Permanent Portfolio Blinders

[Gumby]

Most systems work great until you introduce them to real humans.  Although all of us have grown up under our current worldwide fiat money experiment, it is still in its infancy. Maybe it will last, however if history is any guide, I wouldn't bet on it.

It's kind of funny, but you kind of sound like a Cylon (from Battlestar Gallactica). You won't understand the humor in that unless you're familiar with the series. But, basically, the Cylons (who were a self-aware, artificial intelligent race, created by mankind) saw the human race as imperfect, sinful and not worthy of survival — then they proceeded to slaughter virtually the entire human race.

MT often reminds us that the world we live in is flawed, but this is our existence. This is the world we live in. You can choose to live your life with never ending lament, worry and disappointment, right up until the bitter end...or you can try to accept the world and our species for what they are and thank your lucky stars that you live in an amazing (and somewhat flawed) country like the United States. The choice is yours. I just hope you'll stop posting your fear-mongering/doomsday reports each Tuesday. It's getting a bit tiresome...particularly since we already have the PP to prepare us for these bad situations.

[TBV]

doodle,

I'm just going to throw my Keynesian buddies a bone out there because I think they're right when they talk about the "confidence fairy" in business.  

Businesses want demand in this environment.  Period.  They may not like the uncertainty and taxes and regulation, but take those away and keep their factory running at 75% capacity, and they aren't going to all of a sudden open up a new addition to the factory or hire somebody.  They simple earn a bit more and pocket it... probably invest in something less risky.

They need demand before they'll create more jobs.  Demand comes from consumers.

Now we know consumers don't care about regulation... and especially today, with damaged household balance sheets, they're not going to consume unless they have higher, more reliable income and/or improved balance sheets.

That's where I find the supply-siders to be in complete separation from reality.  No amount of deregulation or tax cuts on the production end is going to magically create jobs, because "the factory ain't at full capacity."  That is literally the very simple, straightforward fact that it comes down to.  The government could eliminate regulation, cut supply-side taxes by 2/3, send Jennifer Aniston in to service the owner for being such a good entrepreneur, significantly reduce union power, enact strict tort reform, and you know what the business owner is going to ask at the end of the day when deciding whether to hire?  "Are we running near full capacity?"  The answer will still be no.

Why?  Because households are still in a rut of high risk of unemployment, low income, and crappy household balance sheets.

This is the crux of the entire policy debate, and I find it's where the right falls completely flat with their narrative.

Now am I saying it's more "moral" to send checks out to all these families at the expense of savers?  Not really.  But let's not act like creating a little more tax and regulatory certainty is going to create jobs.  It's mathmatically just not logical at all.

Moda:

So, demand must come first, is that it?  And investment decisions are dependent on the state of current demand, thus your reliance on the "running at full capacity" theme.  Are you sure?  If so, then how do you explain the role of venture capital, which by definition focuses on incubating companies who have precious little current demand for their products and services?  Many wildly successful companies were started in recessions.  Here's a short list.... http://www.focus.com/fyi/14-big-busines ... recession/

[Gumby]

If so, then how do you explain the role of venture capital, which by definition focuses on incubating companies who have precious little current demand for their products and services?  Many wildly successful companies were started in recessions.  Here's a short list.... http://www.focus.com/fyi/14-big-busines ... recession/

All of those companies were started with the belief that the demand already existed. As the article stated...

Why do these companies succeed? Usually it's because the founders recognized a market need and filled it

[smurff]

Considering that oil is a major input of our modern food production system which sustains 7 billion people, I'm thinking more Mad Max than Little House on the Prarie.....more like Donner Party.

Maybe we will invent nuclear powered farm tools to get us by.

And we'll get the elderly to run the nuclear tractors.  Sort of like what was proposed in Japan for handling the Fukushima disaster.  Lots of radiation damage--cancer, etc.--won't show up for decades.  The idea is that by having elderly technicians do the clean-up and other activities at Fukushima, radiation-related cancers should not be a problem because those technicians would have already died a natural death long before the cancers would appear.

