My Permanent Portfolio Variant

General Discussion on the Permanent Portfolio Strategy

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Smith1776
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My Permanent Portfolio Variant

Post by Smith1776 » Fri May 25, 2018 1:03 am

Hello everyone.

I've been working on and finally implemented an international Permanent Portfolio.

I'm a Canadian investor, and one of the biggest issues I've had intellectually is investing my money in a classic PP -- in other words, all my money domestically. Canada represents something like 3% of the total world's stock market capitalization and we have a tiny population. We are also really unbalanced sector-wise, with huge concentrations in banking and energy.

So what does one do? Do you simply put the stock portion of the PP into a global fund? Maybe, but, as some have pointed out, this means that the rest of your portfolio isn't responding to the same economic conditions as the stock portion is. You may lose some protection and "responsiveness" to underlying economic factors. So, let's add some international bonds? Sure, but the portfolio starts to look more and more complicated going down this path.

Recently, Vanguard released asset allocation ETFs in Canada that are diversified stock/bond portfolios in a single security. The one of interest to me was VCNS (Vanguard Conservative Portfolio). https://www.vanguardcanada.ca/individua ... /?overview

This ETF has 40% in international stocks and 60% in international investment grade bonds in sensible portions relative to the various geographic regions. Best of all, it's just one security. The bond portion nets out to being intermediate-term fixed-income. Perfect.

My precious metals security of choice is of the Sprott Physical variety: CEF. It has 2/3 in gold and 1/3 in silver. http://sprott.com/investment-strategies ... rusts/cef/

Now I've constructed my PP out of just these two securities:

25% in CEF - Sprott Physical Gold and Silver Trust
75% in VCNS - Vanguard Conservative Portfolio

The underlying holdings are thus:

- 17.5% gold
- 7.5% silver
- 30% international stocks
- 22.5% international long-term bonds
- 22.5% international short-term bonds

Many will take issue with the fact that CEF has some silver in addition to gold. That's a deviation that I personally just like for my taste. Also, the portfolio is ever so slight stock-heavy due to the 40/60 split in VCNS. It's not ideal, but close enough for me. An additional caveat is that while the bonds are all considered investment grade, they are not all government securities, and thus not free of credit risk. This, too, is a sacrifice I'm willing to make to get the international diversification I was seeking in addition to the simplicity of having only 2 securities in the whole account.

I've put together a portfolio I'm personally very satisfied with and accomplished what I set out to do: assemble a simple PP variant for a Canadian investor that wants international diversification. Just thought I'd share!
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by Tyler » Fri May 25, 2018 9:50 am

That's very nicely thought through. Well done.

Personally I think diversifying outside of your home country (while retaining a sizable domestic tilt) is perfectly reasonable for someone living in a smaller economy, and VCNS looks like a pretty good fund for putting that on auto pilot.

My one point of feedback is that, if you look at the underlying bond holdings, only about 1/3rd of the bonds would qualify as "long term" by the standard definition of having over 10 years to maturity. But you're absolutely right that the weighted average maturity is reasonably similar to the PP, so I wouldn't necessarily recommend you change anything. Just being picky about definitions. ;)
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Re: My Permanent Portfolio Variant

Post by ochotona » Fri May 25, 2018 10:27 am

The issue with Canada is that EWC has a 49% positive correlation with Junior Gold Miners (GDXJ), and 84% positive correlation with Oil & Gas! (XLE). In that sense, it's kind of a sloppy overlap with "commodities and other real assets" including Gold.
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Re: My Permanent Portfolio Variant

Post by alexy » Sat May 26, 2018 1:53 am

@Smith1776

May I ask you how you got to the point of picking these particular securities? Since you've done a lot of investigation, what were other front runners for you that you've considered? I've seen your other, older, post with different ETFs - you decided against those?

Also, why not physical metal(s)? For ease of re-balancing?
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Re: My Permanent Portfolio Variant

Post by blue_ruin17 » Sat May 26, 2018 11:16 am

The classic PP works in Canada exactly as it was designed to, and has so for almost 50 years now, despite Canada always being tilted towards natural resources and commodities. If anything, the volatile boom/bust nature of commodities works in favour of the PP: it increases the volatility of your stock allocation, which is a positive characteristic within the context of the way that the 'machine' of the PP works.

