Cash why?

[Odysseusa]

Please allow me to offer you this analogy.

Cash in the Permanent Portfolio is similar to the Bill of Rights in the Constitution with Bond, Gold, Stock equate to the Legislative, Executive, Judicial branch.

[murphy_p_t]

excellent discussion.

I searched through all the cash section to find this thread.

I'm struggling with this question of 25% cash, especially in light of Bernanke's commitment to keep rates near zero thru mid 2013 & in light of "operation twist".

Have these 2 Fed actions influenced you to modify your portfolio for the next year or two?

Also, Did HB discuss this extensively?

[MediumTex]

excellent discussion.

I searched through all the cash section to find this thread.

I'm struggling with this question of 25% cash, especially in light of Bernanke's commitment to keep rates near zero thru mid 2013 & in light of "operation twist".

Have these 2 Fed actions influenced you to modify your portfolio for the next year or two?

Also, Did HB discuss this extensively?

No.  Nothing Bernanke is doing/has done has made me think about changing my approach to the PP's cash holdings. 

Few people will remember the details of what Bernanke is doing a few years from now.  IMHO, it's no reason to abandon any part of the basic PP strategy.  If anything, Bernanke has shown pretty clearly that even a very activist Fed chairman doesn't affect the sturdiness of the PP.  If anything, the PP seems to work better during periods like we have seen since 2008.

[moda0306]

murphy,

I've said it in other places but I'll say it here again... QE, to me, is far less impactful than one might imagine, so if you're worried about inflation I'd calm those fears a bit.  Regarding low rates, the 3 volatile assets of the PP have seen 2 phenominal years the last two years.  Historically there's an adjustment that usually takes place within the PP to tame it's average returns down to just under double digits.  I almost think now is the time to make sure you have a good cash cushion in case of a PP pullback.  We're looking at two years in a row of about 15% performance during an EXTREMELY low interest time.  I still love the PP, but I especially love the cash cushion when we see what we've seen the last couple years.

Yes, the gov't is effectively "printing" hundreds of billions of dollars.  There are 2 important things though, that should help put this into perspective.

1) This is happening during a deleveraging, which is the effective destruction of private-sector money already created. So you have to look at the rate of deleveraging to see if there is really more money out there.

2) These dollars aren't being tossed from the figurative helecopter.  They're being used to buy short-term treasury bonds.  These bonds could be argued to be a kind of money in and of themselves, but at the very least they're a claim on future dollars... so for instance, if QE buys 0-3 year treasury bonds in January 2009, these would have all been converted to dollars by 2012 anyway as they mature.  The fed is simply massaging the market.  These dollars they're printing have to be taken into context in terms of WHAT they are buying.  Now the recent "operation twist" changed that a bit (a 30 year bond is very different than a 1 year bill in terms of the contract that is implied... one could argue that there's some "inflationary staying power" involved with allowing a dollar to float in the economy for 30 years vs 1 year), but they're still buying treasury bonds.

Until the fed starts buying foreclosed homes, mortgage securities, or something else out there that can truly change the makeup of available investments in the market, QE will look pretty tame to me.

I'd say that the insanely low interest rates represent proper market pricing as much as they represent federal reserve market manipulation.  A deleveraging will always leave short-term treasury debt in extremely high demand.

[murphy_p_t]

Moda & MT,

Thanks for reply...I agree with you...guess I was thinking I'd be greedy & play along with Bernanke...thats what the VP is for.

[RickV42]

I see cash as helping to reduce volatility and keep me in the game.  Maximizing return does no good if I jump ship.    One simple tool I used to play around with to see the effect of cash:  

http://www.riskcog.com/portfolio-theme2.jsp#59e09ec9e8

-Type in percentages and asset classes on left side and data auto populates
-Don't need to use diverisfy button or inputs above that

33% of TSM/Gold/US LT Tresuries:                             +10.47% CAGR vs. -11.7% max drawdown
25% of TSM/GOLD/US LT Treasuries/US ST Treasuries:  +9.79% CAGR vs. -4.3% max drawdown