Let's debate: Money

Discussion of the Cash portion of the Permanent Portfolio

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Kbg
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Re: Let's debate: Money

Post by Kbg » Wed Mar 17, 2021 9:09 am

vincent_c wrote:
Tue Mar 16, 2021 3:09 pm
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
I think you keep mixing up unit of account with store of value which is muddling up your responses.
Why is it that I am the one that is mixing things up.

There is an assumption here that I am challenging which is this whole notion that for 99% of the planet it is their home currency.
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
Unless passing on wealth to "whomever" is going to remain forever not consumed
Why is this not a valid condition?
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
well maybe gazillionaires can
What is the difference between someone with infinite money and someone who has X% of their money that will never be spent. I would argue that the X% should be managed in the same way as the person with infinite money.

Now the only other argument is that there is no need to manage money in that situation. But if we stipulate that the investor regardless wishes to maximize their portfolio in terms of their chosen unit of account, I don't see why one needs to confine themselves to their home currency.

Especially when we're trying to determine what is the best money for the PP, if money is to be a unit of account and store of value, then we should be able to come to a conclusion like for example "gold is the best form of money for the PP and the PP should only be measured in units of gold".
If you are going to challenge the notion, then bring some facts and evidence other than your opinion and try to convince the readers of the thread I'm not correct. For other readers let me be precise: Home currency is the one that matters as a unit of measure, because that is where one does the largest portion of their consumption and pays their taxes. This clearly would not apply for multi-national corporations that have significant chunks of their businesses in other countries AND do not want to repatriate earnings. If they do want to repatriate earnings, then home country matters again.

Why not a valid condition? I guess it depends on if you want to have a discussion on the extreme edge and one that likely only applies to institutions. My assumption is we were having a discussion about normal investors who have finite live spans and probably only think to their children's and grandchildren's lives.

If you have money in the "I have absolutely no need for this money" then yeah, manage it based on that premise. Those rules are different, but often rules that apply to that condition are really not good rules for more finite time periods.

So it appears we are deciding if we want to have a discussion about institutional money management vs. private investor needs and requirements.
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Re: Let's debate: Money

Post by vincent_c » Wed Mar 17, 2021 9:38 am

Kbg wrote:
Wed Mar 17, 2021 9:09 am
If you are going to challenge the notion, then bring some facts and evidence other than your opinion and try to convince the readers of the thread I'm not correct.
I hope others can chime in as well, but I think there is some common ground. I'll do my best to support my case, but I am open-minded to the fact that I may be wrong.

Here's what I think:

If you have a known fixed cost liability or you can budget for such, then I agree that you should match it with an investment that maximizes returns with the same unit of account. Now in the long run if some of those liabilities track purchasing power and is variable rather than a fixed cost in a fiat currency, then I think the unit of account also has to be a store of value that proxies purchasing power.

I think we also agree that once you have accounted for all liabilities expenses don't matter anymore. I do not think this mindset applies only for multi-national corporations but for anyone where their assets exceed their lifetime liabilities. Think about the amount that is left over after a safe withdrawal amount.

I know that most of you are from the US and that it is easy to dismiss currency risk and to accept home currency as the unit of account. As a Canadian these currency issues were forced upon me and I had to consider whether maximizing Canadian dollars in the long run meant anything if it didn't provide me with more purchasing power.

The idea of purchasing power in my mind is global or personal. An investment could have maximized Canadian dollars but that currency could have devalued significantly against the USD. This is why I believe the unit of account cannot be a fiat currency but something that is real, either gold or a basket of goods and services.
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Re: Let's debate: Money

Post by Kbg » Wed Mar 17, 2021 11:31 am

I'm probably getting too nerdy. Of note, I have not disagreed with anything you've said as applied to the store of value definition of money.
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Re: Let's debate: Money

Post by vincent_c » Wed Mar 17, 2021 12:02 pm

I think I understand.

For all intents and purposes when we are trying to decide on how to invest in money as part of the PP then we are talking about money as a store of value.

However, a unit of account, is what is needed to measure the value of the portfolio at the present. This is basically saying what could the portfolio purchase today if we liquidated the entire position to spend and in that sense the home currency is the most appropriate measure.

Do I have it right?

