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Is PP US-centric ? How can I deal with it ?
Posted: Fri Jul 13, 2012 3:52 pm
by k9
Hello,
I'm from Europe, France more exactly, and I'm rather interested in the PP as it contains sound ideas. However, as it is designed, I think it only works in the US, or probably a few other countries, but is far from being universal, for a few reasons. Well, maybe I'm wrong, but I'd like to know why.
First, an example of a country where PP failed : Greece. You only had stocks from your own country ? Well, it's a shame, because it is not a wonderful period for stocks, but Greece is a small country, volatility is bigger, and greek stocks suffered a lot recently : -45% last year. Well, after all, it's OK, it's a recession, and if something doesn't perform well in your portfolio. You have half of your portfolio in greek public bonds, because they work best during recession / deflation and should compensate for the loss in stocks, right ? Well, actually, too bad for you, the govt defaulted on its debt, you now lost 60% on this part of your portfolio if I'm right. Oh, OK, there's gold. Gold didn't behave too bad. But it's far for compensating the loss of your bonds. I know if the US lets the dollar implode, gold will skyrocket as the dollar is the world's #1 money. Well, that's not the case for other moneys, so too bad for our greek PPer, but his PP made a two-digits loss this year, so much for the smooth ride ; and this is not an accident, the last few years were rather bad too, and I don't think catching up the losses in the next few years will be easy.
Less important but it does count too, there's the problem of fiscality. Here in France, holding bonds is highly discouraged (taxes are close to 50%, not including your broker's fees) while governement-saving accounts are free of taxes and fees and offer a decent remuneration (they are like tax-free TIPS with guaranteed capital and total liquidity).
I guess a French or a Greek Harry Browne wouldn't advise for the same kind of PP as the US one, while following the same 16 "golden rules". So, according to you, what are the key points of the PP that would let me make one adapted to my country's situation (or other countries) ?
Re: Is PP US-centric ? How can I deal with it ?
Posted: Fri Jul 13, 2012 4:05 pm
by craigr
k9 wrote:
Hello,
I'm from Europe, France more exactly, and I'm rather interested in the PP as it contains sound ideas. However, as it is designed, I think it only works in the US, or probably a few other countries, but is far from being universal, for a few reasons. Well, maybe I'm wrong, but I'd like to know why.
First, an example of a country where PP failed : Greece. You only had stocks from your own country ? Well, it's a shame, because it is not a wonderful period for stocks, but Greece is a small country, volatility is bigger, and greek stocks suffered a lot recently : -45% last year. Well, after all, it's OK, it's a recession, and if something doesn't perform well in your portfolio. You have half of your portfolio in greek public bonds, because they work best during recession / deflation and should compensate for the loss in stocks, right ? Well, actually, too bad for you, the govt defaulted on its debt, you now lost 60% on this part of your portfolio if I'm right. Oh, OK, there's gold. Gold didn't behave too bad. But it's far for compensating the loss of your bonds. I know if the US lets the dollar implode, gold will skyrocket as the dollar is the world's #1 money. Well, that's not the case for other moneys, so too bad for our greek PPer, but his PP made a two-digits loss this year, so much for the smooth ride ; and this is not an accident, the last few years were rather bad too, and I don't think catching up the losses in the next few years will be easy.
Less important but it does count too, there's the problem of fiscality. Here in France, holding bonds is highly discouraged (taxes are close to 50%, not including your broker's fees) while governement-saving accounts are free of taxes and fees and offer a decent remuneration (they are like tax-free TIPS with guaranteed capital and total liquidity).
I guess a French or a Greek Harry Browne wouldn't advise for the same kind of PP as the US one, while following the same 16 "golden rules". So, according to you, what are the key points of the PP that would let me make one adapted to my country's situation (or other countries) ?
We talk about this in the book. Basically it comes down to this, the Permanent Portfolio can really only work in countries that aren't corrupt. I don't mean the kind of corruption you may find in the US financial system, etc. But more of government corruption where they plunder assets, drive currencies into the ground routinely, etc. The Permanent Portfolio works well, but it can't perform miracles.
So what we would advise in the book for instance is if you are in the smaller countries (especially those with certain bad financial histories), then you should diversify widely even outside of your place of residence. This is a nod to history. So someone in Greece I would say that you should own the entire EU of stocks, bonds and cash. If you feel strongly about your cash/bonds then only buy German bonds as they have historically been a strong economy. If I was in France, I would feel a little better about owning more of my own country's bonds, but I'd still consider spreading the money across the entire Eurozone.
