Lots of Permanent Portfolio Noise Out There

[MediumTex]

Does it seem like in just the last few days there is suddenly a lot of PP chatter?

1. That Ben Davies PP ripoff report

2. The guy in Florida managing $200 milion in PP money (glad he joined us BTW)

3. Richard Russell's crystal ball broke and he's using PRPFX until it gets fixed

4. That article about PRPFX running out of steam

[Wonk]

MT, I'm afraid it's official....the permanent portfolio is in a bubble. 

[moda0306]

For the PP to be in a bubble, I have to look at the individual pieces compared to non-PP assets.... this isn't scientific, but just something I've tried to think about lately.

Treasury/Corp Bond/Corp Stock Bridge - Are stocks and treasuries overpriced?  Ask Jan?:

Are treasuries offering significantly less yield than their corporate counterparts?  And to finish the bridge, are corporate bonds looking historically attractive compared to corporate stock P/E?  One would think if treasuries and stocks are overpriced, maybe corporate bonds, being the ignored middle sister (think Jan in Brady Bunch), are actually riding a really good yield fence right now to where they're going to beat treasuries but stocks will be in a malaise.  I'm not sure where corporate rates are at this point in comparison, but it may be worth looking at history for points where corporate bonds performed better than a LT treasury/Stock combo.


Treasury/Muni Bridge - Simple... are muni rates looking historically attractive to treasuries?


Gold vs Basket of Currencies or Gold vs. CPI or Gold vs. Basket of Commodities:

These comparisons can maybe help put gold in a spot where people can "price gold" a little better.  I'm not saying "gold should follow CPI," but simply that using one of the above (or all) as a guide to which direction gold may go could help you decide of that portion of the PP is more likely to be overpriced.


Maybe, when the PP's "overpriced," there are times when a dive into a commodity basket (inflation) and corporate bonds (deflation, prosperity, recession - light) would be a cool VP play one could make. 

[moda0306]

To expand on my post... maybe if one were to look at the beginning of years like 1981 ("tough" loss for the PP), one would discover that one of the following were true:

1) Gold is historically higher than it's usual ratio to a basket of currencies or basket of commodities than it usually is.  (would have been tough with so few years of floating gold back then, but we could track it forward and probably decide that it was in fact quite high).  I find this the most likely case for obvious reasons, and becuase it's what really drug down the PP that year.

2) Treasuries maybe were offering quite a bit less yield than their corporate counterparts.

3) Stock P/E was historically high compared to corporate bond yields.

Can I count on Clive to have a workup on this in approximately 12 minutes?

[moda0306]

Sorry to keep rambling, but the implications of the PP being overpriced are pretty interesting.  Unless someone is talking about futures, options, etc, there aren't THAT many assets outside the PP to look at:

1) Other Commodities: Some might think that gold's done its job at "predicting" inflation, and now it's CPI's turn to catch up, so one should invest in some kind of commodity basket as gold is now going to underperform... but maybe it'll underperform because we won't have inflation but deflation, which leads me to...

2) Other Bonds: If one were to think we'll have deflation or disinflation, their tendency might be to say that bonds (but not treasuries) are the best bet.  One would have to look at the tax-adjusted return of munis and corporate bonds and see good opportunities to think that treasuries are overpriced.  One would also have to be at least somewhat pessimistic on stocks, since they share some of the same risks as corporate bonds.  So to decide that non-treasury bonds are the best choice, they'll have to believe that stocks and treasuries are both overpriced to some degree.

3) Real Estate??: It's based on too many non-macro factors (other than the expansion of credit and land scarcity) to decide how to walk through this logic.

4) Emerging Markets or Foreign Stocks: If one thinks that the rest of the world is going to be prosperous, but we aren't, then one might be skeptical of the PP's ability to return as opposed to foreign/EM stocks.  As the world economy becomes less and less effected by the U.S., maybe a decline of the dollar, malaise of the US stock market, and a malaise in Gold (since the rest of the world is seeing prosperity) will be the story of the future.


Just thinking out loud.

[gizmo_rat]

Looking at google's search term trending thingy, there's lots more people out there looking for pp information now than there ever was.
http://www.google.com/trends?q=permanen ... l&date=all

Unfortunately a lot of what you find when first searching is rather intense stuff, which I suspect deters a awful lot of new people who would actually stand to benefit from the ideas.

These noise type articles really cloud the search waters. Personally I found the FAQs on the Crawling road, the comparisons on Mad money machine and Clive's mini site to be really helpful, but I really had to battle through an awful lot of noise to find them.

[pplooker]

The problem is, people won't stick to it.  It wasn't that long ago the variable portfolio was kicking the living daylights out of the PP portfolio for me, and no one was talking about it.  Most people are performance chasers.

[EdwardjK]

I don't know if the PP is in a bubble, but I have been thinking about its component parts.

Notwithstanding our President, the economy appears to be finding its legs.  And the Fed will, at some point, begin to increase interest rates.  So let's say this is good for the equities and money market components.

But rising interest rates will cause the value of LT bonds to decline.  In addition, the belief that economies are stabilizing will/may cause gold prices to decline.

In my opinion, the issue/concern is whether the decline in value of LT bonds and gold will more than offset gains in equities and money markets, resulting in an overall loss in the PP.

Gold is especially concerning to me in that its value is driven primariy by perception.  And, most recently, every Tom, Dick and Harry has been buying it, causing some upward pressure on price.  I am thinking that, as the global economy improves, gold will experience an inordinate decline in value, offsetting  gains elsewhere in the PP.

So, what do you think?

[Storm]

So, what do you think?

Edward, I think that even if the PP might have a bad year, historically it has always performed well, and I don't think market conditions are so extreme that it wouldn't continue to perform well in the future.

[MediumTex]

The PP would probably struggle for while if Bernanke started aggressively raising interest rates, as Volcker did in the early 1980s.

[moda0306]

MT,

Don't you think that raising ST rates, and the trouble it would cause for stocks, unemployment, etc, would actually have the effect of lowering long-term rates due to deflation concerns?

Likewise, any effort to lower short-to-mid-term rates may have a rising effect on long-term rates due to the increased inflation and/or recovery expectations.

I find myself wondering about how much control the fed actually has over interest rates, especially as you extend the duration.

[julian]

MT, I'm afraid it's official....the permanent portfolio is in a bubble.   :)

Not a bubble. Greed will always rule and the upside here is not enough for the majority of ppl which is why it is not more popular. Ppl like me worry about limiting the downside and figure the upside will take care of itself. As the guy from Florida with $200 million, I can tell u too many ppl pass for this to be a bubble  In fact, the mere mention of a bubble and maybe it is too late is why I know we r safe.