Gyroscopic Investing

I understand how the PP works in the US. The theory is that if the US Collapsed, the 25% Long Term Bonds portion would drop to $0, the 25% cash portion drops to $0, the US Stock Market would be destroyed, but the gains in gold would be tremendous, because everyone worldwide would be piling all their previously held USD-assets into gold.

I imagine this only works because the US is so central to the entire global economy. If you lived in Zimbabwe and had 25% Zimbabwe stocks, 25% Zimbabwe govt bonds, 25% Zimbabwe cash, and 25% gold, and the country got destroyed, you'd essentially lose 75% of your assets, and gold likely wouldn't move very much.

The question is whether gold relative to Zimbabwe "assets" would rise, and the answer is probably yes, because Real Estate in Zimbabwe would likely be dirt cheap, but if the country collapsed, would you really want to live there? Also food and energy are global commodities, so your gold would have the same purchasing power for most of your spending needs as it did before the collapse.

Why did HB suggest the PP for non-USers, to use their local currency/bonds/stocks?

I understand the theory of "spend in dollars, invest in dollars; spend in Yen, invest in Yen," however most purchases are global commodities. Even real estate can be considered a global commodity, as evidenced in the housing crisis of 2008 where foreign investors swooped up real estate in the US, primarily in areas like Miami that are attractive as vacation destinations for rich foreigners.

There's also the argument that if the US economy collapses and you lost 75% of your portfolio, the whole world would be collapsed and we'd just need canned beans and ammo. However, at a certain point, this may no longer be true. It was true of England in 1600. It's no longer true of England now. If England were destroyed by a meteor tomorrow, the global economy would move on. Eventually the US is going to stop being such a huge part of the global economy.

Everything I've written in this thread is why I invest 50% of my equities in international stocks. This way, I still have 37.5% of my assets in non-US things. While my 12.5% allocation to international equities will likely be ravished if the US economy is destroyed, it's still some protection. Maybe with the US out of the picture, European companies will take over selling widgets to the rest of the world, and maybe my 12.5% international equities will rise substantially, along with my gold.

The primary question of this thread, is why does PP work in countries outside of the US? The fundamentals seem different.

I don't think the foundation of the PP is just to protect against the $USD collapse.  I think it is more a philosophy that these 4 major asset classes will bob and weave during various economic scenarios (prosperity, inflation, recession and deflation), but the portfolio together will usually rise in a low-volatility manor. Due to re-balancing, you will be buying low/selling high and consequently there is volatility capture.

I'm not sure whether this helps or not but,
1. canadian bonds will go up in the event of a canadian deflation.
2. canadian equities will go up in the event of a canadian prosperity.
3. I don't actually understand how gold is supposed to work for me as a canadian (since it protects against US devaluation, not canadian, right?) My feeling is that if there is inflation in canada, there will likely be inflation in the US too (?) causing gold to go up???

Despite my confusion over gold, canadian PP DOES work, as shown in the table below. (Sorry about the spacing. Not sure how to fix that.) The canadian PP returns are on the left (in CAD), the US returns on the right (in USD).

