Not Even Harry Browne Thought It Was Going To Be This Bad

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Not Even Harry Browne Thought It Was Going To Be This Bad

Post by bronsuchecki » Wed Jul 03, 2013 3:25 am

Craig, any comments on this http://www.tfmetalsreport.com/blog/4809 ... en-lantern

"However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio.  For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.

...

It's unlikely that Browne or for that matter anybody in the alternative investment world back in the early 2000's, could have realized what we do know about the extent of the manipulation in the metals. Nor is it likely that Browne imagined the federal debt could exceed the size of the total economy nor the capability of Central Banks to counterfeit on such a large scale.

Could anybody have envisioned the scale of fraud in the market before LIBOR, rehypothecation and MF Global, the 2008 bailouts, the derivatives bubble or the number of interventions in currency markets including the Swiss pegging the Swiss Franc to the Euro? The Permanent Portfolio Fund has always regarded the Swiss Franc as the currency with a high safe haven status but the Swiss taught us that all fiat currencies are subject to manipulation.

Browne saw a world where long term bonds performed well in a deflationary period and gold outperformed in an inflationary period. Well, here we are well into QE3 as The Fed continues to fortify the monetary base, gold and silver has been volatile with excessive short term risk. No longer can they be confident that gold and bonds will behave in a predictable fashion. Good ole Harry must be turning over in his grave.
"
Disclosure: I work for the Perth Mint. What I say is done in a personal capacity and is not endorsed by the Mint.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Hal » Wed Jul 03, 2013 5:07 am

Hello Bron,

I was reading that article as well today.  Had a look at the PRPFX as mentioned in the text and found (if I am reading it correctly) that their average bond duration is only 4.09 years. Not the 30 year bond and Cash barbell.

http://www.permanentportfoliofunds.com/ ... /PRPFX.pdf

Also another Australian newsletter that spoke very highly of the PP recommended their subscribers sell all their bond holdings as the asset classes are too correlated now.

Some more food for thought....
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 8:31 am

It doesn't surprise me that after 10+ years of outperformance, at the first sign of underperformance(-5% ytd), there's panic in the air and a rush to exit gates. This is exactly what Richard Bernstein predicted about the strategy and its weak followers and its happening right before our eyes. When stock heavy portfolios drop by 50%, the risk of equities gets justified but a mere 5% drop in the pp after 10 years of outperformance and the world is upside down. How predictable are we? Best of luck to all the performance chasers, I will be here when you return...its just a matter of time.

Quote from Richard Bernstein:
"And therein lies the real problem with the TPP: because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There?s nothing wrong with Harry?s portfolio?nothing at all?but there?s everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars."
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Wed Jul 03, 2013 9:13 am

I agree that this is a situation that not even HB could foresee, and that US T-Bonds are no longer safe. I'm sure he would be the first to say that when the world changes in such fundamental ways as we have seen in the past few years, you have to re-examine your assumptions to make sure they are still valid. This is a far cry from switching strategies every time there is a hiccup in the markets.

For example, suppose that a way was discovered to synthesize gold at low cost, or a gigantic deposit was found and mined, maybe from an asteroid, increasing the supply by hundreds of percent. Would you say that we should still maintain a 25% allocation to gold? If not, then obviously there are events that can change your mind about the correct strategy.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 9:17 am

Why are T-bonds no longer safe? The low rates, or your fear of default or hyperinflation or something?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Benko » Wed Jul 03, 2013 9:20 am

Libertarian666 wrote: I agree that this is a situation that not even HB could foresee, and that US T-Bonds are no longer safe. I'm sure he would be the first to say that when the world changes in such fundamental ways as we have seen in the past few years, you have to re-examine your assumptions to make sure they are still valid.
But the basic idea i.e. picking volatile but uncorrelated assets to cover the different possible economic scenarios still sounds like a reasonable one (from my limited knowledge).  Do people agree?  Are there more suitable assets/asset classes?  If not, staying the course sounds like the best idea.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Wed Jul 03, 2013 9:30 am

Pointedstick wrote: Why are T-bonds no longer safe? The low rates, or your fear of default or hyperinflation or something?
Unlike any time in the past 50 years (at least), the Federal Reserve is monetizing an amount of debt greater than the entire net issuance of T-Bonds (including the MBS which are also an obligation of the US government). Obviously this cannot continue indefinitely. There are only two ways for it to end:
1. They stop the monetization, in which case interest rates go to the moon, as there are no other end buyers at rates anything like these rates, thus causing the price of existing bonds to plummet; or
2. They destroy the dollar.