That's the theory, at least.

[doodle]

My brother just told me that the Fijians used to strangle the elderly when they became a drag on the tribe.

I need to remember that when I write my congressman again about long term solutions to medicare.

[Coffee]

Okay-- I'm guilty of only skimming the various posts in this thread, so I may be off base with this contribution:

But, Doodle: If you truly feel that the system is utterly and completely forked beyond repair, then the only rational solution is to go full bore 100% Rawlesian Survivalist-mode... isn't it?

[doodle]

I don't know why everyone equates "system forked" with living in a bunker and eating beans. This situation has happened many, many times in many, many countries.

Here is how Brazil dealt with inflation problem. Interesting: http://www.npr.org/blogs/money/2010/10/ ... ved-brazil

Here is a very good video series on Argentina: http://www.youtube.com/watch?v=rH6_i8zuffs

I don't think we are looking at a Mad Max scenario. I think we are certainly looking at some very tough choices going forward and our system must inevitably undergo some large changes. I am just of the opinion that these large changes will not be implemented until the politicians are forced to react to a crisis.

I simply subscribe to the Von Mises outlook on credit booms and their outcome.

Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.

[Gumby]

I don't know why everyone equates "system forked" with living in a bunker and eating beans. This situation has happened many, many times in many, many countries.

Well, see, that's just it. All of those examples were in other countries that dealt with their own problems on the sidelines. If the dollar implodes, it could take the entire financial system with it (i.e. mad max scenario). Wall street doesn't seem to be willing to price that scenario because there wouldn't be a way to model it or fulfill the investments that bet on it happening. In other words, Wall street fund managers wouldn't see the logic to rush 100% into gold when the gold wouldn't be delivered anyway.

[doodle]

Gumby,

Yes, under this scenario a lot of people would lose a lot of money. It would be very disruptive to the worlds financial system. It could result in global changes to the way that the world does business. But is it something that is inconceivable? Of course not.

When the western Roman empire collapsed the world went into the Dark Ages. There was a cultural and economic deterioration. Granted, this didn't happen overnight, but in todays electronic age, events seem to happen much more quickly.

We have lived through a period of incredible peace and prosperity in the United States. But don't forget it was only 150 years ago that we were killing each other in a Civil War.

I simply look at the present situation with a huge historical bias. Maybe 100 years from now college students will be studying the great crisis of 2012. Maybe 100 years from now there will be no colleges because we will all be subsistence farming. I wouldn't be surprised by either outcome.

I am not saying that it is impossible to work our way through the present situation and achieve peace and prosperity again. I really hope to see the political leadership that puts our country on the right track. So far, I have seen many individuals who have the right idea, but very little movement in the right direction.

[Gumby]

I'm having trouble following your logic. Maybe you could walk me through it. The entire financial system is almost exclusively based on the soundness of US Treasuries.  If there's a crack-up boom of the US dollar, your bank will probably fail. Your ATM card will probably stop working. There won't be an easy way to access your accounts (since ATMs will run out cash or your bank account won't exist anymore). Markets will grind to a halt. Gold deliveries to your ETFs will stop. etc. No cashing in your ETFs. No Jim Rogers portfolio...

...It would be like walking into a casino and asking the floor manager if you could place a million dollar bet that his casino will fail someday. He would smile, direct you to the cashier, take your money and laugh all the way to the bank. Even if the casino fails, you'll still never see your money again.

So, how do you have a crack-up boom of the US dollar and claim your winnings?

[doodle]

I'm confused what people think when they look back throughout history and see the downfall of hundreds of great empires and civilizations and think that maybe this time is somehow different. Do people really think that the United States will maintain its position as global hegemon from now until eternity? I'm sure the Greeks, Romans, Aztec, Mayans, Ottomans...and hundreds of others couldn't conceive of a world where their civilization wouldn't the "king of the mountain". Why is this time in history so unique?

