Let's debate the Permanent Portfolio

[mathjak107]

Which is why my view is always , if it’s good it’s good and if it isn’t well it isn’t until it is .... maybe things won’t turn in my lifetime , maybe they will turn in 6 months ...

It does not mean you react , unless you want to.... but that is the only benchmark that matters .

Plus when portfolios are at record highs what happens now is going to have a far greater effect in dollars then any market action was on smaller amounts . So what happens going forward if your portfolio has full fuel tanks is very different then someone in their accumulation stage with many years yet before their fuel tanks are full .

The fact the past decade was good , but it was on far less money then now , can have the down far out way the good .

This is why kitces did a whole paper on what is called the red zone

[mathjak107]

That red zone is when we have the greatest amount acquired . It is the ten years leading in to retirement and the first ten years in retirement where one needs to temporarily tone things down ..once you clear that red zone one can go back to being more aggressive.

https://www.kitces.com/blog/managing-po ... -red-zone/

[mathjak107]

A dollar invested in the PP today has to reflect the aggregate of the expected returns (nominal and real) for each individual component of the PP.

For stocks, because ​PE ratios are high, stock returns are expected to be lower than average in both real and nominal terms. Bond returns are highly correlated to starting yield and we know how low bond yields are in absolute terms. In real terms, bond returns are either negative or the alternative is not good for gold.

If gold has positive nominal returns going forward then the real return of bonds again is likely to be negative. Current gold prices are way off the peak but also relatively high in recent history. We can say that there is likely an equal chance of gold going higher or lower in nominal terms which is the same as a 50/50 bet with no expected long term returns. This makes sense when in real terms, we don't expect gold to produce a real return.

For cash, we expect negative real returns but we're getting zero nominal returns. The expected return for well-managed cash equivalents/short term bonds is likely to do slightly better than inflation in the long run.


So if we start with nominal returns and weight the expectations according to PP allocations.

We get 1/4 lower than average returns for stocks + 1/4 low returns for LTT + 1/4 no (risk adjusted) return for gold + 1/4 zero/low return for cash.

The weighted average seems to be somewhere around lower than average returns for a dollar invested in the PP today.

In real terms.

We get 1/4 lower than average returns for stocks + 1/4 negative returns for bonds + 1/4 no return for gold + 1/4 negative return for cash.

The weighted average seems to be low to negative real returns for a dollar invested in the PP today.

MJ,

This was actually my way to kick start our debate in case you missed it.

I'm eagerly waiting your response on the positive side for the PP. Looking forward to it.

The positive side is if the economic outcomes align properly you can actually make money when equities are failing ....

At one time I would have said losses would be constrained , but going forward if three asset groups fall then the pp will sustain far greater damage than other models that may be 25% equity .

So right now I can’t really come up with a lot of positives that I found other portfolios like the one I was using did better so far ...

At one time I would have had a lot more positives for the pp then I do in this environment simply because we have never had all the conditions in play that we do now ...I mean in March without the fed intervening we had things like margin calls and liquidity issues cause the number one flight to safety vehicles to plunge when normally they would have soared in the past on their own .

So right now I will refrain from the positives until I actually see the positives at work

[Tyler]

Most people tend to hang out , high five and support only those who support their view ....they never spend time really getting in to the enemies camp ..they never really understand the negatives the other side sees because they never sleep with the enemy .

When one fully understands the enemy’s side and can argue for or against some thing then they likely have a full understanding which they never got just hanging with their own. it is very different when you intimately learn the other side vs believing our own bull shit about the other side

I totally agree that it's important to understand different viewpoints. And to be fair, I've always found this forum to be extremely open-minded. If it wasn't, both of us would have been run off long ago with our talk about Fidelity Insights and Golden Butterflies. Yet here we are.

In any case, sorry if I derailed things, vincent-c. Let's get back to the PP discussion.

[Kbg]

This post may be a big muddled mush of nonsense but maybe I can express the thoughts well enough to foster some good comments as it's something I've been thinking about but have not formed any conclusions.

1. What do we really know about any asset class? Are there any "truths" to various asset classes or just a historical record that we assume will continue as the past?

Yes I think there are some truths.

There are 3 asset classes (I prefer to call them types of risk)

1) Money (which is a store of value/unit of account) or the lack of risk.