That being said, I think OP's portfolio is just fine. You won't be able to hang yourself with it, it is too well diversified. My only skepticism would be how it will react to currency risk. That is why I prefer the domestic PP: there is no surprises with currency risk.a
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Re: My Permanent Portfolio Variant

Post by barrett » Sat May 26, 2018 12:05 pm

Does anyone have a chart that shows more than 20 years of gold's price in CAD?

This is the best I could find:

https://goldprice.org/gold-price-charts ... -per-ounce

Obviously the price of gold being tied to the USD makes its performance in CAD less predictable. I did a lot of work in Canada in the 1990s and was often negotiating CAD contracts months in advance, and then taking a haircut as the exchange rate fluctuated. In general, IIRC, the CAD was weak for the entire decade of the 1990s (well, at least from late 1992 onward), and gold's price for a Canadian investor should have been much better than the flatline we had here in the US.

I'd love to see a chart that goes back to 1972 (ish).

Thanks.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Sat May 26, 2018 4:29 pm

Thanks everyone for your comments and feedback.
alexy wrote:
Sat May 26, 2018 1:53 am
@Smith1776

May I ask you how you got to the point of picking these particular securities? Since you've done a lot of investigation, what were other front runners for you that you've considered? I've seen your other, older, post with different ETFs - you decided against those?

Also, why not physical metal(s)? For ease of re-balancing?
Yeah, I'd say my thinking about the PP for Canadians has definitely changed and evolved in the couple years since I first discovered it. I'd say the biggest reason for the change in my choice of securities is simply that these Vanguard asset allocation ETFs such as VCNS (Vanguard Conservative Portfolio) simply didn't exist up until just a few months ago. I don't have a set process for choosing ETFs. I just do a lot of searching for different fund choices and use whatever screening tools I have available.

I do happen to have physical metals still, I just didn't mention so in my original post in order to keep things simple. The amount I own that is physical is quite small relative to digital now at any rate.

Speaking within the context of trying to keep the portfolio (1) simple with as few securities as possible, (2) trying to achieve international diversification, and (3) maintaining low cost -- there weren't many other competitors that I found to the VCNS and CEF combo. I did briefly consider some other options:

I could put all my money into the Horizons Risk Parity ETF (HRA) found here: https://www.horizonsetfs.com/etf/hra
This ETF is an All Seasons/Permanent Portfolio/Risk Parity type allocation all in one fund. It would certainly keep things simple, but the total expense ratio is way too high at about 1.38%. Additionally, their asset allocation policy is not that transparent and hard to understand. At any rate, it might be a decent option for a fully taxable investor that doesn't want to incur taxation costs from rebalancing (since it's a whole portfolio in one security). This consideration may be enough to offset the high MER for some investors.

In terms of a possible substitute for VCNS itself, the only vaguely close candidate I found is the iShares Balanced Income Core Portfolio ETF (CBD) found here: https://www.blackrock.com/ca/individual ... liotm-fund
This ETF is a 50/50 split between equity and fixed income. The allocations aren't quite as amenable to my PP setup as VCNS, but there are other bigger issues. The equity in the portfolio consists of dividend payers only, so there's less diversification. Additionally, the fixed-income is only short term. Finally, again, the expense ratio is too high.

It's funny. Canada has such a huge selection of exotic ETFs, but there's not much selection when it comes to simple balanced ETFs. I guess those don't sufficiently feed the marketing machine of Bay Street.
Last edited by Smith1776 on Sat May 26, 2018 4:48 pm, edited 1 time in total.
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Sat May 26, 2018 4:31 pm

blue_ruin17 wrote:
Sat May 26, 2018 11:16 am
The classic PP works in Canada exactly as it was designed to, and has so for almost 50 years now, despite Canada always being tilted towards natural resources and commodities. If anything, the volatile boom/bust nature of commodities works in favour of the PP: it increases the volatility of your stock allocation, which is a positive characteristic within the context of the way that the 'machine' of the PP works.

