A 5th Economic Condition?

[stone]

The UK came close to shutting down about ten years ago when the people who drive fuel trucks went on strike and picketed oil depots in protest about fuel prices (the "fuel protests"). They were not unionized and were mostly self employed. The supermarkets started to run out of food. People could not drive to work. If pushed people don't need a union to strike. Wasn't the Iranian Revolution a general strike? Gumby, I agree that it is easy to find support for any idea however stupid if you look for it. I just think that the mainstream media buzz is also fairly stupid.

[Lone Wolf]

When arguing with someone that thinks there's no way to keep his family financially secure without accepting pathetic return, you're bound to run into a very angry person that's not going to want to sit and let himself relax and think, and has let himself stew in an echo chamber of what he thinks is wrong with the world.

Exactly right.  That's a damn alarming feeling.  The cacophony of a million different narratives (all so confidently presented!) can drive you absolutely nuts.  Whipsawing from one worldview to the next is stressful and exhausting.  You can either take shelter in one view or do what Harry Browne suggested and face an uncertain future head-on.

When you buy into one story completely, with your savings, ego, and identity, anyone that comes at you with a different story becomes something more than a person with different ideas.  They become an adversary questioning your very way of life and the financial future of your family!

BTW, on an unrelated point, it amuses me greatly that you two are now calling each other "stoner" and "Grumby".

[Gumby]

I agree that it is easy to find support for any idea however stupid if you look for it. I just think that the mainstream media buzz is also fairly stupid.

I couldn't agree more. Likewise, fringe media buzz is also fairly stupid. It's all useless in terms of figuring out the future. The fact is, no one knows whether we will have inflation or deflation 18 months from now (or 18 years from now). Therefore, it's illogical to waste our time only worrying about one of the possible scenarios. Why not worry about every possible scenario?

Mind you, I don't think there's a problem with someone asking how the PP will perform if we have a certain scenario. But, I think it's absurd for someone to literally only worry about one scenario that probably will not happen. If Doodle is so concerned about hyperinflation, he should convert all of his assets to Gold, build himself a bunker and stock it full of food asap.

[doodle]

I agree that predicting the future is downright tough if not impossible however if you look at the secular bull market in gold and commodities it seems to be pointing in a certain direction.

Bonds have been in a secular bull market for more than 30 years. Stocks have been in a bear market for about 10 years now. Commodities have been in a secular bull market for about 10 years.

Usually secular bull markets end in a blow out top.

You saw this with stocks ten or twelve years ago, housing prices 5 years ago, 30 year bonds saw 2.5% during 2008. It seems to me that the only secular bull market intact is commodities at the present moment. I am guessing that although 2008 saw a huge runup in commodities that it didn't signify the end of the secular bull market which traditionally take 15-20 years to run its course.

It is almost like humans have to take a market to its extreme before it breaks down and reverses trend.

[Gumby]

I agree that predicting the future is downright tough if not impossible however if you look at the secular bull market in gold and commodities it seems to be pointing in a certain direction.

Bonds have been in a secular bull market for more than 30 years. Stocks have been in a bear market for about 10 years now. Commodities have been in a secular bull market for about 10 years.

Usually secular bull markets end in a blow out top.

You saw this with stocks ten or twelve years ago, housing prices 5 years ago, 30 year bonds saw 2.5% during 2008. It seems to me that the only secular bull market intact is commodities at the present moment. I am guessing that although 2008 saw a huge runup in commodities that it didn't signify the end of the secular bull market which traditionally take 15-20 years to run its course.

It is almost like humans have to take a market to its extreme before it breaks down and reverses trend.

Big deal.

So, we're all on the verge of collapse. It's so obvious, right? Do you really think you can figure out where this is all going and when? And, if so, what are you going to do about?

[doodle]

I like Jim Rogers portfolio somewhat....

From an email he wrote me and his press appearances I imagine he is around:  

40% - 50% Commodities

20% - Short Emg. Markets / Tech - as a hedge

40% - Basket of currencies

I think his central thesis is that if things get better commodities will rise. If things get worse govt's will print money and commodities will also rise.

He says that this is one of the few times in his life that he sees a scenario where an asset class benefits no matter which way the world economy goes.

