Barrons Alan Abelson Article

[julian]

See this weeks issue. Now we have  Mike O'Higgins improving the HB 25x4. Sadly, Barrons failed to give HB the credit he so richly deserves. When will ppl learn that HB wasn't trying to make the most amnt of $ possible. He was balancing risk, upside and cash flow. The greed in this country is amazing.

[MediumTex]

With the success of PRPFX, I suppose it makes sense that all of these financial media clowns are trying their hands at permanent portfolio tinkering.

The sad thing is that all of these tinkerers seem not to grasp the concept of a portfolio that doesn't need to be tinkered with.

As a result of either ego or just bad manners, it also seems that very few of these people want to give Harry Browne any credit for coming up with a really marvelous approach to investing.  That's a shame.

[Jan Van]

I was just looking to post about this, found a non-paywalled version through Google: http://online.barrons.com/article/SB500 ... rticle%3D2:

In constructing his MOAR portfolio, he has carefully striven to make it capable of prevailing against what he envisions as two possible if opposite threats: from inflation fed by the easy-money policies so popular with governments everywhere or a wave of deflation as the mountains of debt, private and public, shrink at a faster rate than the central banks are able to print money. A portfolio, in other words, for all seasons.

Obviously, the bottom-line question, which Mike both poses and answers, is specifically how would he structure such a portfolio that "would likely provide an attractive, relatively steady, real inflation-adjusted return" in what is possibly a stretch of scary market years that lie ahead.
He'd put 25% in the iShares Barclays 20 +Year Bond Fund ETF (symbol: TLT); 25% in the iShares Barclays 7-10 Year Bond Fund ETF (IEF); 25% in the SPDR Gold Trust (GLD) and 5% each in the iShares of: MSCI Belgium Index Fund (EWK), MSCI France Index Fund (EWQ), MSCI Italy Index Fund (EWI), MSCI Ireland Index Fund (EIRL) and MSCI Spain Index Fund (EWP).

BTW. I actually have a subscription to Barron's! Got it through one of those "you have xxxx miles that will expire, use them for these magazine subscriptions!" kind of deals. Funny thing is, since the Barron's is sort of a newspaper, it's thrown on your lawn every Saturday morning. And I have no other newspaper subscriptions. So I always pick those up and throw them in the recycle bin. Then a few weeks ago I needed a piece of paper to put on the ground under my motorcycle because I wanted to grease the drive chain. So I pick a paper, pull it out of the plastic, and presto... Barron's! I've had the subscription since November last year... 

[AdamA]

Does anyone remember the William Bernstein piece about HB's PP that was posted on his (Bernstein's) website?

He ends with a quote that says something like, "There's nothing wrong with the PP, nothing at all, but there's everything wrong with its practitioners."  

I think this is exactly what he was referring to.  A lot of people will get into the PP without understanding the underlying theory, and then abandon it as soon as they see one of the asset classes start to do particularly well (usually in the form of a stock market rally), at which time they go "all-in" to that asset.  

He'd put 25% in the iShares Barclays 20 +Year Bond Fund ETF (symbol: TLT); 25% in the iShares Barclays 7-10 Year Bond Fund ETF (IEF); 25% in the SPDR Gold Trust (GLD) and 5% each in the iShares of: MSCI Belgium Index Fund (EWK), MSCI France Index Fund (EWQ), MSCI Italy Index Fund (EWI), MSCI Ireland Index Fund (EIRL) and MSCI Spain Index Fund (EWP).

I think it's good that HB isn't credited for this...no real cash fund, and the stock funds are all foreign, so you're not going to get the stocks-down-bonds-up correlation that often occurs when you stick to stocks/bonds from the same country.  Makes it a bit more random...monkeys w/darts.

Also...all ETF's.  I know we talk about this all the time and there really doesn't seem to be an obvious reason for concern, but I wonder what would happen to a fund like this during a true market crash...would an Italian Index fund survive?

[MediumTex]

I wonder what would happen to a fund like this during a true market crash...would an Italian Index fund survive?

That's what you call a self-answering questiion.

[MediumTex]

Then a few weeks ago I needed a piece of paper to put on the ground under my motorcycle because I wanted to grease the drive chain. So I pick a paper, pull it out of the plastic, and presto... Barron's! I've had the subscription since November last year... 

It sounds like if you were to get a new puppy you would also have some great kennel liners for housetraining.

***

In Triumph-the-insult-dog-comic-speak:

"Barron's!!!  I love that rag!  Ever since I was a little puppy I have loved to poop on it.  There are many things in this world that I say are good for me to poop on, but in most cases I am speaking figuratively.  When, however, I read a Barron's article that fails to give Harry Browne credit for the permanent portfolio, it gives me the actual desire to poop on it, and takes me back to my innocent days of puppyhood, before I became aware of all the bad things in this world and started smoking these cigars."

[Jan Van]

"Barron's!!!  I love that rag!  Ever since I was a little puppy I have loved to poop on it..."

Well, since you started it... The whole Barron's can be read during one pooping session. Don't ask me how I know...