2) Someone else's debt (which under any normal market condition, if somewhere were to lend out money then they would demand their principal + interest)
- The risks here is just what the credit worthiness of the borrower is as well as how long the loan is for because that affects the likelihood of them remaining credit worthy.

3) An interest in the nature of trade (equity, work, business, etc basically exposure to some form of productivity)
- because any business when you find something that produces a positive return you typically will borrow money to multiply those returns then it exposes those who have an interest in this kind of activity to credit risk.

When you can obtain exposure to 2 and 3 at a fair value, then you can guarantee that in the long run you can have a positive return.

Just so people don't point out that I should be arguing in the negative for the PP.

I would point out that it may be that there are times where you are buying into the PP where the credit and duration risks are overvalued. Is that possible?

v_c,

I was hoping you would bite on this one, excellent.

Item 1, since I think it is important to determine before we go forward. Are we talking nominal or real with regard to store of value? I think unit of account holds in all cases up and until it is discarded because the "money unit's usefulness as a measure goes away for some reason...but until that point it is "the" unit of measure. The reason for that could be devaluation, obsolescence or political decision (probably more, those are just the ones i could think of off the top of my head.)

Item 2, agree. "Normal conditions" will be fun to discuss when we get to the bond class. :-) I would also add that bonds are, excluding credit risk, completely predictable and mathematic in nominal terms.

Item 3, agree in theory, not sure I buy off in practice. I think fair value is really difficult to assess and more artistic than fundamentals based. The richest people in human history that gained wealth via commercial activity have almost always (maybe 100% always) been those who could see "fair value (opportunity) in the future" of something completely new. Is that value? Or is value buying an earnings stream cheaply? But what if it is "cheap" for a reason?

I recommend we proceed from easiest to hardest asset in the PP...cash, bonds, stocks and end with gold. When I get a chance I'll put some statements from HB or Craigr on cash and we can go from there. I don't really care if we go in that order, but I think we should take one at a time. A couple of admin things...

Start threads for each asset to make the discussion easier to follow later down the road?

[buddtholomew]

Maintaining a separate thread for each asset makes it easier to navigate but we need a 5th thread for discussing how the assets relate to one another and the value of looking at the portfolio in its entirety. Trees and then forest...

[Smith1776]

Interesting proposal! I'm excited to see where this leads.

[pp4me]

Let's not.

Yeah let's not debate the permanent portfolio on this forum!

Don't want to speak for Sophie but I share her lack of enthusiasm because we long time users of the PP have lots of experience listening to why the PP has worked in the past but won't or might not in the future. In other words, we've heard it all before and rejected it so unless you have something new to add this is an exercise in futility.

If you and others enjoy this sort of debate however, go for it and have fun. It's an open forum and the information brought forth will probably be valuable to those who might be contemplating using the strategy.

[mathjak107]

I have nothing left to add that hasn’t already been said as well

[buddtholomew]

The authors who wrote the book on the PP used to contribute to this forum (one started it), so why will this new thread propel the discussion to new heights?

[yankees60]

The authors who wrote the book on the PP used to contribute to this forum (one started it), so why will this new thread propel the discussion to new heights?

There are now some people here who were not here then?

[buddtholomew]

The authors who wrote the book on the PP used to contribute to this forum (one started it), so why will this new thread propel the discussion to new heights?

There are now some people here who were not here then?

Sure, but what do they have to offer that the authors didn’t in the pages that comprise this forum?

Who joins a community, assigns their own phrasing to the 4 asset classes and leads senior members along on a journey they’ve already taken. What’s the motive? Too lazy to read the threads?

[doodle]

The authors who wrote the book on the PP used to contribute to this forum (one started it), so why will this new thread propel the discussion to new heights?

There are now some people here who were not here then?

Sure, but what do they have to offer that the authors didn’t in the pages that comprise this forum?

Who joins a community, assigns their own phrasing to the 4 asset classes and leads senior members along on a journey they’ve already taken. What’s the motive? Too lazy to read the threads?

I appreciate anytime anyone wants to invest the effort to subject this portfolio to scrutiny. The last thorough debate on this portfolio happened over a decade ago...I think it would be useful to reexamine things in light of all the unprecedented economic actions over the last ten years and I'm happy if people want to dedicate time to the task.

