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Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 3:50 pm
by glennds
This is not a rhetorical question. I am interested in opinions on why the PP is down as much as it is at the moment.

By way of background, I started my PP in October 2012, and inception to date I am down about 7%. I didn't expect a riskless investment but I didn't expect to be down this much either, especially when SPY is on a tear YTD. Upon entering the program I gave myself three years for a full evaluation, so seeing as we're not even 20% into that evaluation period, I don't feel I can pass judgment on the PP strategy just yet. However I think it is completely appropriate to look at how the portfolio is behaving under present conditions and ask ourselves why. I have two theories and I'm interested in others:

Here's thesis #1:
HB talked about four distinct economic conditions (Prosperity, Inflation, Deflation and "Tight Money" Recession). I think there might be a fifth economic condition which I am going to call Stuck in the Middle (think old Stealer's Wheel song). Thanks mostly to our central bank we have a situation where Inflation and Deflation are in a tug of war and Prosperity and Recession are in a tug of war also. This leaves our Permanent Portfolios in a situation where they cannot get a foothold or develop any traction or direction. The good news is this can't go on indefinitely.

These days I am thinking of Ben Bernanke like Dr. Moreau in the Island of Dr. Moreau. Admittedly a fictional story, but in it Dr. Moreau tried to mutate animals into humans and what happened? It didn't work and eventually the mutants reverted back to their natural ways. So here's our Fed using QE and other techniques to mutate the economy into something it isn't which has us Stuck in the Middle. This can't go on indefinitely and eventually the natural order will be restored and the economy will cycle into one of the four categories HB articulated and the PP will regain it's footing and there you have it.

Thesis #2:
The PP worked well for a long time but the correlations between the asset classes have changed because the world around us has changed and now the PP doesn't work as envisioned anymore. Spoiler alert - Okay, this thesis is mostly facetious. At any time in history where the PP suffered any drawdown, the "now things are different" theory is there for the taking. However, I do worry a little about how gold and stocks are moving together as much as they are lately.

For the time being I'm sticking with Thesis #1 and betting that once we are no longer Stuck in the Middle, the PP can get its foothold and one or more of the asset classes will take off and for real, not manipulated reasons.

Any other theories?

Thanks

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 3:52 pm
by melveyr
I really think this can be best thought of as "tight money." Of course, it's not actually tight money but more appropriately "tighter than expected" money.

Historically the PP has not responded well to tighter than expected monetary policy, most notably in 1981, so i don't think the PP is just in uncharted waters. I think lots of people didn't really do their HW before buying into it though.

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 4:09 pm
by MediumTex
It was easy to buy into the PP when it was doing nothing but stacking one great year on top of another.  It's harder to buy it when it appears to be struggling.

I think that we are just in a transitional period where people want to believe that we are on the edge of a new period of prosperity when we most likely are not.  As a result the PP is behaving as it might in the early stages of a secular bull market for stocks, as we saw in 1982 forward.  The truth, however, is that gold and LT treasuries probably have a few more years of solid performance before the stock market is really ready to take off.  (JMHO, of course).

From an average annual returns perspective, there really isn't anything unusual happening with the PP right now.  The problem is if you are a person who bought into the PP over the last 12 months, it probably feels like you've been stung by yet another poorly timed investment decision.  If you really find the logic of the PP persuasive, however, you shouldn't be troubled by a single digit downward drift.  The PP is low volatility, but it's not NO volatility.

If a person abandoned the PP for another investment strategy, it seems likely that they would be drawn to the latest hot strategy and they would probably be buying that strategy near a top as well.  There is nothing wrong with buying near a top as long as you have the conviction to stick with the strategy through ups and downs.  Most investors don't have such conviction, though.  The good news with the PP is that its down periods are far less dramatic than most other strategies, which should make its down periods a bit easier to get through (though it's obviously causing many people a lot of discomfort).

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 4:16 pm
by Pointedstick
"Tighter than expected" money makes the most sense to me. But I can't think of any other portfolio that would weather such conditions better aside from one that's even more cash-heavy than the PP. Most investment portfolios are 0% cash and they're getting absolutely rocked right now.

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 4:30 pm
by Khisanth
When Margin Calls Attack!

Leverage, Margin, and Credit. Specifically, with those three things, one doesn't expect to buy more cash with it -- it's used to buy more equities, or bonds, or commodities.

In such events where deleveraging occurs, all assets go down as selling happens when margin calls occur.

I'm sure there's probably a myriad other reasons why, but I believe that's one of the bigger fishes in the room.

EDIT: Evidently I need to work on my paraphrasing or explanations. I got my storyline from here: http://market-ticker.org/akcs-www?post=222113

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 6:06 pm
by Dieter
Has there ever been a period where the three volatile assets have all had big gains over multi-year periods?  Stocks since 'po, Gold for 10+ years, LTT for 30ish?

I started my PPish investment in Aug '12. All three seemed overvalued to me at the time, but I have sub-optimal foresight ability, so didn't know which. For the time being, the market deemed LTT and Gold the more overvalued.

