PP in environment of economic stagnation and slooooowly rising interest rates

[moda0306]

So bizarro that despite a deflationary recession rates rise by 1.5 points instead of fall by 1.5 points?

I find your line of thinking extremely intriguing... I'm just trying to digest it all.

I think it maybe more of a microeconomic thing, since Japan doesn't have the advantage of having economic size and reserve currency that we do, so their PP doesn't have the macroeconomic gel that ours does.  When the world fell into recession in 2008, it was the entire world, so our VTI (which does plenty of business abroad), and our LTT's (which are invested in heavily all over the world) behaved in much more "deflationary recession lockstep" than Japan's little Nikkei index and their 20 year bonds, which probably didn't behave on the same macro (I mean world-macro, not country-macro) economic principals.

Same with gold in that period... it wasn't dropping because of Japanese deflation, it was dropping because of all the great things that were happening in western economies during the 90's.  In a portfolio where you depend on macroeconomic principals driving the assets, it sure helps to have a reserve currency and the largest economy in the world to help solidify those relationships.

I could be just talking out of my butt... just seems that we're lucky in the U.S. to have such reliable macro movements.

[Gumby]

So bizarro that despite a deflationary recession rates rise by 1.5 points instead of fall by 1.5 points?

Yes and no. There's no way to know. It's as alternate universe with different rules, for all practical purposes. We could certainly be moving in the same direction as Japan, and I think demographics are playing a very large roll. But, the backtesting isn't going to match up to our investment world the way we want it to in terms of rates and investment choices.

[Gumby]

In 1973 inflation hit 18% and then 21% in 1974. Not the sort of rates you want to start issuing LT's at.

I'm not sure they would have been very popular at the time. It was crazy to buy LT bonds during US inflation.

So perhaps the PP isn't universal, but is appropriate only to a limited number of countries where certain circumstances are apparent (hmmm). And even then there are no guarantees that the choice of investments might be available.

I would agree with this. A Japanese investor could certainly try to have a PP, but it won't work the same way as a US PP. What I'm trying to say is that backtesting in Japan isn't all that helpful to us because the variables are too different from our own reality.

Did Harry ever define his interpretation of FAIL and SAFE.

I believe the definition is that you won't lose all of your money. He never guaranteed a profit.

[Gumby]

I think it's easy to imagine the three other pillars reducing to "nothing," but in actuality you would probably maintain some value in the stocks. But, more importantly, consider that if you speculated for that exact scenario, and it didn't come true, you'd be in big trouble as well.

Also, I'd think buying a Japanese TV would be the least of your worries if that actually happened  :-[

Now Harry said something like gold can rise heavily to counter such hyper inflation events, suggesting gains of 20 times but indicating that that might have in part been a consequence of the release to market pricing of gold in the 1970's and that 5 or 10 times might be more realistic.

Gold should go up much more than 10 times over if there was a hyperinflation scenario. See German hyperinflation. Harry Browne was saying that 10-times was what the 1970's settled on for gold.



Even Harry Browne couldn't believe we'd ever see $2000 gold without a major inflation scenario, and now it almost seems inevitable without any signs of severe inflation.

[moda0306]

To compare to Japan's 1990 crisis, a few months ago when I had some time I took a look at the performance of Gold and LTT's on days and/or months of crises in the U.S. (1987 crash, Sep 11, Lehman Collapse, May 2010 Flash Crash... maybe 1 or 2 more that I can't remember).

They did a phenominal job of offsetting stock-market losses during those periods, with no exception.  Either one or the other or both jumped significantly, and the other lost little or gained pretty well.  I know the day-by-day movements aren't of all that much importance, but I wanted to see what the portfolio did on those oh-so-important days.  I am even more confident, after thinking about those events, that the U.S. truly does have a PP advantage and a Japanese-esque PP slip-up isn't nearly as likely as we may fear..

I would be interested to hear more about what HB had to say about foreign PP's.

I am most afraid of Gold's unusual ability these days to mimick stocks, but I understand why that relationship has developed to some degree.

[Gumby]

I would be interested to hear more about what HB had to say about foreign PP's.

I am most afraid of Gold's unusual ability these days to mimick stocks, but I understand why that relationship has developed to some degree.

Appendix G of Why The Best Laid Investments Usually Go Wrong is a short two page recommendation on Foreign PPs titled, "Permanent Portfolio Alterations for Non-Americans."

Harry Browne says:

Permanent Portfolio Alterations for Non-Americans

The suggestions in this book are made with American readers in mind. If you live outside the United States, some of the suggestions I've made for the Permanent Portfolio can be changed. Whether you should use U.S. investments or use investments of the country in which you live depends on how stable and useful you consider the investment markets in the country where you live.

If you are an American living abroad and you expect to return to the US to live within the next few years, it isn't necessary to make any changes from the suggestions I've made. If you don't know when or whether you will return to the US, consider making the changes.

The purpose of Treasury bills in the portfolio is to provide stable purchasing power through a default-proof investment in the currency you rely on. So, for US Treasury bills, you can substitute the equivalent investment in the country in which you live. That can be bills, notes, or bonds issued by the government and maturing in one year.

The long-term bonds can be bonds of the government of the country in which you live, so that you will have protection if there's a deflation in your country. Use the longest maturity available.

Stock-market investments are meant to provide profit when you country is prosperous and inflation is low. So, in general, you should buy stocks of the companies in your country.

However, you might prefer to use American stock-market investments instead. Usually, the stock markets of the world move upward or downward together. And the US securities markets offer a greater number of alternatives — including such things as warrants and specialized mutual funds.

The decision may depend upon how adequately you believe you can cover yourself with stock investments of your own country. One possibility is to split the stock-market budget between investments of your country and the United States.

There is no reason to alter the suggestions I've made for gold, no matter where you live.