[yankees60]

The authors who wrote the book on the PP used to contribute to this forum (one started it), so why will this new thread propel the discussion to new heights?

There are now some people here who were not here then?

Sure, but what do they have to offer that the authors didn’t in the pages that comprise this forum?

Who joins a community, assigns their own phrasing to the 4 asset classes and leads senior members along on a journey they’ve already taken. What’s the motive? Too lazy to read the threads?

I think I must hold the record for spending the most time delving in to the archives. My major questions revolve around implementation. All things are not black and white. I also think that anything believed strongly should always be open to challenge.

[buddtholomew]

Vinny, my comment was not directed towards you.
I only think it’s fair to question the motives of a new member when they want to lead others down a certain path. If I need a refresher I can turn to HB or CR.

[yankees60]

Vinny, my comment was not directed towards you.
I only think it’s fair to question the motives of a new member when they want to lead others down a certain path. If I need a refresher I can turn to HB or CR.

Oh, I knew you were not directing it at me. I was trying to say that even though I'd spent so much time in the archives, I still have plenty of questions.

Finally, not being biased towards another Vincent....I think the other Vincent has been, on many levels, an excellent addition to this forum. His posts have been universally intelligent and substantive and they've engendered similar responses from others in this forum.

I've mainly been on the sidelines for them as a non-participant but I find reading them extremely illuminating.

[Xan]

Towards the beginning of the musical 1776, the representative from Rhode Island, when casting the deciding vote on whether or not to allow discussion on the question of independence, said "Hell yes, I'm for debatin' anything!"

Go for it, guys.

[Kriegsspiel]

As one of the forum's retard-adjacent members, I am an enthusiastic proponent of you smart people talking about the PP in ways I won't understand.

[Kbg]

I'd prefer more along the lines of a recheck of the PPs assumptions/thesis and do they still track/hold up. I think if we go far and wide on a bunch of related but not directly germane we are going to be all over the place and politics will roll into the mix.

[whatchamacallit]

Long thread already here. What I skimmed, it isn't necessarily question of what is much better than PP.

What I feel and I assume others as well is all the market confusion in general.

Record debt makes you question cash and bonds.

Stock prices that have no correlation to productivity at all.

Gold that feels like it should still be king but isn't as easy to move across borders as crypto.

Crypto that requires more faith than the depreciated cash and bonds.

Maybe the confusion really is being caused by the new asset class crypto which would also be a whole new thread.

[yankees60]

Towards the beginning of the musical 1776, the representative from Rhode Island, when casting the deciding vote on whether or not to allow discussion on the question of independence, said "Hell yes, I'm for debatin' anything!"

Go for it, guys.

Hey! I spent the first 22 1/2 years of my life in Rhode Island! How many of you have even met anyone from Rhode Island???!! I've actually met some people who live in this country who never heard of Rhode Island!

[yankees60]

As one of the forum's retard-adjacent members, I am an enthusiastic proponent of you smart people talking about the PP in ways I won't understand.

For the record....in my time here....I've never had you in the former but always in the latter!

[yankees60]

Long thread already here. What I skimmed, it isn't necessarily question of what is much better than PP.

What I feel and I assume others as well is all the market confusion in general.

Record debt makes you question cash and bonds.

Stock prices that have no correlation to productivity at all.

Gold that feels like it should still be king but isn't as easy to move across borders as crypto.

Crypto that requires more faith than the depreciated cash and bonds.

Maybe the confusion really is being caused by the new asset class crypto which would also be a whole new thread.

Just read the below long, long article.

In both this topic (and others in the forum) there are several among us questioning of the future efficacy of the Permanent Portfolio primarily due to not knowing whether or not future economics will resemble past economics. Or, whether we've undergone radical shifts for which the Permanent Portfolio is now mis-aligned.

This author extremely optimistically lists 17 reasons why he sees good economic times ahead. Any or all of them could be dissected in this discussion of the future viability of both the Permanent Portfolio as a whole and its four component parts.

17 Reasons to Let the Economic Optimism Begin

by Neil Irwin

https://www.nytimes.com/2021/03/13/upsh ... #after-top

[Concluding paragraph]

Economics may be a dismal science, and those of us who write about it are consigned to see what is broken in the world. But sometimes, things align in surprising ways, and the result is a period in which things really do get better. This is starting to look like one of those times.