Rethinking the Permanent Portfolio

Discussion of the Gold portion of the Permanent Portfolio

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Smith1776
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Rethinking the Permanent Portfolio

Post by Smith1776 » Thu Jun 20, 2019 3:36 pm

Hello all. I've been doing some thinking, and I believe it's time we consider rethinking the Permanent Portfolio allocations. You guessed it: I'm talking about cryptocurrencies.

The Permanent Portfolio is structured so that the gold portion of the portfolio is, in a nutshell, "alt cash".

However, Harry Browne was not alive to see the era of cryptocurrencies. In his own line of reasoning, Browne said that gold was the world's "second favourite form of money". When confidence in the dollar diminishes, people flock to gold, so the idea goes.

I honestly can't believe I even typed the above passages, as 12 months ago I was the biggest cryptocurrency skeptic.

My personal 180 on the issue has been a slow turnaround, culminating a few days ago with the announcement of Libra, which I'm sure everyone on this board has heard of by now. On a prima facie level, it seems that Libra is the cryptocurrency equivalent of the dollar, while bitcoin may be the digital equivalent of gold.

I'd like to start chatting about a potential change to what we may consider the canonical Permanent Portfolio allocations:
  • 25% equities
    25% long term treasury bonds
    25% cash
    12.5% gold
    12.5% cryptocurrency(s)
The question I think is: what should be in that 12.5% cryptocurrency allocation? All Libra? All Bitcoin? An index of ALL cryptocurrencies? Maybe half in Libra and half in Bitcoin? What about the issue of increased complexity vs. a desire for simplicity in the portfolio?

I don't have answers to any of those questions, but I have been thinking on this matter a lot. Either way, I am convinced that this issue is worth considering, because the status of gold as the de facto alt cash in society may not be as strong as it once was in the coming decades.

My personal feeling is that a Libra dominated allocation to cryptocurrencies, with some exposure to others like bitcoin may be prudent in the coming years. Heck, if someone could create a basket or vehicle to hold all of them in one security, that might be the balance one needs to between the increased complexity and the desire to maintain simplicity.

Mind everyone, I am not proposing that we should all just suddenly make a major shift in the PP theory today. I'd like to simply explore what this all means, and not potentially get stuck in the past by stubbornly espousing an investing theory founded by a man who never lived to see this era. No one can know what Browne would have thought.
“My natural state is an outsider, and no matter what group I'm in or where I am, I've always felt like I'm outside the group, and I've always been analyzing the group.” - Michael Burry
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Re: Rethinking the Permanent Portfolio

Post by pmward » Thu Jun 20, 2019 3:53 pm

Libra is going to be a stable coin, it will not be volatile enough to do gold's job. You could also bypass Libra altogether and just invest in the underlying currencies it is backed by, which Henry specifically said are not a good replacement for gold. Potentially other cryptos could fill gold's shoes, since they are regulated through scarcity, but we have a problem in not knowing what cryptos are going to survive (even Bitcoin could fail), and they have yet to be tested in all the market environments. I'm not anti-crypto, but I think it currently doesn't belong anywhere except the VP because it cannot be counted on. It is a pure speculative bet.
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Re: Rethinking the Permanent Portfolio

Post by Smith1776 » Thu Jun 20, 2019 4:14 pm

Interesting thoughts. Thanks, pmward.

What I'm thinking is that yes, Libra is intended to be a stablecoin, however if your country's native currency were to hyperinflate (Canadian Dollars in my case), then the price of Libra would skyrocket relative to that particular currency. Libra itself would still be stable in principle.

I absolutely agree about not knowing which of the other cryptocurrencies would survive. An index fund vehicle applied to that market could be a potential solution. (Of course, one does not exist at the moment.) Analogously, since we don't know which companies in the stock market will fail, we just buy all of them. Or perhaps we can create our own Dow Jones of cryptocurrencies individually by just buying the majors instead of all the coins.