That being said, I think OP's portfolio is just fine. You won't be able to hang yourself with it, it is too well diversified. My only skepticism would be how it will react to currency risk. That is why I prefer the domestic PP: there is no surprises with currency risk.a
I have a high degree of confidence that a Canada-only PP will do admirably going forward. However, for me, it just doesn't pass the "sleep test" quite as well as an internationally diversified one. Different strokes for different folks I guess. 8)
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by blue_ruin17 » Sun May 27, 2018 5:45 pm

Smith1776 wrote:
Sat May 26, 2018 4:31 pm
blue_ruin17 wrote:
Sat May 26, 2018 11:16 am
The classic PP works in Canada exactly as it was designed to, and has so for almost 50 years now, despite Canada always being tilted towards natural resources and commodities. If anything, the volatile boom/bust nature of commodities works in favour of the PP: it increases the volatility of your stock allocation, which is a positive characteristic within the context of the way that the 'machine' of the PP works.

That being said, I think OP's portfolio is just fine. You won't be able to hang yourself with it, it is too well diversified. My only skepticism would be how it will react to currency risk. That is why I prefer the domestic PP: there is no surprises with currency risk.a
I have a high degree of confidence that a Canada-only PP will do admirably going forward. However, for me, it just doesn't pass the "sleep test" quite as well as an internationally diversified one. Different strokes for different folks I guess. 8)
Funny how that works, eh? That really is THE essential factor of any portfolio though: does it keep you up at night, or do you sleep like a baby? For me, an international PP would come with the baggage of a little tiny seed of doubt that would linger in the background noise of my subconscious around the clock. I would capitulate at the first sign of significant tracking error compared to the domestic PP.

Know thyself.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Mon May 28, 2018 3:49 pm

blue_ruin, I couldn't agree more.

I look at some of the conversations on the Bogleheads forums extolling the virtues of the traditional 60/40 balanced portfolio and kind of cringe. I look at the drawdown data for that allocation on Tyler's site, and I don't see anything truly balanced about that portfolio. At least not for me. Yet, for some people, the risk/reward tradeoff is perfectly suitable for them.

Truth is, I have some money in a Variable Portfolio. As you all know, that money is designated for any kind of speculations that one wants to engage in. The allocation I have in my VP?

60/40.

Yup. My personal situation and inclinations are such that I consider 60/40 to be an allocation only suitable for the VP.

The folks at the Bogleheads forum think I'm nuts. Probably am!
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by alexy » Tue May 29, 2018 1:07 am

@Smith1776

I've got another question for you on the subject of the ETF you've picked (VCNS). I've checked it out and it's a pretty small ETF with only CAD36.8M. I've started reading more on ETFs and their advantages and disadvantages (including this forum, where people talk about safety of an ETF vs underlying securities, etc.). And it got me thinking more about it (I'm new to all of this, so I hope I'm not totally incorrect below).

1. Is getting into a small fund like VCNS dangerous? I presume PP is for long term and you wouldn't want to experience issues like ETF end-of-life due to various reasons (which may result in a significant loss since it'll be hard to sell it if it's going down and you'll only be relying on proceeds of liquidation).
2. Another negative of a small fund - potentially large spread from NAV, as well as limited ability to liquidate if needed.
3. If you were to plan to have 100-200K (or more) in your portfolio - it'll be relatively hard to obtain enough units given that total value is ~37M. Plus, the price will start changing pretty quickly and you'd have to do many trades (assuming you are doing limit order not market) even if you were to purchase $10K worth of units upon new funds becoming available for investment.
4. Was your choice of a single ETF based on simplification of rebalancing and not needed to trade for that every so often, expecting the fund to do it for you? Was that the major deciding factor? Cause the cost of multiple funds vs one her is not that easy to calculate - factors like NAV spread may really affect your position with VCNS, no?
5. Your older post (https://gyroscopicinvesting.com/forum/v ... 65#p161605) was dealing with separate funds. That approach gives you more flexibility, albeit at few more trades per year, potentially. Not sure about those exact funds, but larger, more liquid funds should be relatively safer and easier to deal with?

Maybe I just read too much about ETFs and various aspects of that, and if so, I'd appreciate your opinion.

Would appreciate your feedback.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Tue May 29, 2018 2:10 am

alexy wrote:
Tue May 29, 2018 1:07 am
@Smith1776

I've got another question for you on the subject of the ETF you've picked (VCNS). I've checked it out and it's a pretty small ETF with only CAD36.8M. I've started reading more on ETFs and their advantages and disadvantages (including this forum, where people talk about safety of an ETF vs underlying securities, etc.). And it got me thinking more about it (I'm new to all of this, so I hope I'm not totally incorrect below).