In either of these scenarios, long T-Bonds are a disaster for investors.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 9:37 am

Who is to say that any asset will be safe and that is why the pp has 4 different assets to protect you in the event something unforseen occurs. Many folks were invested in equities in 2007 while they seemed safe and look what happened the very next year.

Bill Gross called for the end of the bond rally over 3 years ago. Wow, don't we have short term memories?

My favorite saying by Keynes: "The markets can stay irrational far longer than you can stay solvent"

 
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Wed Jul 03, 2013 9:43 am

george wrote: Who is to say that any asset will be safe and that is why the pp has 4 different assets to protect you in the event something unforseen occurs. Many folks were invested in equities in 2007 while they seemed safe and look what happened the very next year.
Equities are never safe, and anyone who thinks they are is highly delusional, to put it politely.

T-Bonds used to be relatively safe, until the government decided it could spend any amount it wished and the Fed would buy all their net issuance.

Of course, nothing is perfectly safe, but it is possible for something that appeared safe to become obviously very unsafe. Should we ignore that?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 9:52 am

I'm not sure I follow your logic, Libertarian666. Are you saying that without Fed interference, interest rates would be much higher? I'm not sure I see much evidence that the real economy can support high interest rates right now. The Fed could artificially raise interest rates of course, but I see no reason why they would benefit from doing that. I think there's much evidence that interest rates--especially at the long end of the yield curve--are controlled much more by market forces than by Fed policy.

And why would they have to "destroy the dollar?" By this I assume you mean hyperinflate it… why is that a foregone conclusion? Japan has been doing everything we've been doing recently for two decades--their central bank can explicitly monetize their national debt and their debt-to-GDP ratio is far higher than ours. They've even been trying to create some inflation, and it hasn't worked. Not saying we're Japan now, but we clearly have a template for central bank impotence in the face of economic issues that the entire developed world is beginning to face en masse.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by george » Wed Jul 03, 2013 10:14 am

Even if you are right and rates skyrocket, only if it happens in a straight line, will the pp really suffer because the pp may have you rebalance several times into and out of TLT, along the way as the market stair steps its way to higher rates. This way the impact of higher rates will be muted. In the event of skyrocketing rates, the only good investment will be TBT or TBF and I'm not sure I would want to be in such a volatile etf.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 10:22 am

Also, if rates rise, we have 25% of our money in an short-term bonds--an asset type that quickly adjusts to rising rates and will give us nice fat interest payments. Almost as if it was all planned out that way…  ;)
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Tyler » Wed Jul 03, 2013 10:28 am

IMHO, the article suffers from a familiar weakness:  Assume they're totally right.

What should an investor do?  How does "government psychopathy" only affect the PP?  What is a better alternative?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by AdamA » Wed Jul 03, 2013 10:51 am

bronsuchecki wrote: ...for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy.
I think HB was very much aware of this, and would probably not be that surprised by what's occurring today.
bronsuchecki wrote: In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio. 
I am curious to know what they changed. 

From the article (regarding PRPFX):
Something began to change in 2012 as the fund began experiencing volatility well beyond the tolerance of the conservative investor.


Image

...I imagine the average investor in the PFPRX are hard working folks who scrimped and saved every penny and all of a sudden they find themselves on a rollercoaster ride of volatility that they never expected.
Maybe, but here's what PRPFX looked like in 2000-2001:

Image

So it wasn't that much different then, and patient investors were rewarded in the following years.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by HB Reader » Wed Jul 03, 2013 10:59 am

bronsuchecki wrote: Craig, any comments on this http://www.tfmetalsreport.com/blog/4809 ... en-lantern

"However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio.  For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.


I wasn't aware PRPFX announced a change in its bond portfolio.  Does anyone have link to that? 