Gold TSX/TSM LT Bond ST Bond Returns

1972 46.0/48.9 27.4/16.9 8.1/5.7 3.6/3.9 21.27/18.8
1973 67.1/75.6 0.3/18.1 2.0/-1.1 5.2/6.1 18.65/15.6
1974 71.5/70.5 -25.9/-27.2 -4.7/4.4 8.0/9.1 12.22/14.2
1975 -21.8/-22.7 18.5/38.7 8.0/9.2 7.5/7.9 3.05/8.3
1976 -4.8/-3.8 11.0/26.7 23.6/16.8 9.3/8.9 9.78/12.2
1977 33.0/23.5 10.7/-4.2 9.2/-0.7 7.8/3.7 15.18/5.6
1978 48.5/36.7 29.7/7/5 4.1/-1.2 7.8/5.5 22.7/12.1
1979 123.1/136.3 44.8/23.0 -2.8/-1.2 11.8/10.4 44.23/42.1
1980 17.8/10.8 30.1/32.7 2.1/-4.0 13.4/14.1 15.85/13.4
1981 -33.1/-32.8 10.2/-3.7 -2.1/1.9 19.3/18.9 -6.53/-3.9
1982 19.2/12.5 5.5/20.8 46.0/40.4 15.5/19.5 21.55/23.3
1983 -15.3/-14.3 35.5/22.0 9.6/0.7 9.9/8.6 9.93/4.2
1984 -14.2/-20.2 -2.4/4.5 16.9/15.5 11.6/12.8 2.97/3.2
1985 11.8/6.9 25.1/32.2 26.7/31.0 10.1/13.2 18.43/20.8
1986 19.8/22.9 9.0/16.1 17.2/24.5 9.5/11/9 13.87/18.8
1987 15.1/20.2 5.9/1.7 1.8/-2.9 8.5/6.0 7.82/6.2
1988 -22.3/-15.7 11.1/18.0 11.3/9.2 9.6/5.9 2.43/4.3
1989 -5.7/-1.7 21.4/28.9 15.1/17.9 12.5/8.7 10.82/13.5
1990 -1.2/-2.2 -14.8/-6.0 4.3/5.8 13.7/8.9 0.5/1.6
1991 -10.4/-10.7 12.0/34.7 25.3/17.4 9.8/10.7 9.18/13.1
1992 3.7/-6.2 -1.4/9.8 11.6/7.4 6.7/6.8 5.15/4.4
1993 22.4/17.7 32.5/10.6 22.1/16.8 5.5/6.4 20.63/12.9
1994 3.8/-2.2 -0.2/-0.2 -7.4/-7.0 5.3/-0.6 0.37/-2.5
1995 -1.7/-5.9 14.5/35.8 26.3/30.1 7.3/12.1 11.6/18.0
1996 -4.1/-4.6 28.3/21.0 14.2/-1.3 4.8/4.4 10.8/4.9
1997 -18.0/-21.5 15.0/31.0 18.5/13.9 3.1/6.4 4.65/7.5
1998 6.3/-0.3 -1.6/23.3 12.8/13.1 4.7/7.4 5.55/10.8
1999 -5.1/-0.2 31.7/23.8 -6.0/-8.7 4.8/1.9 6.35/4.2
2000 -1.8/-5.3 7.4/-10.6 13.0/19.7 5.5/8.8 6.02/3.2
2001 7.0/2.4 -12.6/-11.0 6.1/4.3 4.4/7.8 1.23/0.9
2002 24.4/24.4 -12.4/-21.0 11.1/16.7 2.5/8.0 6.4/7.0
2003 -1.5/19.6 26.7/31.4 9.1/2.7 2.9/2.4 9.3/14.0
2004 -3.0/5.6 14.5/12.5 10.3/7.1 2.3/1.0 6.02/6.6
2005 13.9/18.1 24.1/6.0 13.8/6.6 2.6/1.8 13.6/8.1
2006 23.5/23.0 17.3/15.5 4.1/1.7 4.0/3.8 12.22/11.0
2007 12.2/30.9 9.8/5.5 3.4/9.2 4.3/5.9 7.42/12.9
2008 28.2/4.9 -33/-36.7 2.7/9.2 2.8/6.2 0.17/1.9
2009 7.9/24 35.1/28.9 5.5/-21.8 0.5/0.25 12.25
2010 22.3/29.2 17.6/17.4 12.5/9.2 0.5/2.3 13.22/14.5

CAGR 9.989 /~9.7

Generally, each indvidual asset class goes up and down together, even gold. In years where there is a negative correlation (ie: for canadians, the asset goes up, while for americans, the asset goes down), there is usually some other asset that compensates. This is sort of obvious when you look at the yearly average returns, which go up and down together.

I feel satisfied that the canadian PP will give me the returns I am looking for, so I am going to stick with it.
If you look at the calculator, here, you can plug in values for emerging markets to see what the returns are (not as good as if I just used the TSX): http://www.ndir.com/cgi-bin/downside_adv.cgi

I would be happy to have anybody critique my logic.

The central underpinning of the PP is that "the economy," for some reasonable definition of "the economy," moves between the four conditions, and that the four assets move predictably in relation to those conditions.  I don't think it matters whether "the economy" hosts the world reserve currency or not.  We've seen backtests that show the PP would've worked in non-reserve countries (Canada, Japan, Iceland).  And also in UK which used to have reserve currency status.

When a currency (hyper)inflates, the price of gold skyrockets relative to that currency.  That's true whether the currency has reserve status or not; see the Iceland example.  It's true that the reserve currency gets a bit of a boost in this regard.  But I think the principle still works for non-reserve currencies.