1. Is getting into a small fund like VCNS dangerous? I presume PP is for long term and you wouldn't want to experience issues like ETF end-of-life due to various reasons (which may result in a significant loss since it'll be hard to sell it if it's going down and you'll only be relying on proceeds of liquidation).
2. Another negative of a small fund - potentially large spread from NAV, as well as limited ability to liquidate if needed.
3. If you were to plan to have 100-200K (or more) in your portfolio - it'll be relatively hard to obtain enough units given that total value is ~37M. Plus, the price will start changing pretty quickly and you'd have to do many trades (assuming you are doing limit order not market) even if you were to purchase $10K worth of units upon new funds becoming available for investment.
4. Was your choice of a single ETF based on simplification of rebalancing and not needed to trade for that every so often, expecting the fund to do it for you? Was that the major deciding factor? Cause the cost of multiple funds vs one her is not that easy to calculate - factors like NAV spread may really affect your position with VCNS, no?
5. Your older post (https://gyroscopicinvesting.com/forum/v ... 65#p161605) was dealing with separate funds. That approach gives you more flexibility, albeit at few more trades per year, potentially. Not sure about those exact funds, but larger, more liquid funds should be relatively safer and easier to deal with?

Maybe I just read too much about ETFs and various aspects of that, and if so, I'd appreciate your opinion.

Would appreciate your feedback.
I sometimes worry about the fragility of small funds as well. I've read a bit about the subject, and my general impression is that anything below $25 million is in danger of being closed, and anything below $10 million is likely in serious trouble. Be that as it may, with VCNS I rest pretty easy because the fund is practically brand new. The small size is thus understandable. I'm sure it will grow over time. The size of Vanguard itself gives me some additional comfort in that regard.

As for liquidity and NAV, I recall a conversation between members at a different forum that were debating this very topic between HXT and XIU (both ETFs that track the TSX 60 index and XIU is MUCH bigger than HXT). If you're a very high net worth individual, I could see this being a concern if you ever saw yourself needing to liquidate your position very quickly. I'm not fortunate enough to be in that position, but it seems like an awfully nice problem to have!

Joking aside, yes my choice of VCNS is primarily in pursuit of simplicity. I get the international diversification, I incur fewer rebalancing events and thus less in transactions costs and taxable gains. I also don't have to juggle a zoo of ETFs to get my diversification. I still think that the past portfolio configurations I was mentioning are fine, I just like this setup more for my personal situation. (To reiterate, VCNS wasn't even available at the time of my previous posts.)

Getting back to NAV, liquidity, and spreads -- going with those multiple, larger funds would definitely give you institutional diversification. As for tighter spreads and better tracking, it seems to me that the market making process through authorized participants is quite efficient for these ETFs. I think that should ameliorate some concern on the issue. However, the bigger the account, the more I'd be inclined to say yes, buying into a bunch of different funds is probably a good idea.

Of course, buying VCNS doesn't preclude you from buying into the other funds either. Perhaps a prudent setup might involve, say VCNS + CEF like I've got, in addition to some of the other funds that I mentioned in the post that you linked to. In Fail-Safe Investing, Harry Browne did recommend having money spread between multiple funds, so you have his "blessings" on that one. ^-^
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by alexy » Tue May 29, 2018 11:40 am

Thanks for getting back to me. It's really helpful discussing these subjects with people who know more that I do.
Smith1776 wrote:
Tue May 29, 2018 2:10 am
I sometimes worry about the fragility of small funds as well. I've read a bit about the subject, and my general impression is that anything below $25 million is in danger of being closed, and anything below $10 million is likely in serious trouble. Be that as it may, with VCNS I rest pretty easy because the fund is practically brand new. The small size is thus understandable. I'm sure it will grow over time. The size of Vanguard itself gives me some additional comfort in that regard.
I wonder how these funds grow - is it driven purely by interest of investors and Vanguard issues more units the more people buy into it, or the price simply goes higher and then a split happens, or is there some other specific process that results in increase of units?