For less developed countries (Latin America, parts of Asia, etc.), then I'd say a world diversified stock portfolio and buying US bonds/t-bills for the cash is not a bad idea. This is especially true in some places where the local currency follows the US dollar very closely as a central bank policy.
But yes you are right that the portfolio may not work in all cases, but then again what does? I think though the principles still apply and that is to own a broad base of stocks, broad base of bonds that are linked to your economy (like Euro bonds) and cash that is issued by the relevant central bank. Gold is currency neutral and should be owned as directly as possible. If you are in a part of the world where you can put the gold overseas easily, then that should be strongly considered as well.
Welcome to the forum...
Re: Is PP US-centric ? How can I deal with it ?
Posted: Fri Jul 13, 2012 7:08 pm
by TBV
k9:
I've nothing profound to add to Craigr's reply, except to say that the PP doesn't prevent losses. It does, however, minimize them. The unspecified double digit loss that a Greek PP investor may have incurred in the last year is certainly better than being all-in with any combination of Greek bonds and/or stocks alone. I think you'd agree with that. One might say that, in hindsight, it would be better for Greeks to invest elsewhere, perhaps in the United States. But if we said that, then the PP would be US-centric, wouldn't it?
Months back, there was a discussion here about how the PP fared in Iceland during its financial meltdown. The answer was "not great", but a lot better than the returns available to most non-PP Icelandic investors.
Re: Is PP US-centric ? How can I deal with it ?
Posted: Fri Jul 13, 2012 9:19 pm
by Lone Wolf
Craig's advice is great. If I were building a Euro-based PP, I'd take Browne's advice and buy the absolutely most stable bonds I could. In my mind, this would be German bonds. (The interest rates that Germany pays on her bonds shows that the bond market agrees with me on this.) A PP that used German bonds would have treated a Greek citizen quite well.
Having said that, I do think that you make a strong point. The PP does work best for the dollar. The Euro is big enough that I think that a Euro-based PP is probably okay as well. Smaller currencies, though, just don't relate closely enough to gold for the package to work quite as well IMO. This was the trouble that Iceland had when she experienced terrible inflation but didn't have gold take off like they needed. If the dollar had tanked the way that the Icelandic Krona did, you can be sure that gold would have gone to the moon.
Re: Is PP US-centric ? How can I deal with it ?
Posted: Fri Jul 13, 2012 10:16 pm
by clacy
I think the US is probably in the strongest position as far as the PP goes. I feel like if the US ever goes down (80+% stock losses, or massive/rapid currency devaluation or government default), it probably means the rest of the world in in just as much trouble or more.
Re: Is PP US-centric ? How can I deal with it ?
Posted: Sat Jul 14, 2012 9:56 am
by k9
Thank you all ! A lot of food for thought... Well I'm taking your advice for German bonds, I was thinking about it already (even if foreign bonds are rather hard to buy, here ; it looks like banks try to prevent you from doing this as they prefer selling their own packages).
Actually, that's what I did for the stock portion : a Eurostoxx 600 tracker. I'm even wondering whether I'll take a worldwide tracker (tracking MSCI world, for instance). Hmm...
Well, at least, gold is really easier to deal with
Re: Is PP US-centric ? How can I deal with it ?
Posted: Sat Jul 14, 2012 1:30 pm
by Ad Orientem
See the linked blog dedicated to a European Permanent Portfolio in this thread.
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4
Re: Is PP US-centric ? How can I deal with it ?
Posted: Sat Jul 14, 2012 6:17 pm
by MachineGhost
k9 wrote:
I guess a French or a Greek Harry Browne wouldn't advise for the same kind of PP as the US one, while following the same 16 "golden rules". So, according to you, what are the key points of the PP that would let me make one adapted to my country's situation (or other countries) ?
The real issue is what is the global core economy and the global currency issuer? As with Rome in the old days, that is currently the USA. None of the EuroZone countries, including Germany, are currency issuers, so their cash and debt are not safe to hold. But realize that even the British Empire was the core economy once and it lost that status when the USA choose not to bail them out. So while nothing is truly permament, its not worth taking risks with non-core peripheral economies in the PP.