[Gumby]

I like Jim Rogers portfolio somewhat....

From an email he wrote me and his press appearances I imagine he is around:  

40% - 50% Commodities

20% - Short Emg. Markets / Tech - as a hedge

40% - Basket of currencies

I think his central thesis is that if things get better commodities will rise. If things get worse govt's will print money and commodities will also rise.

He says that this is one of the few times in his life that he sees a scenario where an asset class benefits no matter which way the world economy goes.

I'm sure Jim Rogers has it all figured out. How can anything possibly go wrong?  ::)

[moda0306]

Doodle,

I am not going to go into why I think that's a horrible portfolio and an unreliable correlation assumption... but if you were to track some hypothetical portfolio like that I'd love to hear your results.

[rickb]

3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand. All of which implies we will go straight to deflation without the emancipating, hyperinflationary interlude that some mortgage debtors might be hoping for.

Is the implication that the demand for physical cash wouldn't be honored by the banks?  A dollar in a bank is an obligation to hand you a Federal Reserve Note on demand.  Failing to honor that promise would lead to widespread bank runs.  I see the government taking extraordinary steps to keep that from happening (as it would be the ultimate "broken promise".)  That physical cash is either getting into the system somehow or a LOT of really important promises are going to get broken.

There are manifestly not enough dollars to allow banks to honor their "promise" to hand you a FRN on demand since banks are allowed to leverage their deposits by about 10-1 (100-1 for CDs) against (usually long term) loans.  What this means is if more than 10% of a bank's depositors want their cash back the bank must run out of available cash (90% of the depositors' money exists only in the form of loan balances owed to the bank). If this were to happen, the action the government would take would be to close the bank under the auspices of the FDIC and (typically) sell its assets (the loans) to a "stronger" bank (stronger is in quotes here, since ALL banks are leveraged 10-1 against their deposits). 

[Gumby]

40% - 50% Commodities

20% - Short Emg. Markets / Tech - as a hedge

40% - Basket of currencies

Keep in mind that in case of a hyperinflation/end-of-the-world scenario — when the markets collapse — you'll need an actual wicker basket of currencies and a bunker full of those commodities if you ever want to realize the results of this highly speculative portfolio.

[doodle]

Here is DBC (commodities) vs. EUM (short EM) and PSQ (short nasdaq)

http://finance.yahoo.com/echarts?s=EUM+ ... =undefined

If you click on the "Max" option you can see that a 50% exposure to commodities and a smaller to the shorts does counterbalance.

[Lone Wolf]

There are manifestly not enough dollars to allow banks to honor their "promise" to hand you a FRN on demand since banks are allowed to leverage their deposits by about 10-1 (100-1 for CDs) against (usually long term) loans.  What this means is if more than 10% of a bank's depositors want their cash back the bank must run out of available cash (90% of the depositors' money exists only in the form of loan balances owed to the bank). If this were to happen, the action the government would take would be to close the bank under the auspices of the FDIC and (typically) sell its assets (the loans) to a "stronger" bank (stronger is in quotes here, since ALL banks are leveraged 10-1 against their deposits). 

Yep, I agree.  We're on the same page as far as fractional reserve banking goes.

The original quote talked about cash on hand, speculating (incorrectly, in my view) that banks have no more than $25k-$50k physical cash in the vault.  The quote (as I understood it) was saying that hyperinflation is usually a physical cash phenomenon.  The author was speculating that the combination of "mattress money" and the physical cash reserves sitting at banks wouldn't be enough currency to actually fuel really high inflation.  My point is that even if a bank is fresh out of physical cash, the Federal Reserve Bank is obligated to refresh that bank with real cash as needed.  Failure to do that would be a default of the highest order.

Your point is much more interesting IMO.  In a fractional reserve system (and here I paraphrase Harry Browne), all banks have borrowed short and lent long.  If people actually want their money, the banks are toast.  Large-scale withdrawals would put the FDIC system to the ultimate test: what happens when the FDIC insurance fund is exhausted?  Failure to backstop the banks would be unbelievably deflationary and a stunning blow to economic growth.  On the other hand, if the printing presses crank up to make the depositors whole, there's potential for huge inflation.  Either way, the Fed would be certain to inject a lot of liquidity in response to widespread bank failures.  I just don't know what the ultimate result of that would be.