50 years ago the United States looked to be falling behind the Soviet Union in terms of science, world influence, space exploration etc. That "empire" subsequently crashed. People lost everything. I have met many of those people who were forced to start their lives again. Why is this outcome so inconceivable to people in the United States?

If our government continues to run up debt to 200% or 300% of GDP you get to a point where you are locked into a debt trap. There is no way out without restructuring. People will lose a lot of money. Our lifestyles and expectations will change. It will not be a "4 horseman" armageddon scenario, it will simply be a change.


I was just in Argentina a few months ago. Life goes on. People get by. We will too.

[doodle]

China continues to diversify: http://www.cnbc.com/id/43901695

[Gumby]

I'm confused what people think when they look back throughout history and see the downfall of hundreds of great empires and civilizations and think that maybe this time is somehow different. Do people really think that the United States will maintain its position as global hegemon from now until eternity? I'm sure the Greeks, Romans, Aztec, Mayans, Ottomans...and hundreds of others couldn't conceive of a world where their civilization wouldn't the "king of the mountain". Why is this time in history so unique?

50 years ago the United States looked to be falling behind the Soviet Union in terms of science, world influence, space exploration etc. That "empire" subsequently crashed. People lost everything. I have met many of those people who were forced to start their lives again. Why is this outcome so inconceivable to people in the United States?

If our government continues to run up debt to 200% or 300% of GDP you get to a point where you are locked into a debt trap. There is no way out without restructuring. People will lose a lot of money. Our lifestyles and expectations will change. It will not be a "4 horseman" armageddon scenario, it will simply be a change.


I was just in Argentina a few months ago. Life goes on. People get by. We will too.

We all agree with you that it's a possibility. That's not the question here. You can't have a crack-up boom with the world's reserve currency and just expect it to "simply be a change". ETFs will fail. Banks will fail. ATMs will run out of cash. It's illogical to place a bet on something if you can't claim your winnings. So, how do you claim your winnings if your crack-up boom prediction comes true?

Just answer the question.

At least Harry Browne had an answer for that.

[doodle]

In case most people haven't noticed the "worlds reserve currency" is already on very shaky foundations. China and Russia are transacting in their own currencies. I wouldn't be surprised if Middle East soon asks for some collateral for oil like gold or something else. We have terribly abused the worlds reserve currency and the rest of the world will continue to slowly divest itself of dollars as they are doing and move into other currencies. It won't happen overnight but this movement has been underway for years now.

Right now we are really at the crossroads. If the politicians wake up and enact some big legislation we can get out of this mess. But, if we get a few more years of squabbling with no plan and more aimless quantitative easing, you can kiss the American Dream goodbye.

People who are walking around like sheep thinking that everything is OK are deluded. We need strong leadership and a plan if we are going to dig ourselves out of this mess. If not, I think history provides us a pretty good idea of what happens.

As far as claiming my winnings...I will probably lose alot just like every other American. Who knows. I am still hopeful that we get a plan and start fixing this mess.

[melveyr]

Would you be happier if the government had a surplus?

[MediumTex]

I'm confused what people think when they look back throughout history and see the downfall of hundreds of great empires and civilizations and think that maybe this time is somehow different. Do people really think that the United States will maintain its position as global hegemon from now until eternity? I'm sure the Greeks, Romans, Aztec, Mayans, Ottomans...and hundreds of others couldn't conceive of a world where their civilization wouldn't the "king of the mountain". Why is this time in history so unique?

50 years ago the United States looked to be falling behind the Soviet Union in terms of science, world influence, space exploration etc. That "empire" subsequently crashed. People lost everything. I have met many of those people who were forced to start their lives again. Why is this outcome so inconceivable to people in the United States?

One of the premises behind the PP is that the scenario you describe does occur from time to time.

