Gyroscopic Investing

In their book, Rowland and Lawson say to split your assets 4 X 25, and they have a table showing the performance of such a portfolio from 1972 to 2011.

Peter Schiff has a new book on the market.  The title is The Real Crash, and the marquee on the top of the cover says America's Coming Bankruptcy.  If Schiff is right, then a different set of rules apply.  Schiff recommends a three-pronged approach:  (1) quality dividend-paying foreign stocks in the right sectors, (2) liquidity, and less volatile investments, such as cash and foreign bonds, (3) gold and gold mining stocks.

Both PP and Schiff claim to be "able to sleep at night" approaches.  The big difference seems to be whether or not you believe in something which has never happened before:  the bankruptcy of the U.S.  Seeing as no one knows the answer to this question, would it make sense to put half your assets into the PP approach, and the other half into the Schiff approach?

I used to think Peter Schiff was a genius.  It wasn't until I held the PP for a while and watched the US 30 year treasury bond at work that I realized he really wasn't. 

He's an inflationist, and basically a dime a dozen (albeit entertaining on occasion). 

The PP holds 25% gold, so even if Schiff is right and the US "goes bankrupt" (something that I don't think will happen in the near future for a lot of reasons), you're going to be better protected than you would be with any other strategy that I can think of (including the ones advocated by Schiff).

I get phone calls from Peter Schiff's brokerage from time to time and sometimes take the time to the explain my current investing strategy. 

It's very fun. 

I tell the sales rep that I hold a portfolio that conists of 25% US stocks, 25% US dollars, and 25% US long term treasury bonds, and 25% gold. 

He then tells me that hyperinflation is coming.  I then tell him again that I have 25% gold in my portfolio.

He tells me that this isn't enough. 

I ask him how much gold he has.

He tells me I need mining stocks and foreign stocks.

I ask him how these have done compared to US Treasuries of late.

etc...

Bottom line is that 25% gold covers you pretty well for the scenario that Schiff has been screaming about for years and, with the PP, while you wait for the US to "go bankrupt," you can enjoy some nice returns from US stocks and US Treasuries. 

Another thing to keep in mind about Schiff...how well did his strategy work in 2008-09, when the housing bubble, that he himself predicted, burst?   

Harry Browne was initially an inflationist who made many of the same bets and arguments that Schiff does currently.  He made a lot of money doing so, but later admitted that he was simply lucky.  The PP was his attempt to diversify out of a portfolio that was dependent on one kind of economic environment for its success.  He knew all of these arguments when he designed the PP, and I don't really think that much has changed since.

Ask yourself a couple of the following questions:

- What would cause the U.S. to go bankrupt?
- Are the constraints on the federal government the same as those acting on an individual, family, city, or even state government?
- If the U.S. government defaulted on its debts, what do you think would be the reaction in foreign stock markets?
- What about foreign central banks and foreign debt-issuing governments whose debt you'd be holding?
- Which safe and useful liquid assets can you own if you're worried about your home country's currency going to zero?
- What do you think would happen to a publicly-traded gold mining company that conducts its business in a currency that fails?

A lot of Schiff's arguments are intuitively appealing to a skeptical-minded conservative- or libertarian-leaner (such as myself), but dig deeper. Don't take everything he's saying at face value. Find out when he started making these predictions. Why hasn't t happened yet? And how well would you have done if you'd listened to him and invested in his recommended manner at that time?

The real difference between Schiff's strategy and Harry Browne's is that the former is predicated on the belief that you can safely predict the future while the latter assumes that you can't. If Schiff is right, you might make a lot of money. But if he is wrong you could take a big hit. With the PP you are unlikely to take a big hit in any scenario short of Armageddon. And even in a true SHTF scenario the damage would be limited while most investment strategies not expressly tailored in advance to the crisis de jure would be exposed to potentially ruinous losses.

I have grown weary of the purveyors of disaster porn. This broken record has been playing since 1972 (or even 1933). One day maybe they will be right. But if you are going to orient your portfolio to a specific and very extreme scenario then you had best be prepared for the consequences if you are wrong.

bill wrote: The big difference seems to be whether or not you believe in something which has never happened before:  the bankruptcy of the U.S. 

The US may not have declared bankruptcy, but the US federales defaulted twice in the 20th century.