Frankly, I predict a much more boring future than any of these scenarios.    But what do I know about the future?  Next to nothing, that's what!

[Gumby]

Here is DBC (commodities) vs. EUM (short EM) and PSQ (short nasdaq)

http://finance.yahoo.com/echarts?s=EUM+ ... =undefined

If you click on the "Max" option you can see that a 50% exposure to commodities and a smaller to the shorts does counterbalance.

And if you adjust the dates of that chart to Oct 20 2008 — Aug 30 2010, it shows a portfolio that loses a lot of money through a deflationary crash (like 2008-2009).



Keep in mind that most crashes are deflationary.

EDIT: The dollar actually got stronger — in relation to other currencies — over that period, so the portfolio would look even worse with a basket of currencies. The fact is that there was nothing keeping this portfolio from losing money between Oct 20 2008 — Aug 30 2010. In real terms, the overall performance was even worse.

[cowboyhat]

Lone Wolf,

What happens when everyone wants cash, but all the banks have on their books are bad debts, is what happened in 2008. The government buys all the bad debts from the banks to stop an immediate deflationary spiral. Now there is plenty of cash in the banks and they can keep making loans to the remaining credit worthy customers like giant corporations, but all the little people still owe their unpayable debts. The banks are fine for the moment, big business is okay for the near term, but the debtors are still hurting and stop buying stuff. The paralyzed economy enters zombie-land.

In Zombie-land with decreasing demand from the little people, most business stops expanding, no need for loans from banks, so the money sits or wanders off to play at the craps table. Pieces of flesh start falling off the zombie as declining demand starts choking the weaker businesses, employment decreases, little people buy less, and we have a long miserable economic contraction. Unless some end user demand comes from somewhere, eventually the fabric of society starts to fray, and people embrace a political freak of some kind.

I guess it doesn't matter whether the economic contraction is paired with an expanding or a contracting money supply if the money never gets to the people who buy stuff. If the new money doesn't flow out of the financial system is just creates violent swings in liquid asset prices. The new, hot, speculative money dilutes the old stable invested money, and savers and investors lose to speculators.

Maybe that's the 5th economic condition: economic contraction combined with captured monetary expansion.

[Tortoise]

In a fractional reserve system (and here I paraphrase Harry Browne), all banks have borrowed short and lent long.  If people actually want their money, the banks are toast.  Large-scale withdrawals would put the FDIC system to the ultimate test: what happens when the FDIC insurance fund is exhausted?  Failure to backstop the banks would be unbelievably deflationary and a stunning blow to economic growth.  On the other hand, if the printing presses crank up to make the depositors whole, there's potential for huge inflation.

...Only if the depositors who have been made whole by the printing presses then proceed to spend all of that cash (thus bidding up prices) rather than continue to hold onto it as savings, right?

The way I understand it, credit expansions are inflationary because people borrow money in order to spend it or speculate with it. All that spending and/or speculation tends to bid up prices.

If there were a general run on the banking system and the government intervened by printing money to make everyone whole, a strong possibility seems to be that people would take their cash, stuff it under their mattresses until confidence in the banks was restored (e.g., by new government regulations "guaranteeing" that banks would henceforth behave themselves), then eventually deposit the cash back into the banks. They would only spend most of the cash if they completely lost faith in the value of the currency, which seems like a separate issue from completely losing faith in the solvency of fractional-reserve banks.

Maybe I'm not thinking about this clearly. If so, someone please help me understand what I'm missing.

[doodle]

Gumby,

With regards to Rogers portfolio I think that many are overlooking the forest for the trees.

The longer term trend from 2000 in commodities is huge:
http://www.indexmundi.com/commodities/

Similarly the dollar index move has been sharply downward from 2000:
http://www.chartsrus.com/chart.php?imag ... cker=FUTDX

So yes over the period of a year or two it was a losing portfolio but over the last ten years it would have produced huge gains.

The reason why I pay so much attention to Rogers is that I have not seen him get a longer term trend wrong yet.

If you read any of his books

Investment Biker
Adventure Capitalist
A Bull in China
Hot Commodities

He has been dead right every time.