If so, then the whole discussion of a unit of account is a red herring because the thing I was trying to decide is what money should be in the context of the PP. In any increasing timeframe other than the present, the unit of account becomes less and less relevant and the long term store of value becomes more and more important.

One thing that I have thought about is that even for someone with infinite funds, if they were a PP investor, anytime they are called to rebalance from cash into the other assets they are buying risk assets in that present. So this explains why cash in the PP is to be held in the unit of account because when you need to use it, it is in that moment.

So the PP diversifies between unit of account and store of money "money" by holding home currency cash and gold.

If we're in agreement, we can move on to whether gold is indeed the best store of money. I'm sure there is no disagreement by anyone that gold is a form of store of value and there is much disagreement on whether bitcoin is a store of value. I also mentioned that land is a store of value. So does anyone have any thoughts on how to deal with allocating to stores of value? Whether there is any need to diversify gold?
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Re: Let's debate: Money

Post by vincent_c » Wed Mar 17, 2021 12:06 pm

I also think that you don't actually need any cash, but more like sufficient liquidity.

During a drawdown you are not spending down all your cash, and any arbitrary rebalancing allocation merely ensures that you don't run out of cash. But if there are other ways to ensure that you don't run out of liquidity to buy risk assets when they fall, I don't see an absolute requirement to hold cash.

The big assumption is how certain you are of your liquidity position.
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Re: Let's debate: Money

Post by Kbg » Thu Mar 18, 2021 8:45 am

vincent_c wrote:
Wed Mar 17, 2021 12:02 pm
I think I understand.

For all intents and purposes when we are trying to decide on how to invest in money as part of the PP then we are talking about money as a store of value.

However, a unit of account, is what is needed to measure the value of the portfolio at the present. This is basically saying what could the portfolio purchase today if we liquidated the entire position to spend and in that sense the home currency is the most appropriate measure.

Do I have it right?

If so, then the whole discussion of a unit of account is a red herring because the thing I was trying to decide is what money should be in the context of the PP. In any increasing timeframe other than the present, the unit of account becomes less and less relevant and the long term store of value becomes more and more important.

One thing that I have thought about is that even for someone with infinite funds, if they were a PP investor, anytime they are called to rebalance from cash into the other assets they are buying risk assets in that present. So this explains why cash in the PP is to be held in the unit of account because when you need to use it, it is in that moment.

So the PP diversifies between unit of account and store of money "money" by holding home currency cash and gold.

If we're in agreement, we can move on to whether gold is indeed the best store of money. I'm sure there is no disagreement by anyone that gold is a form of store of value and there is much disagreement on whether bitcoin is a store of value. I also mentioned that land is a store of value. So does anyone have any thoughts on how to deal with allocating to stores of value? Whether there is any need to diversify gold?
Yep you got it. Unit of measure does matter assuming one ever wants to consume. Hyperinflation is a great real world example of why this issue isn't a red herring.

However, I would completely agree that at the end of the day store of value is more important because if you have a good store of value then by definition the conversion to home currency won't be a big deal.

On liquidity, yep also agree. Anything that has a good market and is quickly convertible to something that enables you to immediately consume will suffice which in today's world is just about any paper or digital financial instrument. And of course there's good old fashioned paper money. I imagine there is other stuff out there as well I'm not familiar with.

OBTW...I use consume in the economics sense as opposed to savings which is delayed or future consumption. This actually is an important concept because it means that "money" has no practical use except for it's eventual conversion to something real that is then used/consumed. It is foundational to the concept of credit. The borrower receives immediate money for consumption and pays interest which the lender can use to increase future consumption.

But now we are back to store of value LOL and it is time to move on.
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Re: Let's debate: Money

Post by Kbg » Thu Mar 18, 2021 8:53 am

So, on to store of value.

The data clearly indicates US paper money is not a good store of value over longer periods of time given the advent of centralized banking.

To me the interesting thing we should dive into is the balance between being a good store of value and stability/volatility of the asset. I suspect we will find the temporal dimension matters big time here.

I'd be interested in a discussion here that clarifies/illuminates when we might, for example, favor cash or gold and under what conditions. But for sure if there are other candidates that are good stores of value let's bring those into the discussion.
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Re: Let's debate: Money

Post by vincent_c » Thu Mar 18, 2021 10:35 am

Ok good.