I was aware that a totally separate fund they manage, The Versatile Bond Portfolio (PRVBX), had made some changes. 
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by MediumTex » Wed Jul 03, 2013 11:00 am

Gadfly piece.

The comments about PP investors being performance chasers seems like an especially cheap comment.  All investors chase performance, not just PP investors.

RE the bond market, the chicken littles have been beating their chests since this time in 2008, long before the Fed's extraordinary steps even started.  They've mostly been wrong over the intervening five years.  Are they right now?  Maybe, maybe not.  Who knows?

Suggesting that Harry Browne didn't foresee all of this in his economic model says more about the commentator than it does Harry Browne.  Browne's insights do not lend themselves to being understood by the average hack financial journalist with a set of pet theories he's trying to work into every piece he writes, and it shows in almost every article I read that is pushing the "it's over for the PP" narrative.

Just noise.

Nothing has changed.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by MediumTex » Wed Jul 03, 2013 11:01 am

HB Reader wrote:
bronsuchecki wrote: Craig, any comments on this http://www.tfmetalsreport.com/blog/4809 ... en-lantern

"However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio.  For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.


I wasn't aware PRPFX announced a change in its bond portfolio.  Does anyone have link to that? 

I was aware that a totally separate fund they manage, The Versatile Bond Portfolio (PRVBX), had made some changes.


It wouldn't surprise me if the thinly researched piece got the fund they were writing about wrong.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by craigr » Wed Jul 03, 2013 11:11 am

bronsuchecki wrote: Craig, any comments on this http://www.tfmetalsreport.com/blog/4809 ... en-lantern

"However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio.  For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.


If the Permanent Portfolio fund has any weakness, it's that it overweights inflation hedging assets. Bonds are not the problem this year, gold is!

If I look at the bonds in the 4X25 Permanent Portfolio it is basically 50/50 long/short. So blended duration is around 7-8 years or so. Basically it emulates an intermediate term bond fund in duration so the risks are muted. The fund owns even fewer bonds so rising interest rates are even less of a problem for the fund. The fund's issue is again that it owns a lot of inflation protection assets and there is no inflation in the U.S. right now that is very significant...

It's unlikely that Browne or for that matter anybody in the alternative investment world back in the early 2000's, could have realized what we do know about the extent of the manipulation in the metals. Nor is it likely that Browne imagined the federal debt could exceed the size of the total economy nor the capability of Central Banks to counterfeit on such a large scale.


The problem with their assumption is there is big difference between money/credit being made available by banks and that same money/credit making it into the economy to cause inflation. In the U.S. we do not have high inflation now. There are pockets here and there (health care for instance), but it is not widespread. Same for govt. spending. I don't think govt. spending is very good long-term, but the effect in the economy has been pretty tame in terms of inflation so far.

Of course, that could eventually catch up and ignite inflation. But the Fed is trying to front-run it by changing their policies now. 

The MIT Billion Prices Project tracks online prices and gives a good proxy to the CPI:

http://bpp.mit.edu/usa/

So assuming their data is not being tainted, it is not showing abnormal inflation. This is also what I see just on a personal level.

...or the number of interventions in currency markets including the Swiss pegging the Swiss Franc to the Euro? The Permanent Portfolio Fund has always regarded the Swiss Franc as the currency with a high safe haven status but the Swiss taught us that all fiat currencies are subject to manipulation.


This one item I actually do agree with that the Swiss Franc should be dumped from the fund. It should have been done when the Swiss broke the last of the gold linkage 10 or so years ago. It definitely should have happened when they pegged to the Euro. At that point the Swiss Franc had lost all credibility as an inflation protection asset.

Browne saw a world where long term bonds performed well in a deflationary period and gold outperformed in an inflationary period. Well, here we are well into QE3 as The Fed continues to fortify the monetary base, gold and silver has been volatile with excessive short term risk. No longer can they be confident that gold and bonds will behave in a predictable fashion. Good ole Harry must be turning over in his grave.


I think gold is doing exactly as expected actually. The Fed is winding down their policies and this has lowered inflation expectations. It also started bringing rates from negative to positive real territory. Both of these are bad for gold. Rates are going up on the long bonds, but gold took the worst pounding as investors no longer feared inflation but thought the stock market might be a better place for their money.