Even his short trades seem to come to pass sooner or later. I remember him saying he was short Citi, Fannie Mae, and Lennox Home in late 2007. I remember people looking at him like he was crazy. These calls were made before the crash not during or after. He simply said the longer term fundamentals were deteriorating and he was short.

He is using the same language again for the long bond and it makes me very worried because of his track record. He is currently short long bond and although he recognizes that he might have to cover if things take a big turn for the worse, he sees a strong longer term trend.....

[Gumby]

So yes over the period of a year or two it was a losing portfolio

That chart illustrated the peak to trough, which was 1 year, 10 months and 10 days. The JR portfolio took even more time to actually recover all of its losses.

Nevertheless, that's quite a statement for an investor who supposedly is searching for safety and security.

Look, Doodle, I'm sure there's a good chance that Jim Rogers will be proven right over the long term. But, most investors with families and kids, and nervous wives, would not have the patience to wait two years, or more, for their entire wealth to recover from a deflationary crash. That's when people make bad investment decisions and change their plans at the worst possible time.

The Jim Rogers portfolio sounds like an excellent VP. But, it's clearly not very stable. And it's not a very practical portfolio for someone who wants to sleep like a baby at night. Most people would bail on that portfolio after two years of losing +20% of their wealth through a deflationary crash, like we saw in that chart above.

It seems like the Permanent Portfolio is not the investment vehicle for you at this point in your life. You seem to believe Treasuries are extremely risky (even though they are the #1 risk-off investment in the entire world). You can only imagine one outcome for the world we live in (even though it probably won't happen that way). You'd prefer to speculate on that outcome with money you can afford to lose (even though it could be financial suicide). And you've convinced yourself that an investment guru like Jim Rogers is always right (even though we all know that's impossible). When you put all of those things together, you've pretty much violated every rule that Harry Browne ever wrote.

So, this begs the question of why are you even considering the Permanent Portfolio if you clearly don't believe in anything about it?

[Lone Wolf]

What happens when everyone wants cash, but all the banks have on their books are bad debts, is what happened in 2008.

If there were a general run on the banking system and the government intervened by printing money to make everyone whole, a strong possibility seems to be that people would take their cash, stuff it under their mattresses until confidence in the banks was restored (e.g., by new government regulations "guaranteeing" that banks would henceforth behave themselves), then eventually deposit the cash back into the banks. They would only spend most of the cash if they completely lost faith in the value of the currency, which seems like a separate issue from completely losing faith in the solvency of fractional-reserve banks.

Right.  IMO it would all depend on the reasons behind the sudden demand for physical cash and the level of faith in the currency itself.  From the examples I've looked at, hypers are always about that.  I think the central question would be whether people are withdrawing physical cash because it is the best way to exchange an increasingly worthless currency for real stuff, pronto.

Zimbabwe, for example, placed extremely harsh limits on how much money people were permitted to withdraw from the bank.  (I don't recall the exact amounts, but the daily limit on cash withdrawals was extremely small.)  This is a form of "bank holiday" and greatly raised the value of physical cash vs. electronic cash.  It still didn't stop hyperinflation from coming because physical goods were much more valuable than a currency the people had lost faith in.  Thus, money went into rapid circulation rather than into mattresses.

Why was physical cash more valuable?  Because it could more quickly and immediately be exchanged for real goods before the currency lost any additional value.  The velocity of money was accelerating so much that it was imperative to spend it as quickly as possible to get maximum value for it.  I think that it's all down to supply and demand and relative valuations.  Physical cash became nothing more than an intermediary for getting electronic cash turned into real stuff ASAP.

The idea that this massive demand for physical cash could collapse fractional reserve banking is an incredibly interesting side effect.  In fact, fractional reserve's fragility can create all kinds of unpredictable monetary side effects.  Thomas Rustici argued very convincingly on EconTalk that the Smoot-Hawley tariffs had a much bigger role in causing the Depression than had previously been believed.  Rustici found that the areas hit hardest by the subsequent trade wars were ground zero for many bank failures (and the monetary contractions that come with them.)