[MediumTex]

http://randomroger.blogspot.com/2011/04 ... -name.html

Thanks Clive.

Here are a couple of nuggets from that piece:

The other issue is that longer term treasuries are expensive these days. They have been expensive for a while and there is no way to know how long they will stay expensive but if at some point they revert to normal the transition from expensive to fairly priced will be very painful for holders of ETFs where the holders are devoted to some sort of strategy that doesn't look forward.

Apparently, this fellow isn't aware that current interest rate levels are more or less at the 100 year mean for U.S. sovereign debt.  There isn't a mean reversion if you are already at the mean.

For all I know the strategy could do very well yet again but a portfolio built on lousy fundamentals has much less margin for error. This doesn't have to be the worst thing in the world as long you you understand the fundamentals of what you're buying and the lack of financial underpinning.

Wow.  I would say he is the one without a financial underpinning.

***

Pearls before swine.

[Saluki]

MT, perhaps I'm missing something, but I don't understand your "pearls before swine" comment.  Are you disagreeing with Roger's critique of the MOAR strategy here, or did you think he was referring to the Permanent Portfolio?

[MediumTex]

MT, perhaps I'm missing something, but I don't understand your "pearls before swine" comment.  Are you disagreeing with Roger's critique of the MOAR strategy here, or did you think he was referring to the Permanent Portfolio?

Perhaps I missed something.

Roger's comments about bonds seem equally applicable to either the MOAR strategy or the original permanent portfolio strategy (since they both use a 25% allocation to TLT).

On the other part I quoted, was he referring to the MOAR strategy as lacking financial underpinning as a means of acknowledging that the original permanent portfolio does have financial underpinning?  I may have assumed based upon his bond comments that he had a weak grasp of the whole strategy.  If I mis-read that part, then I stand corrected.

Here is another Roger quote from a permanent portfolio post on April 3:

If you think the comments about about long bonds hold any water [i.e., that bonds at current levels cannot provide similar returns to the last 20 years] what would be a suitable replacement given current events? Big picture, there are a couple different ways to go in the realm of relatively low octane and simplicity; one would be some sort of short dated exposure that avoids interest rate risk (this could be a fund or individual issues) or some sort of foreign exposure with either close to normal (as we think of them) yields or some other appealing attribute. Many of our clients own sovereign debt from Australia that only goes out a couple of years and yields close to 4%. We also own Norwegian debt that yields quite a bit less but I believe Norway is on incredibly firm economic ground.

This comment, too, suggests that he does not understand the role of LT bonds in the overall permanent portfolio strategy.  

I don't know Random Roger and I am not familiar with his work.  It was a quick reading of the posts cited above that made me think "pearls before swine."    

If Roger has a better permanent portfolio understanding than I am giving him credit for, let me know.  I don't want to be unfair to anyone else's take on Harry Browne's strategy.  There has just been a lot of weak permament portfolio analysis coming out lately that doesn't seem to grasp the basic underlying strategy (i.e., seek volatility in non-correlated assets and let the volatility work for you) and Roger's long term bond comments seemed like more shallow PP analysis.

[Saluki]

A personal observation: If I had to bet on the direction of interest rates in the near future, I would place my money on them going down.  It  seems to be taken as gospel among market commentators that rates are going to rise, and I have rarely seen such near universal opinion about a market move actually going as expected. 

[MediumTex]

If I had to bet on the direction of interest rates in the near future, I would place my money on them going down.  It  seems to be taken as gospel among market commentators that rates are going to rise, and I have rarely seen such near universal opinion about a market move actually going as expected. 

I feel the same way, though I'm happy my net worth doesn't depend on this prediction being correct.

[hrux]

Rates have spent quite a bit of time in the current general range. However, the
telling part is when the gold standard was phased out. Inflation was not an issue before that. For 50+ years of that time you are looking at rates under conditions that are very different than
today. If we don't get our house in order, rates will almost certainly go up eventually. Whether they go down first is another story.

[MediumTex]

Rates have spent quite a bit of time in the current general range. However, the
telling part is when the gold standard was phased out. Inflation was not an issue before that.

I don't know about that.  I imagine there was a lot of inflation when FDR confiscated gold and re-priced it from $20 an ounce to $35 an ounce.

For 50+ years of that time you are looking at rates under conditions that are very different than
today. If we don't get our house in order, rates will almost certainly go up eventually. Whether they go down first is another story.

Japan suggests that rates can go down for at least 20 years following the bursting of an asset bubble.  The U.S. is only a few years into its post-housing bubble era.

Japan's house looks like a college freshman's dorm compared to the U.S.'s house, and Japan is paying 2% on 30 year bonds.  Look at what Britain is paying on 30 year debt--is there house in better shape than the U.S.'s?  

I don't think logic is a good guide when it comes to understanding interest rate movements.  Logic would suggest that the last 20 years of Japanese AND U.S. bond market action should not have happened....but it did.

I agree that at some point rates will rise, but since I have no idea when that will be or what will trigger it, the information is not helpful.  

All of these things do make me sleep a little better knowing that the permanent portfolio doesn't require me to guess correctly about which way things will break (or when).