One final note before I go on to my thoughts on store of value.

The currency of the unit of account is really the currency that you can borrow in or trade your time for. This is important because if you can maximize risk adjusted return in the currency you can borrow in, then any safely levered position will outperform an unlevered position that otherwise tracks purchasing power more. Again, the big caveat is that leverage is inherently risky and safe leverage has more to do with one's personal situation (i.e. if someone can be bailed out then they can take on more risk).

Now onto store of value.

Notwithstanding the previous discussion on unit of account, I think it is only a change in mindset from short term perspectives to long term that will allow you free yourself from thinking about short term volatility in the unit of account. If store of value is meant to be the default long term position (that thing that you are trying to accumulate more of in the long run), then store of value is actually a no risk position.

We could begin to introduce other forms of store of value, but I would like to suggest a novel approach.

What do you guys think of the PP as a whole a store of value. This is to say that the long term goal is to accumulate units of PP in terms of the unit of account. The PP would then be my position that is free of risk, and any shift in the PP allocation, whether it is through markets changing and you're riding momentum in one of the assets, you're basically taking on more risk from the default position.

Another way to approach assessing a store of value is whether we can explain certain risk premium that can be collected by taking on risk relative to that store of value. So for example gold has no default risk so by investing in stocks you are gaining exposure to credit risk and expect to capture a premium.

But if we take this approach, then how do we look at duration risk? We have to go back to the unit of account in order to avoid duration risk because interest rates are set according to the unit of account.

If we switch back to looking at gold as having no risk, then can we say that selling gold for cash is actually taking on some duration risk? For example, if real interest rates go down then your cash can buy less units of gold if you were to convert back. If duration risk were to be measured against gold, then there will be treasuries that you can buy with approximately the same duration as gold and then we have isolated the risk of investing in treasuries.

Whether this risk is a premium or discount depends on if there is a positive real return on treasuries. If there are negative real returns on treasuries then it really makes no sense to take on risk where it is not compensated properly in the long term.

A question I would have is whether we can take this second approach and replace gold with the PP as a whole.
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Re: Let's debate: Money

Post by Hal » Thu Mar 25, 2021 5:04 pm

Interesting discussion on Money - enjoy.
https://www.youtube.com/watch?v=-kx2-2m ... yj&index=6
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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Re: Let's debate: Money

Post by vincent_c » Fri Mar 26, 2021 3:00 pm

Hal wrote:
Thu Mar 25, 2021 5:04 pm
Interesting discussion on Money - enjoy.
https://www.youtube.com/watch?v=-kx2-2m ... yj&index=6
I guess this provides a reminder that money can have broad and narrow meanings.

For the purposes of investing, I don't think it is meaningful to think about things like means of exchange and units of account. Really the focus should be on what is the appropriate store of value for PP investors.

I think for me personally at least, it makes sense to think about my PP as completely risk off every time it is in 4x25% and anytime it deviates from this I am taking on some kind of risk. I am leaning to the idea that you do not need a way to measure units of the PP because it is always "1 unit of PP".

There is only ever a practical need to measure something relative to another when you actually need to trade for it.

What this all means is that if I am overweight cash and I let it ride, I am hoping cash will outperform the PP (constantly rebalanced) as a store of value. Likewise if I do the same with gold, I am hoping that gold will outperform the PP (constantly rebalanced) as a store of value. I feel like there must be some kind of long term drag on the portfolio whether holding gold or cash because neither of these things produce risk premiums that should be compensated.

This brings an interesting question on whether we should not hold any cash and never allow gold to be more than 1/3 of the remaining PP.
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Re: Let's debate: Money

Post by Kbg » Sun Mar 28, 2021 8:39 pm

v_c,

It appears the ball was in my court. :-)

Pretty much agree with most of your last longer post...what's to follow aren't counterpoints but simply "more stuff" to think about.