Anyhow, hyperinflation requires a severe loss of faith in the currency (well beyond my "Gee, fiat currencies are kinda silly, huh?" smirky objections.)  I am certainly not expecting this for the United States so long as the Fed maintains some semblance of reasonableness and independence.  Still, the Fed's Board of Governors is a very, very small group of people to put absolute faith in, so nothing's ever totally off the table!

[moda0306]

What do the "board of governors" really do?  Doesn't Bernanke have the power to do whatever he wants, for the most part?

I was debating with a friend who had "the most important job in the world," and I had it at a pretty dead tie between the President of the US and the federal reserve chairman... but I didn't really know how much lone power Bernanke had.  I am under the impression he could bring the US economy to an absolutely terrorizing halt if he so much as felt like it.

I sometimes wonder what the stock-market would do if Bernanke, in one of his congressional meetings, decided to start singing show tunes or something crazy.  It's absolutely insane in some ways that any one man could become delusional and take the whole economy with him before anyone could do anything about it.

[doodle]

I like the "idea" of a permanent portfolio because it simplifies my life. Unfortunately, when investing becomes like a rigid religion, it can lead to underassesing the impact of obvious long term secular trends.

I am curious for example with all of this talk of hyperinflation....if gold started to shoot up toward 3000 dollars an ounce and the fiscal situation was looking more and more dire.....and Ben Bernanke's forehead was getting shinier and shinier as sweat beads trickled over his brow during congressional testimony would you rush out to sell your gold and transfer it into long bonds? How many here would pause and think if they were throwing good money after bad?

How many people here if you were living in Japan would feel comfortable holding 25% of your assets in long bonds yielding 1.3% looking at the demographics and HUGE fiscal issues that that government is staring down?

A permanent portfolio is a bit of an oxymoron I think because I believe that certain risky / high loss events can be avoided. At least I like to think that they can...

I like Clives tweak of shortening up the bond duration to a five year ladder. I think that is something that won't greatly harm the portfolios return and could avoid a potentially big loss for someone nearing the age of retirement.

[Lone Wolf]

What do the "board of governors" really do?  Doesn't Bernanke have the power to do whatever he wants, for the most part?

The votes usually go the Chairman's way, but I think it's hard to tell the difference between cause and effect.  If an FOMC decision yields more than 1 or 2 dissenters it calls the Chairman's power into question.  (From what I understand, they kind of poll the room to make sure the vote goes smoothly, although this is obviously hearsay!) 

I sometimes wonder what the stock-market would do if Bernanke, in one of his congressional meetings, decided to start singing show tunes or something crazy.  It's absolutely insane in some ways that any one man could become delusional and take the whole economy with him before anyone could do anything about it.

Yeah, seriously!  I was never comfortable with all the "maestro" talk surrounding Alan Greenspan in the 2001 timeframe.  It's not that I thought he was doing a bad job.  It was this notion that there was supposed to be this one guy "directing" things.  Economies are emergent beasts.  Having one guy with a big brain trying to centrally plan something, even something as seemingly "simple" as the discount rate is a very strange idea.  What if that guy shows up to testify before Congress wearing a tutu and a rubber glove on his head?  Why inject this unnecessary element of fragility into our economic system?

What would the market reaction be if Ben Bernanke shaved his beard?  Would this be like Samson got his head shaved?

It's just such a contrast to the power of emergent, decentralized, sturdy systems that really work best in practice.  I guess there's a deep-seated need in people to feel like "someone's in charge".

[Gumby]

I am curious for example with all of this talk of hyperinflation....if gold started to shoot up toward 3000 dollars an ounce and the fiscal situation was looking more and more dire.....and Ben Bernanke's forehead was getting shinier and shinier as sweat beads trickled over his brow during congressional testimony would you rush out to sell your gold and transfer it into long bonds? How many here would pause and think if they were throwing good money after bad?

You bet I would. Those LT bonds would be awesome at 18%!

I think you underestimate the power of Treasury bonds. You see them as an instrument on the verge of failure. But, the fact is that Treasuries can't really fail without taking down the entire world's financial markets with them. If Treasuries fail, it's game over. End of the world. This is why the Treasury market isn't crashing right now — money managers can't price the "end of the world" into their current investment models. So, they choose to ignore the problem, for better or for worse. China and Japan (and others) feel the same way. Even if China and Japan wanted to sell Treasuries they wouldn't be able to find buyers, and there wouldn't be enough alternative safe assets in the world for that money to flow into. Even hinting that they would sell their bonds would instantly kill their own investment. They are, for all practical purposes, stuck with Treasury bonds.