I too thought that this fund coming out of Vanguard has a bit of backing based on the issuer. However I'm not sure whether fund liquidation would affect Vanguard or they simply "close" it if the interest is low / not worth it. Not sure how that works, will need to research that.
Smith1776 wrote:
Tue May 29, 2018 2:10 am
As for liquidity and NAV, I recall a conversation between members at a different forum that were debating this very topic between HXT and XIU (both ETFs that track the TSX 60 index and XIU is MUCH bigger than HXT). If you're a very high net worth individual, I could see this being a concern if you ever saw yourself needing to liquidate your position very quickly. I'm not fortunate enough to be in that position, but it seems like an awfully nice problem to have!
Well, looking at some posts here 200K is nowhere near being a "high net worth" - people are talking about millions, haha. But in all seriousness - if a fund is relatively small, then premium/discount over NAV and low trading volume may affect you even if you don't need to fully liquidate your position.
Smith1776 wrote:
Tue May 29, 2018 2:10 am
Of course, buying VCNS doesn't preclude you from buying into the other funds either. Perhaps a prudent setup might involve, say VCNS + CEF like I've got, in addition to some of the other funds that I mentioned in the post that you linked to. In Fail-Safe Investing, Harry Browne did recommend having money spread between multiple funds, so you have his "blessings" on that one. ^-^
Well, that will become harder to manage and rebalance - you'll have to figure out your exposure and play with rebalancing a bit more, I think. Also in Canada we don't have the same breadth of funds as in the US, so we are more limited to what we can chose from - so your picks are pretty good ones.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Tue May 29, 2018 2:24 pm

Alexy, absolutely -- I really enjoy discussing the Permanent Portfolio. The only thing that disappoints me is that I discovered the Permanent Portfolio only after Medium Tex and Craigr left and so I never got a chance to chat with either of them.

Regarding the creation of additional VCNS units -- market makers will actually create and redeem units as the market dictates in an effort to keep the share price in line with NAV. This helps tremendously with liquidity. The fund can also grow and shrink in size as needed. Closed end funds, by contrast, will not have new shares created and redeemed on demand and can have significant deviations from NAV.

What's really interesting is that National Bank of Canada actually has a Permanent Portfolio fund. This could be an option worthy of investigating if you don't wish to go the DIY route. (I've got no affiliation with them. Just sharing a discovery I made.)

https://advisors.nbfwm.ca/en/teams/the- ... portfolio/
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by mukramesh » Tue May 29, 2018 2:36 pm

Smith1776 wrote:
Sat May 26, 2018 4:29 pm

I could put all my money into the Horizons Risk Parity ETF (HRA) found here: https://www.horizonsetfs.com/etf/hra
This ETF is an All Seasons/Permanent Portfolio/Risk Parity type allocation all in one fund. It would certainly keep things simple, but the total expense ratio is way too high at about 1.38%. Additionally, their asset allocation policy is not that transparent and hard to understand. At any rate, it might be a decent option for a fully taxable investor that doesn't want to incur taxation costs from rebalancing (since it's a whole portfolio in one security). This consideration may be enough to offset the high MER for some investors.
I don't think this bold section is correct. You would need to pay taxes even when the fund buys and sells securities to rebalance internally.

https://investor.vanguard.com/investing ... funds-etfs

Please correct me if I am wrong. Perhaps the taxation is different in Canada?
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Tue May 29, 2018 3:27 pm

mukramesh wrote:
Tue May 29, 2018 2:36 pm
Smith1776 wrote:
Sat May 26, 2018 4:29 pm

I could put all my money into the Horizons Risk Parity ETF (HRA) found here: https://www.horizonsetfs.com/etf/hra
This ETF is an All Seasons/Permanent Portfolio/Risk Parity type allocation all in one fund. It would certainly keep things simple, but the total expense ratio is way too high at about 1.38%. Additionally, their asset allocation policy is not that transparent and hard to understand. At any rate, it might be a decent option for a fully taxable investor that doesn't want to incur taxation costs from rebalancing (since it's a whole portfolio in one security). This consideration may be enough to offset the high MER for some investors.
I don't think this bold section is correct. You would need to pay taxes even when the fund buys and sells securities to rebalance internally.

https://investor.vanguard.com/investing ... funds-etfs

Please correct me if I am wrong. Perhaps the taxation is different in Canada?
Nope, you're definitely not wrong. In Canada we get all capital gains distributions flowed through to us via our T3 slips. However, the treatment is usually more efficient via the fund than when trying to do it manually is all.