-devaluation of US$ from $20 to $35 / oz Au, compliments of FDR
-closing the gold window and allowing Au to rise from $35/oz to what it trades at today


To answer your larger question, others have already beaten me to that.

bill wrote:Peter Schiff has a new book on the market.  The title is The Real Crash, and the marquee on the top of the cover says America's Coming Bankruptcy.  If Schiff is right, then a different set of rules apply.  Schiff recommends a three-pronged approach:  (1) quality dividend-paying foreign stocks in the right sectors, (2) liquidity, and less volatile investments, such as cash and foreign bonds, (3) gold and gold mining stocks.

Both PP and Schiff claim to be "able to sleep at night" approaches.  The big difference seems to be whether or not you believe in something which has never happened before:  the bankruptcy of the U.S.  Seeing as no one knows the answer to this question, would it make sense to put half your assets into the PP approach, and the other half into the Schiff approach?

I think it is a very risky idea to wager everything on one particular outcome, because if that outcome never happens large losses can roll in.

So this applies to betting against the dollar. I think also that there should be some context here because Schiff wants to diversify into non-dollar bonds, etc. but other currencies can be even less stable. The Euro for instance is likely to go away before the dollar. IMO. It was always a bad idea and each year the pressure just mounts. So diversifying into Europe can actually increase risk for U.S. investors.

Then with gold there is a risk that the gold markets goes cold for 20+ years as it has in the past.

If someone wanted to hedge their bets, I'd say that a core permanent portfolio is a good start and just make a second variable portfolio that allows you to sleep well. Since the Permanent Portfolio already holds 25% in gold, I'm not sure I'd be looking to lever it up with more gold and gold miners. If anything, I'd be inclined to start including real estate index funds if I wanted another kind of inflation protection, but still wanted income generation. Then you could consider adding more international stocks and international bonds (preferably only from the stronger countries in Europe and other developed countries outside of europe if you felt strongly about it).

Outside of that, I tend to ignore doom and gloom stuff and also pieces that are overly optimistic (Dow 36,000). I like to be very neutral and agnostic and keep my portfolio that way as well. I don't want any surprises and investing is inherently risky and full of surprises. So I try very hard to limit where I take my risks and what kind of risks those are. Investors can't eliminate the possibility of loss as every investment has a risk. Yet, at the same time concentrating bets means the investor is seeking out a lot more risk that can cause a large loss.

All of the replies here are excellent and I want to 2nd them. I consider myself extremely libertarian and it sort of disgusts me to buy government debt. But the reality is that they have the power to print and guarantee their debt which makes those long term treasuries a good bet when people are looking for safety. And of course the permanent portfolio requires you to hold 25% in gold and that should be enough to protect you from inflation. Even if Schiff is right and eventually we encounter hyperflation, the permanent portfolio can protect you from volatility between now and then.

The world is really complicated. Even though Bernanke is printing dollars like crazy, there is credit deflation. And the rest of the world is devaluing their currencies too. So the exchange rate of the dollar relative to other currencies has to be considered. So at the end of the day price inflation is pretty low. With the economy still doing poorly I'd expect deflation sooner than inflation. However the policy response to deflation might be to inflate away!

Considering the many ways the future can play out, the permanent portfolio is a great way to maintain and grow your savings safely.

bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

melveyr wrote: bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

I am concerned about something like this happening: http://www.pbs.org/wgbh/commandingheigh ... ation.html

melveyr wrote: bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

I suspect that he is worried because he has been watching a lot of CNBC and other mainstream news outlets whose job it is to make sure that people remain in a perpetual state of worry.

bill wrote:

melveyr wrote: bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

I am concerned about something like this happening: http://www.pbs.org/wgbh/commandingheigh ... ation.html

Can you walk us through the mechanics of how a Weimar Germany hyperinflation could occur here, given the structure of our monetary system and the fact that the U.S. treasury market is the largest and most liquid in the world?

In other words, who would benefit from a "U.S. bankruptcy"?  If no one would benefit, why would it be permitted to happen, given that it's very easy to avoid bankruptcy and related liquidity crises when you are free to increase the money supply any time you want to?

Think about it.

bill wrote:

melveyr wrote: bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

I am concerned about something like this happening: http://www.pbs.org/wgbh/commandingheigh ... ation.html

Okay so you are worried that the US will enter a war that destroys its productive capacity, and then it will be saddled with debt in a foreign currency imposed by the winners of the war, and then the US will deficit spend its own currency to buy the other currencies in the FOREX market to pay back the foreign denominated debt?

