Derivatives Risk

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JohnnyFactor
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Derivatives Risk

Post by JohnnyFactor » Tue Feb 28, 2017 9:15 pm

I don't really understand what derivatives are but I know they're big bets that could go very wrong. Smart and wealthy people like Buffett have warned against them. I would like to know the risk to the PP if the derivative market crashes. Would it be like 2008, or more like Mad Max? Is there anything outside of the PP I should be doing that could minimize the fallout exposure?
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Cortopassi
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Re: Derivatives Risk

Post by Cortopassi » Wed Mar 01, 2017 8:58 am

That's why you have bonds, cash and gold. Depending on the stock/bond ETFs you might use there's some level of risk there, but if you have physical gold and cold hard cash you are more protected than the general stock buying public.

Cause you know, now that Trump is president, the stock market will never, ever fall. He told us last night. And if it does, it surely wouldn't be his fault... :D

In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.

I don't know of anything outside the PP to reduce the risk. People might say invest in real stuff, land, real estate, art, etc. But I think most any market will crash in a Mad Max scenario, with the possible exception of gold/silver/metals.

But what do I know.
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dualstow
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Re: Derivatives Risk

Post by dualstow » Wed Mar 01, 2017 10:24 am

JohnnyFactor wrote:II would like to know the risk to the PP if the derivative market crashes.
I think the existence of things like derivatives and the crash that they caused (or that the abuse of derivatives caused), is the reason I hold a pp. I might be naive, but that's my thinking. Otherwise, I'd be 100% total stock market and enjoying this rally more than I already am.
RIP Toots
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
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technovelist
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Re: Derivatives Risk

Post by technovelist » Thu Mar 02, 2017 9:23 pm

Correct, the PP is probably the least vulnerable to "black swans" like a derivatives crash, among all reasonably "normal" portfolios.

At least as long as you are using actual physical gold, not ETFs or the like.

CEF is an intermediate case. According to their prospectus, they don't engage in any transactions like lending gold or silver, or encumbering their holdings in any way, and they have the physical metal in high-security vaults in Canadian banks. You would still have a lot of trouble getting cash for CEF shares if the financial system was frozen, but after it came back up you should be okay.

At least that's how it looks to me. Of course, I won't reimburse you if I'm wrong, do your own research, etc.
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JohnnyFactor
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Re: Derivatives Risk

Post by JohnnyFactor » Thu Mar 02, 2017 9:53 pm

I've been considering Perth Mint for physical gold holding. They're just a phone call away from shipping the bullion or a plane trip away from getting it myself (google says 26 hours travel minimum!). In theory, it sounds good. I just hope the logistics of it all don't prove to be a problem.
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Re: Derivatives Risk

Post by rickb » Tue Mar 07, 2017 12:08 am

Cortopassi wrote: In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.
Perhaps TLT doesn't directly deal in derivatives, but in a market collapse like the one narrowly averted in 2008 (thank you, Obama) my guess is TLT would end up not looking very pretty. See http://www.gyroscopicinvesting.com/foru ... f=3&t=4223
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pugchief
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Re: Derivatives Risk

Post by pugchief » Tue Mar 07, 2017 12:18 pm

rickb wrote:
Cortopassi wrote: In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.
Perhaps TLT doesn't directly deal in derivatives, but in a market collapse like the one narrowly averted in 2008 (thank you, Obama) my guess is TLT would end up not looking very pretty. See http://www.gyroscopicinvesting.com/foru ... f=3&t=4223
Are you thanking Obama for creating the disaster or fixing it after he did? ;D
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Desert
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Re: Derivatives Risk

Post by Desert » Wed Mar 08, 2017 9:55 pm

pugchief wrote:
rickb wrote:
Cortopassi wrote: In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.
Perhaps TLT doesn't directly deal in derivatives, but in a market collapse like the one narrowly averted in 2008 (thank you, Obama) my guess is TLT would end up not looking very pretty. See http://www.gyroscopicinvesting.com/foru ... f=3&t=4223
Are you thanking Obama for creating the disaster or fixing it after he did? ;D
There is much that can be blamed on Obama, but the 2008 collapse was clearly caused by Gingrich and Clinton.
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Kbg
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Re: Derivatives Risk

Post by Kbg » Tue Mar 14, 2017 11:05 pm

There are derivatives and then there are derivatives...some are quite safe and others are beyond not safe. Some are less difficult to understand than how your ETF is put together and others are of mindblowing complexity.

Mostly people who don't have a clue provide simple answers to this question...and the real answer is a big it depends.

Between having a 120K of gold sitting in my house or owning one futures contract of the equivalent value I'd take the futures contract without hesitancy...I'd probably take it over any form of physical gold stored anywhere available to the smaller investor.
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Re: Derivatives Risk

Post by dualstow » Wed Mar 15, 2017 7:16 am

You may know something about derivatives, kbg, but I think you missed the question. It's not about holding the safest derivative of your choice. It's about, if the overall market were to be fouled up again by derivatives -- understood to be the tricky, dangerous ones -- how would the PP fare?

At least, that's how I read it.
RIP Toots
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Kbg
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Re: Derivatives Risk

Post by Kbg » Wed Mar 15, 2017 8:02 am

I did read it correctly, but it's like asking what is the risk to PP if money crashes. What does that mean? Money globally, the dollar, the concept of money, M1, M2, M3, electronic transaction exchanges? What?
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dualstow
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Re: Derivatives Risk

Post by dualstow » Wed Mar 15, 2017 8:10 am

Like 2008.
RIP Toots
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
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