My original statement was definitely misleading, now that I read it. My apologies.
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by WhiteElephant » Wed May 30, 2018 3:03 am

That's a great allocation!
Using only two funds is a nice simplified way of implementing the PP, and it's still widely diversified. The international exposure and the silver might help or not, but it likely won't make a huge difference either way.

Are you going to keep some cash on the side as well?
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Wed May 30, 2018 4:15 pm

WhiteElephant,

Your post about cash reminded me of this Warren Buffett quote that I love:

"When bills come due, only cash is legal tender. Don’t leave home without it.”

What a cheeky guy.

Anywho, yes I've got "shallow" cash outside of the Permanent Portfolio in my bank savings account that's good for about 6 months. My "deep" cash holdings are sort of implied within the NAV of the Vanguard Conservative Portfolio ETF inside the Permament Portfolio.
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by Smith1776 » Wed May 30, 2018 5:48 pm

As a follow up to some of our previous discussion on international diversification, a memory of Long-Term Capital Management and the Russian debt crisis of 1998 popped into my mind.

Is it possible that our faith in the notion that treasury securities are free of default risk is misplaced? I think it is obvious that the question depends in large part on the country we are talking about. However, in principle, is it a train of thought worth pursuing?

Reuters has an article that references a paper written by Fitch Ratings that says "the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth."

https://www.reuters.com/article/fitch-t ... 5620130510

Here is a link to the original paper below.

https://www.next-finance.net/IMG/pdf/Wh ... y_Debt.pdf

Another interesting article from LinkedIn by David Beers of the Bank of England on the subject.

https://www.linkedin.com/pulse/how-freq ... vid-beers/

Of course, this is all just "shop talk", and I'm not seriously questioning the prudence of, say, someone whose bonds are all U.S. treasurys. I wouldn't exactly be losing sleep at night over it in their shoes. However, it is fun to think about. If you are investing from within a smaller country in particular, at what point does international bond diversification become justified, even if your government has its own printing press? At some point, is it conceivable that an international portfolio of investment grade bonds can be considered less risky than the bonds of one's own government, EVEN if said government can print it's own cash?
I still find the James Rickards portfolio fascinating.
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Re: My Permanent Portfolio Variant

Post by Xan » Wed May 30, 2018 7:23 pm

Maybe it's a distinction without a difference, but I believe the contention of many is that governments issuing bonds denominated in their own fiat currency should never HAVE to default, but they still might choose to.
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Re: My Permanent Portfolio Variant

Post by barrett » Thu May 31, 2018 11:54 am

Xan wrote:
Wed May 30, 2018 7:23 pm
Maybe it's a distinction without a difference, but I believe the contention of many is that governments issuing bonds denominated in their own fiat currency should never HAVE to default, but they still might choose to.
Excellent point, Xan. It's a scenario that is at least worth keeping in mind. The PP does indeed have a lot of exposure that particular type of risk, especially if one goes with T-Bills for the cash portion (I do and I also have a large whack of savings bonds... crap!).

Of course, if the USG chooses to default, gold would likely be a pretty good place to be.
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Re: My Permanent Portfolio Variant

Post by Hal » Thu May 31, 2018 1:24 pm

Smith1776 wrote:
Wed May 30, 2018 5:48 pm
As a follow up to some of our previous discussion on international diversification, a memory of Long-Term Capital Management and the Russian debt crisis of 1998 popped into my mind.

Is it possible that our faith in the notion that treasury securities are free of default risk is misplaced? I think it is obvious that the question depends in large part on the country we are talking about. However, in principle, is it a train of thought worth pursuing?

Reuters has an article that references a paper written by Fitch Ratings that says "the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth."

https://www.reuters.com/article/fitch-t ... 5620130510

Here is a link to the original paper below.

https://www.next-finance.net/IMG/pdf/Wh ... y_Debt.pdf

Another interesting article from LinkedIn by David Beers of the Bank of England on the subject.

https://www.linkedin.com/pulse/how-freq ... vid-beers/

Of course, this is all just "shop talk", and I'm not seriously questioning the prudence of, say, someone whose bonds are all U.S. treasurys. I wouldn't exactly be losing sleep at night over it in their shoes. However, it is fun to think about. If you are investing from within a smaller country in particular, at what point does international bond diversification become justified, even if your government has its own printing press? At some point, is it conceivable that an international portfolio of investment grade bonds can be considered less risky than the bonds of one's own government, EVEN if said government can print it's own cash?
You raise some very good points there Smith1776.