As for intrinsic changes, all assets in the PP, esp Gold, are easier/cheaper to trade than 30 years ago, which probably has some impact on correlation / volatility.

And then there is government actions that have a bit of impact (just saying they'll change QE from 75B ish/mo to 65B (or whatever it was), and look at the market react....

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 6:17 pm
by smurff
glennds wrote: These days I am thinking of Ben Bernanke like Dr. Moreau in the Island of Dr. Moreau. Admittedly a fictional story, but in it Dr. Moreau tried to mutate animals into humans and what happened? It didn't work and eventually the mutants reverted back to their natural ways. So here's our Fed using QE and other techniques to mutate the economy into something it isn't which has us Stuck in the Middle. This can't go on indefinitely and eventually the natural order will be restored and the economy will cycle into one of the four categories HB articulated and the PP will regain it's footing and there you have it.
The original Dr. Moreau movie was "Islands of Lost Souls" from 1932 (with Charles Laughton as the "Doctor" and Bela Lugosi as one of the mutants, the "Sayer of the Law.").  In that movie, the animal-human mutants became angered at the Mad Doctor, who had beaten them with a whip as a matter of course.  He also tortured them as part of their "treatment."  By the end, Bela Lugosi's character led them in a rebellion.  They captured him and subjected the Doctor to his own tortuous "treatments"  in the "House of Pain."  (BTW, there was enough in this film to make me wonder how it got past the Hays Code, but I guess they really weren't enforcing censorship code until two years after this film.)

So I wonder what will happen to Dr. Bernanke when the rebellion comes about.  The mutant economy will not be stopped by QE lashing, but how will it treat him?

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Mon Jun 24, 2013 10:51 pm
by moda0306
In a world where the "natural" interest rate is near zero (evidenced by low inflation and little new lending), simply raising expectations of future rates a bit will induce a "tight money" environment where the volatile PP assets go down and cash is left trying to buffer the blow.

This is what 1981 looks like when you change expectations during a deflationary recession instead of an inflationary spiral.

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Tue Jun 25, 2013 7:44 am
by dualstow
glennds wrote:
These days I am thinking of Ben Bernanke like Dr. Moreau in the Island of Dr. Moreau. Admittedly a fictional story, but in it Dr. Moreau tried to mutate animals into humans and what happened? It didn't work and eventually the mutants reverted back to their natural ways. So here's our Fed using QE and other techniques to mutate the economy into something it isn't which has us Stuck in the Middle. This can't go on indefinitely and eventually the natural order will be restored and the economy will cycle into one of the four categories HB articulated and the PP will regain it's footing and there you have it.
H.G. Wells! I read the book about ten years ago and while my tiny brain cannot decide whether Bernanke is good or bad, I love the analogy!

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Tue Jun 25, 2013 8:37 am
by goodasgold
melveyr wrote: I really think this can be best thought of as "tight money." Of course, it's not actually tight money but more appropriately "tighter than expected" money.

Interesting analysis, Melveyr. I don't claim to know much about economics, but in the short term we do seem to be experiencing a "tight money" recession, as the Fed desperately tries to inject a little inflation into the mix, leading to a rare, simultaneous fall in all three of the PP's volatile segments. For this reason (IMHO), cash is now king.

In advance of hitting a rebalancing band, I am tempted to jump the gun and cash in some of my appreciated stock funds, before the stock decline accelerates, in order to gather some "dry powder" in advance of a major rebalancing episode. I know this move would violate PP orthodoxy, but that's the way I feel.

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Tue Jun 25, 2013 5:18 pm
by sophie
I'm with you both here...I think what might be happening is more of a fear of tight money as a result of reduction in Fed bond buying.  So the markets are reacting in 1981 fashion.

I had the same reaction ("darn, wish I'd rebalanced when stocks were still at a peak"), but we really don't know yet if the fear reaction will continue, producing a large sustained shift in asset prices, or if it will fizzle out eventually.  I suspect the latter, and that the upward move in stocks may well resume.  Unless Professor Trelawney comes along to tell me which way things will go, I'll just have to stick to the plan.

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Tue Jun 25, 2013 8:29 pm
by dualstow
sophie wrote: Unless Professor Trelawney comes along to tell me which way things will go, I'll just have to stick to the plan.
Somehow I don't trust that woman. ;-)

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Tue Jun 25, 2013 10:41 pm
by murphy_p_t
maybe the 5th is "financial repression"?

https://en.wikipedia.org/wiki/Financial_repression

did HB ever refer to repression?

Re: Why do you think the Permanent Portfolio is down at this time?

Posted: Wed Jun 26, 2013 9:27 am
by blackomen
Not everything might think this way but I'm actually glad that the PP is staying beat down for now as I'm quite young..

I'd rather buy more and more PP cheaply than have it shoot up and be forced to buy it at higher prices when I receive my paycheck each month.