If Treasuries fail, and you're holding foreign currency ETFs, or commodities ETFs, or you're shorting Emerging markets, you will be unable to capture your winnings because the whole house of cards will come crumbling down and the markets will probably grind to a halt. Cash machines will stop working. Your accounts will be frozen, etc. This is probably the biggest reason why the Treasury market hasn't already self-imploded. The market doesn't know how to factor an end of the world scenario. How does a money manager justify rushing from Treasuries to gold if the gold delivery may not even be honored in an end of the world situation? And the Treasury market is so big that even if most people wanted to sell their Treasuries, they wouldn't be able to because even if they could find buyers, there wouldn't be any other assets left to absorb the tsunami of cash running out of them.

So, Treasuries live on for no other reason than their sheer size and complexity. And despite all of that, HB Reader is right (in another thread) when he says that Congress can bring the house of cards down if it wants to. But, if they do, it will probably be the end of investing as we know it. So, people — right or wrong — aren't convinced that it's going to happen.

Your investment style seems to be banking on the end of the world (i.e. Treasuries failing). But, are you really preparing yourself for the end of the world if you're still investing with electronically-based assets (via EM shorts, currency/commodity ETFs, etc)? I'm not convinced you're really thinking the 'end of the world' scenario through with an ETF-based Jim Rogers portfolio.

How many people here if you were living in Japan would feel comfortable holding 25% of your assets in long bonds yielding 1.3% looking at the demographics and HUGE fiscal issues that that government is staring down?

Many Japanese own long bonds and they actually prefer those bonds over other risky Japanese investments — that's actually why the yields are so low in the first place.

A permanent portfolio is a bit of an oxymoron I think because I believe that certain risky / high loss events can be avoided. At least I like to think that they can...

If it were only that easy!

I like Clives tweak of shortening up the bond duration to a five year ladder. I think that is something that won't greatly harm the portfolios return and could avoid a potentially big loss for someone nearing the age of retirement.

I think that Clive's tweak is very similar to PRPFX — which seems right up your alley. PRPFX also holds 10% Swiss Francs, to hedge against the dollar, which you could also consider. It's not a fail safe plan, but at least it's PP-like.

[doodle]

Gumby,

You bet I would. Those LT bonds would be awesome at 18%!

I know you were exaggerating a bit with the 18% but if long term rates were to even double you would have to question the survival of the system because at that point nearly 1/2 of tax revenues would be taken up servicing the debt.

That would be a "game over" scenario.

You are right that currently there are not any alternatives to treasuries but emerging markets capital markets in China, Brazil, Korea, Africa, Southeast Asia are developing. Soon treasuries won't be the only place in the world to safely park your money. We WILL have to compete with a deeper international bond market.

Many here realize that the United States is fading as the epicenter of world capital markets. The demographics and fiscal strength of emerging markets gives them a big advantage over the aging, debt bloated western economies.


I LOVE the idea of a long term portfolio....a semi-permanent portfolio... but the home country bias to the US (which is very vulnerable in the longer term) and exposure to LT treasuries after 30 years of declining rates are two issues that I see as dangerous.



I agree that my portfolio would probably look a lot more like PRPFX that the 4x25

[MediumTex]

I know you were exaggerating a bit with the 18% but if long term rates were to even double you would have to question the survival of the system because at that point nearly 1/2 of tax revenues would be taken up servicing the debt.

That would be a "game over" scenario.

Really?  Would the U.S. not still be the largest economy in the world with the largest military, a relatively stable political system and enormous domestic deposits of natural resources?

With those structural advantages, I would say it's not game over, but rather GAME ON!

You are right that currently there are not any alternatives to treasuries but emerging markets capital markets in China, Brazil, Korea, Africa, Southeast Asia are developing. Soon treasuries won't be the only place in the world to safely park your money. We WILL have to compete with a deeper international bond market.