An additional thought is the potential privacy concerns here. Facebook is leading the Libra consortium. If Libra really picks up steam, what happens when this entity/consortium can see all of our transactions?
“My natural state is an outsider, and no matter what group I'm in or where I am, I've always felt like I'm outside the group, and I've always been analyzing the group.” - Michael Burry
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Re: Rethinking the Permanent Portfolio

Post by pmward » Thu Jun 20, 2019 5:01 pm

Smith1776 wrote:
Thu Jun 20, 2019 4:14 pm
What I'm thinking is that yes, Libra is intended to be a stablecoin, however if your country's native currency were to hyperinflate (Canadian Dollars in my case), then the price of Libra would skyrocket relative to that particular currency. Libra itself would still be stable in principle.
Any hard asset or other currency would do the same in this case. There would be no magic in Libra. Other currencies might even do better, since CAD may even be part of Libra's backing. It's also virtually impossible for a developed country with all of their debt denominated in their own currency to hyper inflate. I'm not sure if Canada has any foreign currency denominated debt (the U.S. does not), but they would need a ton of it to cause a hyperinflation. In other words, you are better off worrying about pretty much anything other than hyperinflation. Could you get high inflation? Sure, so this justifies some gold. Hyperinflation, I wouldn't waste any time making any portfolio decisions based on this until your country assumes a massive amount of foreign denominated debt.
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Re: Rethinking the Permanent Portfolio

Post by Smith1776 » Thu Jun 20, 2019 5:07 pm

pmward wrote:
Thu Jun 20, 2019 5:01 pm
Smith1776 wrote:
Thu Jun 20, 2019 4:14 pm
What I'm thinking is that yes, Libra is intended to be a stablecoin, however if your country's native currency were to hyperinflate (Canadian Dollars in my case), then the price of Libra would skyrocket relative to that particular currency. Libra itself would still be stable in principle.
Any hard asset or other currency would do the same in this case. There would be no magic in Libra. Other currencies might even do better, since CAD may even be part of Libra's backing. It's also virtually impossible for a developed country with all of their debt denominated in their own currency to hyper inflate. I'm not sure if Canada has any foreign currency denominated debt (the U.S. does not), but they would need a ton of it to cause a hyperinflation. In other words, you are better off worrying about pretty much anything other than hyperinflation. Could you get high inflation? Sure, so this justifies some gold. Hyperinflation, I wouldn't waste any time making any portfolio decisions based on this until your country assumes a massive amount of foreign denominated debt.
Thanks for the input, pmward.
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Re: Rethinking the Permanent Portfolio

Post by Kbg » Thu Jun 20, 2019 8:19 pm

To each their own...conceptually I don't see any difference between say the Swiss Franc and a cryptocurrency. Let's say cryptocurrencies do go mainstream, then they will simply be a quasi Forex cross with your home currency.

One should step back and ask themselves the following question: Is cryptocurrency A better than government backed currency B? Which is better and why?

Personally, I think gold is more difficult to manipulate than a crypto. Gold is a piece of metal, there is X amount of it on earth, it's physical, it can be scientifically assessed as to its tangible properties to determine if it is "real." Cryptos can (and are) manipulated just as the former "bedrock" currency the Swiss Franc was. You can potentially take governments out of the currency business, but you can't take the humans out.

Those who pay any attention to my posts know I'm not a big physical gold fan either. I just think one has to step back and look at basic fundamentals and question their premises and assumptions. Hey, maybe I'm just a rock carrying neanderthal who isn't keeping up with the times. But I think I'm smart enough to understand the inherit differences between something in the periodic table and a piece of software. Gold is a hard asset, cryptos are a financial asset that happen to be an algorithm. With the 25% gold piece it seems to me that real estate, other metals, collectibles etc. are more in the spirit of the PP.

Millennia of history says one thing absolutely with regard to currencies: The people with the rocks, sticks, swords, spears, guns, rockets, missiles, bombs and cyber weapons set the rules for anything that is a major medium of exchange.
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Re: Rethinking the Permanent Portfolio

Post by dualstow » Thu Jun 20, 2019 8:28 pm

(kbg)conceptually I don't see any difference between say the Swiss Franc and a cryptocurrency.
The crucial difference is in your final paragraph.