And you worried about this to the level where you wouldn't want to hold the greatest deflation hedge during a period with extreme deflationary pressures?

I am new to this stuff, so please bear with me.  Is it not true that running the printing presses is the same as adding water to the soup?  And is it not true that interest rates are so low that they have nowhere to go but up, which means I'd have to hold my nose while putting 25% of my life savings into 30 year bonds?  I am testing the waters as to whether or not to drink the PP Kool Aid.  Thanks.

bill wrote: I am new to this stuff, so please bear with me.  Is it not true that running the printing presses is the same as adding water to the soup?  And is it not true that interest rates are so low that they have nowhere to go but up, which means I'd have to hold my nose while putting 25% of my life savings into 30 year bonds?  I am testing the waters as to whether or not to drink the PP Kool Aid.  Thanks.

I like that soup analogy. The Fed is changing the composition of the soup, not the level. It sucks out some T-Bills with its straw, and spits out some Federal Reserve Notes back into the soup. The overall level of the soup doesn't change. Some people think that if the soup's composition changes to more Federal Reserve Notes than T-Bills than there will be massive inflation. However, the Fed has been altering the soup heavily for the last four years and the soup's composition has not had an effect on the price level.

Another country to look at is Japan. Japan has been messing with the soup using the exact same technique as the Fed for over 20 years. Thus far, the composition of the soup has not translated into higher inflation or growth for them either.

Additionally, one thing to keep in mind is that private sector banks also contribute to the soup. Every time they make a loan, that adds more soup. Every time someone pays off or defaults on their loan, that slurps some soup out.

So now imagine that a lot of people default on their debts (slurp), and then afterward a lot of nervous people start to pay off their loans (slurp) and then spooked banks stop extending as many new loans (slurp). As you can see, that's a lot of soup leaving the pot and the banks aren't adding much back in.

That's why at a time like this, congress can add soup to the pot but it doesn't really cause any inflation; in their own stupid, clumsy, ignorant way, they're actually helping to keep the level of soup in the pot more stable than it would be if they didn't. Without that, there would be substantial real deflation and you're darn right I'd buy those 30-year bonds.

Of course, once the private-sector soup infrastructure starts working better, adding more government soup could indeed cause that bowl to start overflowing.

bill wrote: I am new to this stuff, so please bear with me.  Is it not true that running the printing presses is the same as adding water to the soup?  And is it not true that interest rates are so low that they have nowhere to go but up, which means I'd have to hold my nose while putting 25% of my life savings into 30 year bonds?  I am testing the waters as to whether or not to drink the PP Kool Aid.  Thanks.

Here is where a lot of the things you read go off the rails. Basically, if the money being "printed" is not going into circulation to be used (no demand), then there won't be inflation. The banks could each get $1 Trillion handed to them, but if it sits as electronic credits on their books, or in their vaults as paper, and nobody wants or needs to have loans, etc. then the money will not cause inflation. It is just sitting there doing nothing. So the fact that the Fed makes a lot of easy money available means little if nobody needs/wants it right now. It is only when people are demanding that money and it enters the economy quickly that we'll start to see inflation.

But when that starts to happen in earnest, the central bank can immediately start removing dollars from circulation and cut it off almost as quickly as it began if they wanted.

It is a delicate balance though when, how, if that happens and that's an issue to contend with. But the main point is having money available from the central bank does not mean inflation must come. The problem fundamentally in a deflationary situation is you can't make people spend money they don't have or don't want. That's what is going on right now.

For instance, the other day I was discussing with someone their finances and they said that if they had any extra money right now they'd use it to pay off all their debt they had acquired over the years immediately. Now that is a common sentiment. That kind of mood means even if they were handed a huge tax credit tomorrow to spend in the economy it may in fact just go to pay off the debts and not make it into the economy. And again, no money going into the economy in excess to the products and services being offered, then no serious inflation will be happening. Demand will remain weak and inflation will not be an issue.

bill wrote:

melveyr wrote: bill,

Are you concerned about the US government running out of US dollars, when it is literally the only source of US dollars? Or are you worried about inflation, when the inflation rate is the lowest it has been in decades?

