Gyroscopic Investing

I get that the Permanent Portfolio is built on the interplay between four different asset classes that should behave in complementary ways depending on whether we are in (or transitioning between) four different economic cycles. I get it and I like it. Upside is somewhat blunted, but ruinous downside is seriously hedged.

So what if we are not in a free market? Here we have a situation where the bond and interest rate market is being synthetically manipulated by our central bank, at least insofar as 80% of US debt is being purchased by a contrived buyer with manufactured money  that would not exist in a free market. Is this an aberrant and atypical scenario, and does it pose a new and unique risk to the engineering behind the Permanent Portfolio?

Is the central bank manipulation one of the reasons that three of the four asset classes are trading at comparatively high or near-record levels? When in the back-test analysis has that happened before? Unless I missed it, three out of four assets performing strongly did not seem to be contemplated in Fail Safe Investing.

Or could it be as simple as the central bank's manipulation has simply swapped one asset's performance for another? For example, were it not for the contrived market for US debt, would interest rates be considerably higher, bond prices lower and thus cash would be performing better than it is now? What would happen to the gold market and the stock market if the Fed were not doing what it is doing?

Or maybe the answer is that the manipulation can only go on for a finite period, and eventually the laws of the free market will assert through a (potentially massive) correction and the PP will respond accordingly and normalize it's direction?

Don't misinterpret me. I'm a PP fan, albeit a new one. I just want to understand whether we're in uncharted contextual waters and what it might mean.

glenn

I think these are great questions to ask and I look forward to hearing others ideas.

A few thoughts which might have relevance:

-Does the Fed action in setting rates reflect in any way what the market rate of capital would be without their interference? Or is their rate setting pure central planning, unrelated to reality?

-Although the scale of the Fed's action is unprecedented, its really nothing new since Nixon closed the gold window? This is when we moved to a pure faith-based currency. HB developed the PP under this regime.

I think the PP is a portfolio that actually was designed to benefit from a manipulated market far more than other portfolios. Harry Browne was a very wise man, and understood the nature of the macroeconomy after we came off a gold standard back when nearly nobody else did and the conventional wisdom held that treasury bonds were terrible investments.

Consider: the PP holds four asset classes that respond to "market manipulation", but in different ways. Stocks zoom up during liquidity injections, bonds zoom up when the interest rate is forced down, gold zooms up when the real interest rate falls, and cash returns higher coupon payments when rates rise.

No market has ever been truly free. They've all been manipulated, regulated, or hobbled to some extent by government. One of the shining features of the PP, in my opinion, is that it lets you profit from this state of affairs rather than just banging your head futilely against it.