That's why we have 25% of our assets in gold when most people recommend no more than 5%-10% in gold as part of a balanced portfolio.

Do you think that the permanent portfolio is not designed to weather the scenario you are describing?  In recent times, it seems to have handled the live-fire test of Iceland pretty well.

I'm surprised that you don't recognize the elegance of the permanent portfolio design when you consider the situations you are imagining.  I would think that your doomsday tilt would make you embrace the PP, not take issue with it.

The problem, of course, is that doomsday is only one of the possible future scenarios, and we need to be ready for the others as well.  That's why we hold the four PP assets classes...because the world may end tomorrow, or it may not.

doodle, how are you translating your concerns into action?  In what way is the PP an incomplete response to your concerns?

[doodle]

Melvyr, surplus talk gets us back into the Money=debt MMT debate.

All of this serves to complicate the simple issue that the American lifestyle is being propped up by sacrificing future growth for present consumption. Yeah, you might have a nice car and a nice house...but your water system is rotten and your roads are full of potholes.

If the government keeps pumping up the consumption bubble and we don't put anything into capital investment our economy is going to be on life support.

If the government adds another 10 trillion to the debt in the next 5 years but it all goes to medical bills and restaurant tabs, what kind of a situation are we going to be in then?

[doodle]

Medium Tex,

Action steps:

1. Looking for land in a small stable close-knit community...possibly outside of US
2. Tilting away from long bonds and US currency. I only hold about 35% in US currency now.
3. Hoping and praying that we get some leadership.

[MediumTex]

We all agree with you that it's a possibility. That's not the question here. You can't have a crack-up boom with the world's reserve currency and just expect it to "simply be a change". ETFs will fail. Banks will fail. ATMs will run out of cash. It's illogical to place a bet on something if you can't claim your winnings. So, how do you claim your winnings if your crack-up boom prediction comes true?

I'm still trying to figure out what people would be buying if they were selling dollars en masse?

Wouldn't this mean that non-U.S. currencies would explode in value relative to the dollar, which would be like the largest manufactuing economy in the world (i.e., the U.S.) winning the lottery?  Sure the input prices would rise, but the plant and equipment costs would remain the same, which would provide an ENORMOUS competitive advantage relative to the rest of the world. 

As one example, the China story would come to a screeching halt if all of the offshored U.S. manufacturing suddenly came home because the U.S. became a cheaper place to do business.  Would that be a bad thing?  It seems to me that an enormous number of new U.S. jobs would be created.

Bear in mind, too, that each country that decides to abandon the dollar is probably also abandoning access to the U.S. military when it needs our help.  That will translate into a nice savings there.

[Gumby]

In case most people haven't noticed the "worlds reserve currency" is already on very shaky foundations. China and Russia are transacting in their own currencies. I wouldn't be surprised if Middle East soon asks for some collateral for oil like gold or something else. We have terribly abused the worlds reserve currency and the rest of the world will continue to slowly divest itself of dollars as they are doing and move into other currencies. It won't happen overnight but this movement has been underway for years now.

Right now we are really at the crossroads. If the politicians wake up and enact some big legislation we can get out of this mess. But, if we get a few more years of squabbling with no plan and more aimless quantitative easing, you can kiss the American Dream goodbye.

People who are walking around like sheep thinking that everything is OK are deluded. We need strong leadership and a plan if we are going to dig ourselves out of this mess. If not, I think history provides us a pretty good idea of what happens.

For Chrissakes, you don't need to convince us anymore that things are in bad shape. We get it. But, when you respond to our simple question like this...

I will probably lose alot just like every other American. Who knows. I am still hopeful that we get a plan and start fixing this mess.

...it's pretty clear to everyone that you haven't thought this through.