I am concerned about something like this happening: http://www.pbs.org/wgbh/commandingheigh ... ation.html

Bill
When we lose a world war and get saddled with devastating reparations denominated in a currency we can't control then I will start worrying. Hyperinflation is not a monetary phenomenon. It is a political one. I can't think of a single case of hyperinflation that was not symptomatic of a failed state. Civil war. civil unrest, foreign invasion, revolution or some other form of violent regime change, incompetent and corrupt government unable to provide basic services or ensure the rule of law. Those are the triggers along with debt denominated in a currency you can't control that tend to bring about currency collapse. Money printing may spark inflation. But hyperinflation is a completely different animal.

bill wrote: I am concerned about something like this happening: http://www.pbs.org/wgbh/commandingheigh ... ation.html

I a huge fan of The Commanding Heights, but as the other replies have shown, Germany's hyperinflation has to be taken into context.

Even if we went to double digital interest rates again due to rising inflation expectations, it still wouldn't be hyperinflation.  It would be painful to the T-Bonds, sure, but unless you are a competent market timer, I'd stick to the PP where you are hedged by the other three assets.

bill wrote: I am new to this stuff, so please bear with me.  Is it not true that running the printing presses is the same as adding water to the soup?  And is it not true that interest rates are so low that they have nowhere to go but up, which means I'd have to hold my nose while putting 25% of my life savings into 30 year bonds?  I am testing the waters as to whether or not to drink the PP Kool Aid.  Thanks.

It's best not to approach investing like you would a math or physics problem.  What seems rational in investing almost always leads you in the wrong direction.

craigr wrote: For instance, the other day I was discussing with someone their finances and they said that if they had any extra money right now they'd use it to pay off all their debt they had acquired over the years immediately. Now that is a common sentiment. That kind of mood means even if they were handed a huge tax credit tomorrow to spend in the economy it may in fact just go to pay off the debts and not make it into the economy. And again, no money going into the economy in excess to the products and services being offered, then no serious inflation will be happening. Demand will remain weak and inflation will not be an issue.

I think that analysis stops short.

If they paid off their debt:

• what would they do with the money that was formerly going to debt payment?  Maybe spend it?
• what would they do with the increased net worth aka asset:liability ratio? Incur more debt?

A couple of my neighbors were talking at this spring's irrigation meeting about how they wanted to buy a new car but still owed too much on the current car and were not able to roll the difference into the new loan.  If they could pay off their car debt, I expect they would go out and buy or lease new cars.

Slotine wrote:

Pointedstick wrote: Of course, once the private-sector soup infrastructure starts working better, adding more government soup could indeed cause that bowl to start overflowing.

Ah, but that's when we find out that the Fed hasn't just been adding more soup, but has instead been adding stale saltine crackers.  They've sunk to the bottom to form a fine gooey mess, which they'll just quickly scoop up with a strainer.

Exactly. Congress is the school board president who decides how much soup to add. If you want to complain about the level of soup, it's him you want; the Fed is just the middle-aged lunch lady with the ladle.

Pointedstick wrote:

Slotine wrote:

Pointedstick wrote: Of course, once the private-sector soup infrastructure starts working better, adding more government soup could indeed cause that bowl to start overflowing.

Ah, but that's when we find out that the Fed hasn't just been adding more soup, but has instead been adding stale saltine crackers.  They've sunk to the bottom to form a fine gooey mess, which they'll just quickly scoop up with a strainer.

Exactly. Congress is the school board president who decides how much soup to add. If you want to complain about the level of soup, it's him you want; the Fed is just the middle-aged lunch lady with the ladle.

Nice imagery.

I like it.

MediumTex wrote:

Pointedstick wrote:

Slotine wrote: Ah, but that's when we find out that the Fed hasn't just been adding more soup, but has instead been adding stale saltine crackers.  They've sunk to the bottom to form a fine gooey mess, which they'll just quickly scoop up with a strainer.

Exactly. Congress is the school board president who decides how much soup to add. If you want to complain about the level of soup, it's him you want; the Fed is just the middle-aged lunch lady with the ladle.

Nice imagery.

I like it.

It is nice imagery, although he could have added a hair net.

AdamA wrote:

MediumTex wrote:

Pointedstick wrote: Exactly. Congress is the school board president who decides how much soup to add. If you want to complain about the level of soup, it's him you want; the Fed is just the middle-aged lunch lady with the ladle.

Nice imagery.

I like it.

It is nice imagery, although he could have added a hair net.

Maybe a hair net made from strands of 24 karat gold that he wears solely because of "tradition."

MediumTex wrote: Nice imagery.

I like it.

+1!