OP: a thread from last summer, “Harry on Bitcoin”
viewtopic.php?f=9&t=9673&hilit=bitcoin+pp
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Re: Rethinking the Permanent Portfolio

Post by Smith1776 » Thu Jun 20, 2019 10:56 pm

dualstow wrote:
Thu Jun 20, 2019 8:28 pm
OP: a thread from last summer, “Harry on Bitcoin”
viewtopic.php?f=9&t=9673&hilit=bitcoin+pp
Thank you for this.
“My natural state is an outsider, and no matter what group I'm in or where I am, I've always felt like I'm outside the group, and I've always been analyzing the group.” - Michael Burry
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Re: Rethinking the Permanent Portfolio

Post by Smith1776 » Thu Jun 20, 2019 11:03 pm

Some interesting thoughts all around.

The question of what the practical difference is between a cryptocurrency and, say, the Swiss Franc is a valid one. After all, they're both alternative money in a dollar dominated world.

However, I think the key difference is how the world treats Bitcoin, in contrast to how it treats the Swiss Franc.

It seems to me that Bitcoin/cryptocurrencies, are systemically being favoured as digital gold equivalents. The role of gold being the world's "second favourite money" is being somewhat challenged by this class. I don't think anyone can say the same thing with another fiat currency at the moment.

Additionally, after reading Dimitri Speck's book Gold Cartel, it isn't immediately clear to me that gold is harder to manipulate than the cryptocurrency market. It seems that governments have been manipulating gold with futures even during these past few decades since it became supposedly "free floating". The book is quite compelling, and a read I definitely recommend.
“My natural state is an outsider, and no matter what group I'm in or where I am, I've always felt like I'm outside the group, and I've always been analyzing the group.” - Michael Burry
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Re: Rethinking the Permanent Portfolio

Post by jacksonM » Fri Jun 21, 2019 6:51 am

Maxine Waters is worried about the "national security" issues of cryptocurrencies and thinks congress should start taking a look (translation: they are worried they can't control it and/or get their hands on it).

She may be a fruitcake but she's also the chairman of the house finance committee.

Between the U.S. govt and Facebook I don't trust either one of them so I doubt I'll be buying any Libras.

On the other hand, when we start to evacuate the planet for Mars due to climate change it will be hard to haul all of that gold with us. I'm pretty sure Libras will travel through space nicely however.
Last edited by jacksonM on Fri Jun 21, 2019 1:20 pm, edited 2 times in total.
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Re: Rethinking the Permanent Portfolio

Post by dualstow » Fri Jun 21, 2019 7:24 am

I would use libras with friends at restaurants the way I use apple pay cash now. I’d never make them a part of my portfolio, however. Not the vp, and certainly not the pp.
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Re: Rethinking the Permanent Portfolio

Post by Kbg » Fri Jun 21, 2019 7:57 am

A couple of quick thoughts, sorry if I misinterpreted what someone meant.

When any crypto begins to wrack up serious transaction value, governments will be involved. Anyone who does not believe this I think is delusional.

Never read the book, but governments absolutely mess with gold. There are many, many historical examples of that. I am a bit of a history buff and currently I am listening to a podcast on Byzantine history. Earlier this week the podcast was talking about an emperor who printed/pressed gold coins that were 1/16 less than the previous standard, called them a different name, and forced everyone to accept them at the same value as the larger coin. However, it was standard practice to simply weigh gold as all gold pieces would wear down over time and merchants bought and sold in terms of weight not face value of the coin. Accordingly, the attempt had zero impact.

My take on all of this is gold usually is thought to perform a couple of parts in a PP. A store of value that is negatively correlated to the US dollar or simply a non correlated asset that does well during periods of inflation and economic stress. Philosophically I am absolutely in the latter camp. If one is in the former camp, then I think a better approach is hard assets and diversification. Certainly crypto could be held for diversification purposes. Finally if I were the hardcore hate government in my business kind of guy, I’d be a land and hard assets guy in their physical form.

So I think it depends on what you really are after...I know where I am at in the mix and paper gold suits me fine.
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