Having been in a similar position as yourself I considered 75% https://www.vanguardinvestments.com.au/ ... /?overview
and 25% Gold at the Perth Mint

Following discussion on this forum, went for all Australian Bonds. Why? Glad you asked ;D

After reading the paper mentioned in this link: https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt

Decided if our Debt to GDP was less than 60%, I would hold all local bonds.
If between 60 to 90% would consider diversifying with overseas bonds and
over 90% would definitely diversify.

https://tradingeconomics.com/australia/ ... ebt-to-gdp

May not be the optimal approach, but this is my current strategy.
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Re: My Permanent Portfolio Variant

Post by Kbg » Thu May 31, 2018 1:56 pm

The US has defaulted on its bonds 2 or 3 times. The US has made gold illegal. All of these events occurred when dollars were redeemable for gold. No serious country does this anymore. Finite things, particularly when scarce and deflation is occurring, make very poor forms of currency. The opposite is also true (infinite currency and an inflationary economy ). At a very basic level, the reason for everyone ditching the gold standard is that you can not reverse the first condition and it changes only when the mass of citizens decide collectively and individually that deflation is over. The second situation can be changed easily via the power of the printing press.

Whack jobs aside, the mainstream economic profession (and governments) long ago came to the conclusion that the second condition was the lesser of two evils. (And it is.)

As a side note...serious hyperinflation is actually very difficult to create and is always associated with some type of supply shock externally caused (think OPEC in the 70s or Germany after WW1) or self-caused (think Zimbabwe and Venezuela deciding food for their people was optional).
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Re: My Permanent Portfolio Variant

Post by boglerdude » Fri Jun 01, 2018 12:07 am

https://johnhcochrane.blogspot.com/2018 ... -oped.html

From the comments:
"Yes, we can easily default on our obligations like we did in 1932 and 1973, And we can do it smoothly as you suggest, with opportunistic and deliberate default via the Fed. Possibly keep inflation under 5% for a ten year period, dump some debt. It worked in 1973, except it took us ten year to rebuild finance. But the rebuilding was because it was sudden, Nixon defaulted unexpectedly over night. Instead, do it deliberately, dump about 4T of debt, all of finance is aware, all of finance can bet along the way and avoid coordination failure."

ELI5? How exactly do you pull off an inflationary default
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Hal
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Re: My Permanent Portfolio Variant

Post by Hal » Sat Jun 02, 2018 4:48 am

boglerdude wrote:
Fri Jun 01, 2018 12:07 am
https://johnhcochrane.blogspot.com/2018 ... -oped.html

From the comments:
"Yes, we can easily default on our obligations like we did in 1932 and 1973, And we can do it smoothly as you suggest, with opportunistic and deliberate default via the Fed. Possibly keep inflation under 5% for a ten year period, dump some debt. It worked in 1973, except it took us ten year to rebuild finance. But the rebuilding was because it was sudden, Nixon defaulted unexpectedly over night. Instead, do it deliberately, dump about 4T of debt, all of finance is aware, all of finance can bet along the way and avoid coordination failure."

ELI5? How exactly do you pull off an inflationary default
After consulting with my evil twin brother......

To carry out an inflationary default I would issue a External US trade dollar, possibly partially backed by some commodity (gold/silver/oil).
The value of which would allow the foreign creditors to be payed back in full. We could call it the Nixon Note ::)

Then I would have the Federal Reserve Dollar pegged to it at say 90% of the Nixon Notes value.

While stroking a fluffy white cat, I would announce due to an emergency caused by (insert your choice) Russians/Chinese/Iranians/Tongans, this was the only option.

Over time I would drop the peg percentage to what ever was necessary to default on the debt (while allocating the cause to someone else.)
The US citizens still get their promised pensions, but you would have hardly any purchasing power. Overseas creditors would be happy and still carry out business with American corporations

Quickly get into my private jet and go to Zurich.

Any other suggestions?
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