Are you kidding?  You're seriously comparing the U.S. treasury market to China, Brazil and Africa?  I think that if you spent a month in those countries and continent you might reconsider your opinion.  Just to focus on Brazil for a moment, I think it was you who posted the chart of sovereign debt defaults/hyperinflation events in the last 100 years and Brazil was like the New York Yankees of that list.

Many here realize that the United States is fading as the epicenter of world capital markets. The demographics and fiscal strength of emerging markets gives them a big advantage over the aging, debt bloated western economies.

Wait a second, the U.S. isn't the only country with a lot of debt.  The one and only way that an emerging market economy can become self sustaining is if a domestic middle class emerges.  The problem, though, is that a middle class demands a lot more than the peasantry, including human rights, access to the political system, protection of property rights and free expression of political beliefs.  Does anyone really think communist China is about to allow such a class to emerge?  How about Russia? 

The U.S. isn't the only country in the world with problems.

I LOVE the idea of a long term portfolio....a permanent portfolio but the home country bias to the US whcih is currently very vulnerable and exposure to LT treasuries after 30 years of declining rates are two issues that I see as dangerous.

Whoa!  The PP doesn't have home country bias, it has world reserve currency and safest bond market bias.  We just happen to be living in that country, which makes the PP an especially appealing option for the U.S. investor.

Doodle, I don't know what to tell you.  You seem like a person who likes the idea of a safe and stable investing method, and you have stumbled upon exactly that in the form of the PP.  For reasons I don't fully understand, you don't seem willing to accept that the PP may actually work exactly as promised.  In reading your posts, it seems as if you think that your current concerns about the PP are somehow new, and that there haven't been similar reasons to worry about the PP since the day it was conceived.  The key insight that any PP investor must come to, however, is that these reasons to worry are precisely what makes the PP work so well.  If there wasn't one or more PP asset that everyone hated, there would be no opportunities to buy low and sell high.

For those of us who use and appreciate the PP, there is often a history of painful investment lessons as we have moved from one thing to another in the process of figuring out how difficult successful investing really is.  In many cases, the difficulty arises not from trying to conquer the market, but from trying to conquer your own fear, preconceived notions and other factors that often cause people to run with the herd even as they imagine that they are acting independently.

The PP will be here when you are ready for it.  I urge you to keep the strategy in the back of your mind.  If, however, you find another approach to investing that better matches up with your own risk tolerance and temperament and leads you where you want to go, then I say don't look back.

The PP is not for everyone.  It wouldn't have been for me 10 years ago.

[HB Reader]

I like the "idea" of a permanent portfolio because it simplifies my life. Unfortunately, when investing becomes like a rigid religion, it can lead to underassesing the impact of obvious long term secular trends.

I am curious for example with all of this talk of hyperinflation....if gold started to shoot up toward 3000 dollars an ounce and the fiscal situation was looking more and more dire.....and Ben Bernanke's forehead was getting shinier and shinier as sweat beads trickled over his brow during congressional testimony would you rush out to sell your gold and transfer it into long bonds? How many here would pause and think if they were throwing good money after bad?

How many people here if you were living in Japan would feel comfortable holding 25% of your assets in long bonds yielding 1.3% looking at the demographics and HUGE fiscal issues that that government is staring down?

A permanent portfolio is a bit of an oxymoron I think because I believe that certain risky / high loss events can be avoided. At least I like to think that they can...

I like Clives tweak of shortening up the bond duration to a five year ladder. I think that is something that won't greatly harm the portfolios return and could avoid a potentially big loss for someone nearing the age of retirement.

doodle --

Absolutely, you always wonder if you are throwing good money after bad when you rebalance.  I had exactly those doubts when I bought stocks in early 2009 and gold back in 2003 (around the time I retired).  Buying a long dated Treasury bond in the early 1980s required a major act of will for me.  But the PP gives you a framework within which to do it that assures that you won't be wiped out, even if things keep going one way. 

It's not always easy and it's certainly not a rigid religion.  It is taking profits and recognizing that trends (secular or cyclical) are often only "obvious" in hindsight.   

Having some separate speculative money in a VP to bet on your expectations can help.  But if you find yourself using it only to "hedge" directly against your more mechanical PP moves, you probably need to rethink your overall strategy.