented" (it's not). I mean, 2008 took Hank Paulson, Larry Summers etc by surprise, and those people are not dumb or out of touch with the markets. Just by chance there were a few people predicting doom and gloom at the right time, just because there are always some of those around at any given moment in time. And of course in hindsight there were lots more of them :-)

I signed a contract on my first apartment the day before the Lehman brothers/AIG collapse in fall 2008. I wasn't paying too close attention to the markets at that time, but I wasn't completely out of it and there was no indication that something frightening was about to happen. I thought I was done for and even had friends telling me to walk out on the contract and my deposit because the real estate market was about to collapse, but it all worked out fine - better than fine actually since I'd sold my taxable stock holdings in order to hold cash for the sale. After that...well let's just say that I enjoy laughing at fear mongers and letting my passive investments continue to do their thing.
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Re: When all asset classes are overvalued

Post by glennds » Tue Feb 27, 2018 10:56 am

sophie wrote: I shouldn't have read it as that's 10 minutes of my life I'll never get back.
Sophie, I couldn't agree more. Plus the author is using one of the oldest parlor tricks in the book to turn the reader into a "subscriber" which conveniently results in an income stream for him.
What's the parlor trick? Playing on fear and pain avoidance, which is a nearly irresistible instinct hardwired into our reptilian brains. Add to that another trick I call Black Magic, where he and only he is privy to the complex world around us and the future. And the instinctive relief response to both tricks is to become a subscriber and send him money. How's about that?

I still say it's healthy to continually question and challenge the Permanent Portfolio, but for me, I have found no better vehicle for the money I can't afford to lose, except perhaps tweaks on the concept like GB. One of the best features of the strategy is the forced re-balancing which purposely overrides the reptilian instincts referenced above. Those instincts doom most investors. Re-balancing is as counter-intuitive as it gets when you stop and think about it. The design of the PP is partly intended to save the investor from him/herself.
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Re: When all asset classes are overvalued

Post by Kevin K. » Tue Feb 27, 2018 2:43 pm

glennds wrote:
Kevin K. wrote:

Hello Kevin,
Your last paragraph above makes the case that things are different now than they were in Harry Browne's time, in other words the Permanent Portfolio may be antiquated. I don't know whether I agree or not, but I do think it's a question that any prudent Permanent Portfolio investor ought to consider.

As a person who clearly has given it a lot of thought, and who has been a PP investor in the past, what is your chosen capital preservation strategy appropriate to the current environment?
Thanks
glenn
Hi Glenn -

I most certainly don't have any special insight but like everyone else here respect the thinking behind the PP as well as its historical performance. For me anyway the best thing to come along since the great Rowland/Lawson PP book is Tyler's Portfolio Charts site and its spin-off PP iterations such as the GB and Desert portfolios.

I am also a great admirer of Larry Swedroe's "Larry" (aka minimizing fat tails) portfolio which is probably as close to the PP as you can get without holding a significant chunk of gold. It has the same massive tracking error issues as the PP though and I am among the many who have found that difficult to live with over the years. So my personal very imperfect solution at the moment is 40% very highly diversified equities (50:50 international:U.S. with tilts to small and value using DFA funds) 50% short-term bonds (corporates, CDs and Treasuries) and 10% cash. It's basically an iteration of the Larry Portfolio but with even shorter-term bonds due to the interest rate environment we are in and 10% more stocks because my time horizon is too long (and nest egg too small) to live with his 30% played-the-game-and-won allocation.

For me the most important take-away from the Tresidder article is no different from what i get from the perma-bear FA guy I use to access the DFA funds: we are quite far along in a stock and bond market that has been fueled by smoke-and-mirrors from the Fed, stock buybacks and a lot of other shenanigans and the mainstream Wall Street narrative about how great and healthy the economy is is not supported by what is actually going on on the ground. In the U.S. we have a stock market bubble, a bond market bubble, a real estate bubble and a government which is hell-bent on destroying the few regulatory checks and balances that have been put in place since the 08 crash while also being eager to vastly increase the national debt. Sooner or later some or all of these bubbles seem very likely to burst. The PP is obviously one "bunker" portfolio that has worked well in the past but as the GB, Desert and Larry portfolios show there are plenty of other iterations that are worthy of consideration.
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Re: When all asset classes are overvalued

Post by Roy » Fri Mar 02, 2018 9:20 am

Kevin K. wrote:
I am also a great admirer of Larry Swedroe's "Larry" (aka minimizing fat tails) portfolio which is probably as close to the PP as you can get without holding a significant chunk of gold. It has the same massive tracking error issues as the PP though and I am among the many who have found that difficult to live with over the years. So my personal very imperfect solution at the moment is 40% very highly diversified equities (50:50 international:U.S. with tilts to small and value using DFA funds) 50% short-term bonds (corporates, CDs and Treasuries) and 10% cash. It's basically an iteration of the Larry Portfolio but with even shorter-term bonds due to the interest rate environment we are in and 10% more stocks because my time horizon is too long (and nest egg too small) to live with his 30% played-the-game-and-won allocation.
Hi, Kevin,

The original “Larry” was and remains a reasonable choice—about 30% in diversified small cap and very valuey, like DFA (though ETFs like IJS can now do comparable domestic job). It featured 2-year Treasuries, precisely to include the environment we are in now. Even though credit risk tends to be rewarded in short term stocks, these can get whacked in environments like 2008-09, hence the Treasuries, accepting lesser return for better safety in crisis.

At times Larry played with adding 5% (or less) in CCFs but the same bet on Gold did a better job, in my view, end even he eventually admitted it could work in that capacity as a diversifier. Though, perhaps not needed.

Does take a longer-term view to realize the solid returns (that the higher expected return sticks might provide) and tracking error risk is very real along the way. It's one of those allocations that is easy to write on paper but not so easy to live through, during times when everyone who is stock-heavy is chirping. This happened to a big-time corporate exec I know. He entirely understood the strategy and accepted the risks, embraced it post-crash and held it—right up until he made 20% less than his colleagues, soon after. Then he bailed.

But a good bet if concerned about Left Tail events—providing one is equally unconcerned about the tracking, as you seem to understand.
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Re: When all asset classes are overvalued

Post by Kevin K. » Fri Mar 02, 2018 2:02 pm

Hi Roy -

It's really a pleasure to see your name pop up here and it gives me the opportunity to thank you for your many insightful posts over the years.

You're right on all counts about the Larry portfolio of course and it's good to be reminded of what the original one was since he's offered so many other iterations since. And you're also more-than-correct about the proliferation of specialized ETFs in recent years that are more than adequate substitutes for most if not all of the DFA funds.

Two other iterations of the LP have also intrigued me: 70% Intermediate Treasuries with 15% Small Cap Value, 8% Int'l Small Cap and 7% Emerging Markets, and Desert's 60% ITT, 10% Gold, 25% Total U.S. Stock Market and 5% Total International Stock. Both are viable low fat tail alternatives to the PP that overcome the understandable resistance some of us have to large amounts of gold and/or owning a ton of 30 year Treasuries. I especially like the first one which comes from Swedroe's "Black Swans" book. I mean as long as you're going to take on tracking error might as well have the equities most likely to outperform given current valuations.

I couldn't post the screen shots due to lousy computer skills but it's really interesting to run these allocations vs. the PP for 2000-2014 or so on Portfolio Visualizer just to get a sense of performance over our two most recent market crashes.
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