So I don't know if I find much in this article that worries me. Besides, what is their solution to the mess? I don't know myself so I'm just buckled in for the ride at this point.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Robert » Wed Jul 03, 2013 11:56 am

Oh no, it's different this time!  ;)
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Wed Jul 03, 2013 12:45 pm

Pointedstick wrote: I'm not sure I follow your logic, Libertarian666. Are you saying that without Fed interference, interest rates would be much higher?
Yes, of course. They are the only purchasers of T-Bonds. What happens when the only purchasers of anything stop purchasing? The price will go... down. This isn't rocket surgery!
Pointedstick wrote: I'm not sure I see much evidence that the real economy can support high interest rates right now. The Fed could artificially raise interest rates of course, but I see no reason why they would benefit from doing that. I think there's much evidence that interest rates--especially at the long end of the yield curve--are controlled much more by market forces than by Fed policy.
There is no market in T-Bonds. There is only the Fed.
Pointedstick wrote: And why would they have to "destroy the dollar?" By this I assume you mean hyperinflate it… why is that a foregone conclusion? Japan has been doing everything we've been doing recently for two decades--their central bank can explicitly monetize their national debt and their debt-to-GDP ratio is far higher than ours. They've even been trying to create some inflation, and it hasn't worked. Not saying we're Japan now, but we clearly have a template for central bank impotence in the face of economic issues that the entire developed world is beginning to face en masse.
The difference is that the Japanese public is buying Japanese T-Bonds; they are not being monetized by the Japanese central bank, thus there is no inflationary pressure being built up there as there is here.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by AdamA » Wed Jul 03, 2013 1:07 pm

Libertarian666 wrote:
Yes, of course. They are the only purchasers of T-Bonds.
Really?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 1:11 pm

Libertarian666 wrote:
Pointedstick wrote: I'm not sure I follow your logic, Libertarian666. Are you saying that without Fed interference, interest rates would be much higher?
Yes, of course. They are the only purchasers of T-Bonds. What happens when the only purchasers of anything stop purchasing? The price will go... down. This isn't rocket surgery!
Libertarian666 wrote: There is no market in T-Bonds. There is only the Fed.
So… those T-bonds I thought I bought recently… they're not really T-bonds? Or do I not count as being part of the market for T-bonds? I'm not sure where you're getting that the Fed comprises the entire market for government bonds. Can you provide some evidence for this?
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Libertarian666 » Wed Jul 03, 2013 1:47 pm

To be more precise, they are purchasing ~90% of the new issuance of T-Bonds:

http://www.bloomberg.com/news/2012-12-0 ... bonds.html

And that is not counting the MBS (also government backed) that they are also buying.

Existing bonds, of course, are bought and sold all the time, but what would happen if the Fed stopped buying $1T of government bonds per year, much less started selling some of the ones they already have? I cannot imagine any possible way that the prices would not go down substantially in that situation.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Pointedstick » Wed Jul 03, 2013 2:47 pm

Your supply-and-demand analysis isn't wrong, but I think you're making an assumption that the Fed is creating artificial demand rather than crowding out demand from non-Fed market participants. If the Fed were to stop buying all the new bonds, what's to say that demand from private entities, foreign governments, and other central banks woudn't flood in and make up most or all of the demand shortfall?

Not saying that's exactly what I think is going to happen, but it doesn't sound all that implausible to me.
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Re: Not Even Harry Browne Thought It Was Going To Be This Bad

Post by Ad Orientem » Wed Jul 03, 2013 3:04 pm

On the subject of Fed manipulation of the bond market, we have been down this road before. Direct and very aggressive debt monitization began in 1944 and continued until 1951. It was massive to the point where proportionately it was more aggressive than what we have seen in the 2008 - present Fed policy. Yes, it did spark inflation and when the Fed finally ended it's unrestrained money printing in 1951 we saw the end of the first 30 year secular bull market in bonds. But it did not spark hyperinflation nor was there an explosion in interest rates. Rates began to rise but it was a gradual process that continued until the early 1980's.

So I'm not seeing why the sky is going to fall this time around.
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