How would it have worked in Iceland when the economy collapsed recently? Wouldn't it just be re-shoveling gold back into the failing currency, failing bonds, and failing stock market?

See this detailed analysis by Marc De Mesel:
http://europeanpermanentportfolio.blogs ... eland.html

KevinW wrote: See this detailed analysis by Marc De Mesel:
http://europeanpermanentportfolio.blogs ... eland.html

Not just this, but as the Iceland stocks were skyrocketing a Permanent Portfolio investor would have been selling them down and rebalancing into things like gold along the way. So while there was a bad outcome in the economy, Permanent Portfolio users in that situation would likely have done markedly better than the typical Iceland investor.

Another thing about Iceland is that if you were there and the crash happened and you had an Icelandic PP, your purchasing power would be saved and all of your neighbors would be ruined. And this would have happened even with most of your portfolio ruined. So with your gold you could purchase at rock bottom prices people's homes, cars anything. Investing isn't only about growing your money, it's also about maintaining your purchasing power while everyone else's collapses. Don't look at the PP in a vacuum, compare it to how people's stock heavy portfolios would do in a crash.

Indices wrote: Another thing about Iceland is that if you were there and the crash happened and you had an Icelandic PP, your purchasing power would be saved and all of your neighbors would be ruined. And this would have happened even with most of your portfolio ruined. So with your gold you could purchase at rock bottom prices people's homes, cars anything. Investing isn't only about growing your money, it's also about maintaining your purchasing power while everyone else's collapses. Don't look at the PP in a vacuum, compare it to how people's stock heavy portfolios would do in a crash.

The problem is homes and cars are only a small portion of your spending needs. You also need to buy food and put gas in your car. You don't simply have to compare your portfolio to your local neighbor, but also to your global neighbors because everyone else in the world is "competing" to buy food and gas as well.

Thus your real purchasing power may be higher than your neighbors but still severely impact your standard of living.

Of course, there's no "better" alternative than the PP. However, I just don't think it works as well outside of the US to protect purchasing ability.

TripleB wrote:

Indices wrote: Another thing about Iceland is that if you were there and the crash happened and you had an Icelandic PP, your purchasing power would be saved and all of your neighbors would be ruined. And this would have happened even with most of your portfolio ruined. So with your gold you could purchase at rock bottom prices people's homes, cars anything. Investing isn't only about growing your money, it's also about maintaining your purchasing power while everyone else's collapses. Don't look at the PP in a vacuum, compare it to how people's stock heavy portfolios would do in a crash.

The problem is homes and cars are only a small portion of your spending needs. You also need to buy food and put gas in your car. You don't simply have to compare your portfolio to your local neighbor, but also to your global neighbors because everyone else in the world is "competing" to buy food and gas as well.

Thus your real purchasing power may be higher than your neighbors but still severely impact your standard of living.

Of course, there's no "better" alternative than the PP. However, I just don't think it works as well outside of the US to protect purchasing ability.

The same issues facing Iceland could very well favor the US. A market collapse can happen at any moment. If there were a big run up in stocks in this country we could see an Icelandic collapse. While the PP would make you better off than your neighbors, you are correct, you would still suffer. There is no real good solution. The PP can only do so much regardless of country. It cannot prevent disaster only mitigate it.

Triple B, fuel for your car and food are only partly priced by international commodity markets. We pay £1.31/l for petrol in the UK. That is because duty is set very high so as to price people off the road. If the GBP collapsed, then only 25% of that price would get pushed by the exchange rate change. For food, things are even more dramatic. If you buy a loaf of bread, you are paying for all of the domestic retailing, processing and logistics costs. I like making home made bread. I just bought flour for £1 for 4kg. That shows how tiny an amount the basic wheat commodity costs. Even if 4kg cost £10, I would be spending sweet FA. Foreign manufactured goods do get effected massively though. The 5% inflation we have in the UK is just a trickle through of the 30% devaluation we had in 2008.
Is it actually true that USD movements influence gold more than movements of other currencies? The euro-crisis seems to have caused both the USD and gold to together get stronger relative to GBP or euro. Indian purchasing power is a very big influence on the gold price. As Indian's get richer, they pay more for gold and India is the big gold importer.