Harry Browne was asked the same question on his radio show. He simply responded by saying that the PP has 25% of your wealth in gold bullion coins. He recommended keeping half of those coins as close to you as possible (home safe, etc) and the other half in a vault overseas — in a country like Switzerland (unfortunately, this is more difficult to do these days). He went on to explain that having the bullion coins would probably be enough to get you to safety, and out of the country if necessary. The rest of your gold could be transferred or claimed separately. If not, then at least you'd have the other half of your gold. He was very much against Gold ETFs, because he said they would fail during a crisis.

That was his response.

Yours was...

I will probably lose alot just like every other American. Who knows. I am still hopeful that we get a plan and start fixing this mess.

We just feel like you haven't really thought your predictions through, and you don't even see that the rest of us already have a plan for that nightmare crack-up boom scenario!

[MediumTex]

Action steps:

1. Looking for land in a small stable close-knit community...possibly outside of US

What countries are you considering as possible landing spots?  I'm interested to know about countries where a foreigner can move into a small community and become part of the "close-knitness" of it.  This is normally a hard thing to pull off.

How strong is the local currency in your list of possible locations?  What is their history of inflation?

How is their bond market?  What rates are they paying on long term debt?

How dependent upon the U.S. are they (currency peg, foreign aid, military alliance, etc.)?  If the U.S. stopped providing any assistance of any kind, what effect would it have on the countries you are considering?  Do these countries trade with the U.S.?  You would have to assume that a lot of this would dry up in a U.S. armageddon scenario.

[moda0306]

MT,

You hit the nail on the head.  This is what I'm trying to say... that as the dollar enters the realm of looking truly unappealing to hold by foreign governments, this will lead to foreign demand for our goods and a positive trade balance.

This would be inflationary, but it's hardly the hyperinflationary disaster we hear about.

I think before we scream about high rinflation, we at least have to start seeing our trade balance start to shift back towards positive or some kind of mass social unrest and government corruption to occur.

[MediumTex]

Action steps:

2. Tilting away from long bonds and US currency. I only hold about 35% in US currency now.

So it sounds lilke you DO view the PP as an incomplete solution to the problems you are concerned about.

Are you not concerned that your predictions about the future may be wrong, and that you are needlessly speculating when the PP would provide you all the protection that you need?

If you had lived through the 1970s and early 1980s, you would know that the current social mood has happened before (I was a kid back then and remember well the overall foul mood among the people, disgust with politicians, fear over world events, etc.), and people back then were saying the exact same things you are saying now.  The problem is they were all wrong.  The U.S. didn't collapse; the U.S. dollar didn't collapse, the U.S. bond market didn't collapse; the U.S. never saw hyperinflation.  Are the people expressing similar fears today right this time?  I don't know, but I'm not interested in betting on the matter.  I would rather just snuggle up with my PP and a bowl of popcorn and watch things unfold without any money on any particular outcome.

I truly believe that you are not grasping the peace of mind that the PP can provide.  If you understood this dimension of it, I think you would feel differently.

But to be honest, I used to feel like you feel now.  It was something I just had to grow out of, and I don't say that to trivialize how you are feeling now; rather, I say that because I learned a lot of valuable lessons in the process of discovering that even when I was totally convinced of something I could still be totally wrong, and when I discovered that there is a viable alternative to this trial and error approach to reality in the form of the PP it really clicked with me.

doodle, I think you are running with the herd and you don't even know it.  When you are able to separate yourself from the groupthink you are participating in, I think the world will look like a very different place.

Remember that our ultimate goal is what Harry Browne called "a mental state of well-being."  Seek that and different paths may present themselves.

[doodle]

MT,

To achieve that mental state of well being I feel I must make some adjustments to PP.

As far as land I have been looking at a number of places, in no particular order of importance.

Rural Appalachia WV, TN, mostly as well as parts of Texas....how is the Hill Country?

Internationally, Southern Chile, Panama, potentially Southern Mexico

I prefer to stay in temperate climates. Cold weather doesn't suit me.

[doodle]

Oh....and Fiji.