One thing were I strongly believe institutional investing principles and personal investing principles diverge, and should diverge, is when it comes to investing horizon/period. Our lives are finite and as a good working assumption shorter than institutions. Regardless, the principle that matters is duration of the savings period and the duration of the spending period. Thus, what may be a very good approach for one timeframe, may not be a good one at all for another timeframe. It may be useful for additional discussion to explicitly define one or two time periods so that we aren't making a ton of defacto assumptions that are really more time frame issues. (Side note: Somewhere on the board I think MachineGhost wrote a lot about assuming durations for the other assets. I know someone did, but it may not have been MG. Personally, I've never really bought into that approach as the behavior of the assets do not equate to the definition of duration, and going back to time unless I assume a lifetime longer than I'm likely to live that approach was of no practical value.)

On the PP as a unit of measure...sure that could be done. Pick your favorite CPI measure and that would be an easy approach (CPI vs. PP...one could subtract or divide depending on what one wanted to measure.) It doesn't have to be CPI, just anything that is real vs. nominal, broad based and has data available.

If you want to explore your last post...then I think you pick some comparatives and let the data speak for itself. (see the just above)

Personally, I never came to the board originally for HB politics and when it comes to financial stuff it's always about the numbers for me. So if you decide to explore the above, I'm happy to opine on what the numbers may mean. My gut says gold actually isn't going to do that well standalone, but I like your idea of the PP as the unit of accounting...that's an original thought and an intriguing one to explore I think.

Update...change gut to fact. No one in their right mind can objectively argue gold is a good store of value:

Evidence: 1980 to 2000. That's a two decade "F" for a store of value grade.
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Re: Let's debate: Money

Post by vincent_c » Mon Mar 29, 2021 12:33 pm

Kbg wrote:
Sun Mar 28, 2021 8:39 pm
If you want to explore your last post...then I think you pick some comparatives and let the data speak for itself. (see the just above)
Let's think this through first.

CPI is an attempt at measuring how much certain things have gotten more expensive and is one way to measure purchasing power.

The idea of true purchasing power though, I feel like is relative to total wealth creation. If you have a fixed population and wealth is a zero sum game then one person's purchasing power has to increase relative to another.

In my mind a true store of value would allow you to hold it and maintain your financial position in that population.

So here is my thesis.

A portfolio of equities that is pure beta is going to give you the exposure to productivity. The problem is volatility and time horizon so the value of equities could be suppressed for a long period of time. The PP is designed to allow you to capture a portion of the equity risk premium in what hopefully is a more stable way, trading off total return for an expectation of more stable returns.

If an investor had the benefit of hindsight, they could always design a combination of PP assets that would have produced the best way to capture the equity risk premium for any particular investor if they knew their risk tolerance regarding drawdown, etc. over any given past time period. An agnostic investor would have had to make a bet on whether they can stay the course with their allocation given how much of the equity risk premium they wanted to capture.

This is where investing gets personal and which is why I think that the PP is more of a philosophy rather than strictly a 4x25% portfolio.

I know that Harry would have agreed with me that the only way to actually achieve the goal of maintaining financial position in the population is to make sure that you actually are personally productive and more so relative to any others you are trying to increase your financial position against. Part of the simplicity of the 4x25% portfolio is that it should work well enough for the average investor buying into the idea of a fail-safe approach in capturing some equity risk premium and making up the shortfall through one's own productivity.

I would propose that the ideal store of value is personal and is a combination of PP assets that enables you to no longer worry about the investments and focus on your own productivity to make up whatever shortfall is needed to grow wealth at a rate that increases your financial position in the world.

There is no investment or combination of investments that will achieve this goal on its own. Do you agree?
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Re: Let's debate: Money

Post by vincent_c » Mon Mar 29, 2021 3:38 pm

Also to tie back into the concept of money.

I think I am concluding that money is a store of value but the best money is by design also not the best store of value because it has to take into all those other practical considerations for what commodity functions objectively better as a form of money.

The PP could be a better store of value than gold, but it is hard to argue that it is a better form of money in the broad sense compared to gold.

To me this is something I have only just considered because I always thought that the best money would be the best in all individual aspects of being money and not just overall.

This brings another interesting point which is, are PP investors allocating to gold as money because there are benefits to that allocation that go beyond maintaining purchasing power? Given that there is a good chance gold is the best form of money that we have, how much weight do we place on holding gold because it has those aspects of money that provide benefits to holders of gold that may not be compensated for or tangible when looking purely at returns.
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