My Permanent Portfolio Variant

[alexy]

Thanks for getting back to me. It's really helpful discussing these subjects with people who know more that I do.

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.

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.

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.

[Smith1776]

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/

[mukramesh]

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?

[Smith1776]

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.

[WhiteElephant]

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?

[Smith1776]

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.

[Smith1776]

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?

[Xan]

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.

[barrett]

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.

[Hal]

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

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.

[Kbg]

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).

[boglerdude]

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

[Hal]

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?

[boglerdude]

Maybe persistent deficits, spend 500 billion/year, collect 300B in tax, Print a 200B bond and give it to the Fed, they print a new 200B in cash for you.

Some% of the national debt eventually has to be paid back to citizens but some% can never be paid back to the Fed. Permanent increase in money supply.

QE mightve done it but they're paying the banks to not put the cash into the economy (IOER). Nice work if you can get it.