How does the PP respond to a devaluing currency

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Hal
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How does the PP respond to a devaluing currency

Post by Hal » Mon Dec 10, 2018 7:11 am

First off, thanks to LazyInvestor for his earlier posts on Non-US PP's. I had to re-evaluate some preconceptions!

Now after listening to all of HB's radio shows I understand that:

1, In severe, say > 5 to 10% inflation, in a US PP, funds flow from the USD into the next most popular form of money which is gold. Since the amount of gold is less than the amount of USD, golds price rises rapidly covering losses in the other 3 PP assets.

2, In Non-US PP's, this effect does not take place. HB mentioned to an Indian caller that he would still have the gold if the other 3 assets collapsed. But he did not say gold would increase in price to cover the losses in the other 3 PP assets.

So given that his statements are still true....

If a countries economy has no growth, and a neutral change in money supply (say collapse in credit is almost exactly matched by money printing), how does the PP react? Seems like you would have just the bond interest + stock dividends ? The currency would also devalue against countries that have growth, therefore less purchasing power for imported goods.

and secondly, outside the US, you could hold almost any hard asset (including gold), to "preserve" some purchasing power. However any hard asset would not offset losses in the other 3 PP asset classes

Am I missing anything here?

Hal

ps: HB mentioned that he could not find anything that reacted strongly to "tight money" so he used cash. Secondly for non US-PP's it appears nothing reacts strongly to inflation. So a non-US PP does not respond to 1/2 of the possible economic climates?

pps: :) Benjamin Grahams thoughts. https://medium.com/the-intelligent-inve ... 1f4728836e
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Tortoise
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Re: How does the PP respond to a devaluing currency

Post by Tortoise » Mon Dec 10, 2018 5:34 pm

The idea of a non-US PP has been discussed here many times over the years. The general consensus seems to be that the PP really only works as Harry Browne designed it when its cash and bond components are denominated in the world's reserve currency, which is currently the US dollar.

Therefore, a "non-US PP" may not really be achievable in the Harry Browne sense. You can certainly construct such a portfolio, but it may not react to various economic climates in the same way that a US PP does.

If anyone disagrees, please feel free to chime in. Given that about half of the new threads here over the past several years seem to have involved questions about non-US PPs, it seems like a very hot (and possibly controversial) topic.
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europeanwizard
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Re: How does the PP respond to a devaluing currency

Post by europeanwizard » Tue Dec 11, 2018 1:14 am

I think Hal's conclusion is correct; you'd just have the bond interest + stock dividends. However with the Euro as it is, I think gold serves a nice backup in case something else than inflation happens.
Kike Moreno
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Re: How does the PP respond to a devaluing currency

Post by Kike Moreno » Tue Dec 11, 2018 3:50 am

If there is inflation also in the US then gold will work as expected. In case of an euro-only inflation we can get some protection by holding international stocks. So a possible allocation is:
- 12.5% eurozone stocks
- 12.5% global stocks
- 25% gold
- 25% cash in euros
- 25% 30-year german bund (the safest bond in the eurozone)
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