Why you should not use the Permanent Portfolio
Posted by John T. Reed on
A reader of my How to Protect Yourself from Hyperinflation & Depression book says he is going to put his assets in the “Permanent Portfolio.” That is a simple-minded portfolio of equal parts stocks, gold, bonds, and cash or treasury bills. It was invented by the late Harry Browne.
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Albert Einstein said that, “Everything should be made as simple as possible, but no simpler.” Browne’s portfolio violates that rule.
.
My wife and I own some gold eagle coins. She wanted to keep them because she inherited them from her brother. I would have gotten rid of them. She let me convert half of them to junk silver, which I did. I would also get rid of the junk silver, but she wanted to keep that for the same reason.
.
Here is my article on gold, most of which applies to silver as well. The matter is not a close call and, except for one point—the nuttiness of gold bgs—inarguable.
.
https://www.johntreed.com/…/60940227-disadvantages-of-gold-…
.
Stocks lost 90% of their value in the Great Depression. I am not real big on recommending such an asset in a book about how to protect yourself from depression.
.
Bonds, USD cash, and Treasury Bills are all dollar denominated. During hyperinflation, US dollars and other dollar-denominated assets like bonds become worthless. Note that I did not say worth less; worthless. I am damned well not going to recommend dollar-denominated assets in a book about protecting yourself from inflation.
.
Bonds and Treasury bills also have credit risk. During the Great Depression, there were many safe bonds that were honestly rated AAA like top corporations and the US government. The national debt-to-GDP ratio then was 17%.
.
Those days are gone. US government bonds and bills have been lowered to AA by S&P and they are liars to say they are that good.
.
The US national debt-to-GDP ratio is now 107% (https://www.usdebtclock.org/). That is approaching the all-time record of 122% during the Korean War. That ratio was not so bad because everyone knew government spending was going to be drastically cut when about 15 million military personnel and civilian defense factory workers got fired after the wars, which they were.
.
Today’s over-100% ratio is NOT from temporary war spending. It is from PERMANENT entitlement spending. The average American has long been casually saying that they know they are not going to get their social security because the federal government is going bankrupt.
.
They are correct that will happen. That is why I wrote the book. But they are nuts to speak of that casually and not taking emergency steps to prepare for it.
.
What about buying AAA corporate bonds? There are now only two: Johnson & Johnson and Microsoft, and Johnson & johnson is being sued for asbestos in baby powder. I would not complain too much about buying them, but in a depression or hyperinflation, I expect they will sell fewer cans of baby powder and fewer copies of Windows. And even if they pay as agreed, they are US dollar-denominated. If there is high inflation, you will get all your interest and principal, but it will be worthless.
.
My point here is that they can also go bad withOUT high inflation. When my wife graduated from college she went to work for the Pennsylvania Railroad which had a AAA bond rating at the time. Several weeks later they declared bankruptcy and defaulted on their bonds. That is, they went from the highest rating to the lowest, overnight.
.
The theory of the Permanent Portfolio is that it achieves some sort of ultimate diversity. Bull!
.
In terms of a single risk—hyperinflation or lesser high inflation—50% of it is worthless: bonds and cash or Treasury bills. In terms of another single risk—deflation or depression—stocks lost about 90% of their value in the Great Depression.
.
The inflation-adjusted price of one troy ounce of gold has varied from $236 to $2,164 in the space of about nine years (Dec. ’70 to January ’80). In other words, in fluctuates wildly—up to ten times or one tenth of its previous value.
.
Today, 2/12/20, it is $1,565.80. The long-term average gold price adjusted for inflation is about $650. That means it spends half its time above that and half below, which suggests it is over priced when it is above that.
.
At present, the price of silver is $17.54. It’s historical average is around $15.40 so it is less overpriced than gold but still overpriced.
.
My book takes a whole different approach than the usual financial planner. There is a simple concept that is more difficult to do in practice but still takes care of most of the objective in the title of my book. If you are currently concerned about the price of something rising in the future—and you sure as hell should be with entitlement spending on a run-away-federal government train—buy it now.
.
What if you are concerned about the price of EVERYTHING going up in the future? Buy everything now.
.
Start with your biggest expense: housing. How do you buy all the housing you’ll ever need now? Buy a free-and-clear house. That will leave you with taxes, insurance, and repairs, but one of those can be minimized by buying in low property tax areas. HI is the lowest with a tax rate of .27%.
.
And you must know a concept the financial planners seem not to know: VALUE IN USE. If you own a rental house that you do not live in, it’s market value fluctuates like any other price.
.
But a home that you LIVE IN during a time of high inflation protects you from having to pay far higher rent as you would if you were a tenant. Similarly, if the value of the house goes down as it did in the Great Depression, you as the owner occupant of a free-and-clear home are unaffected. The value IN USE is unchanged by either inflation or deflation.
.
Financial planners see FINANCIAL assets as the solution to inflation or depression. If you need money you sell asset A—like gold—and pay for what you need to buy, selling assets triggers transaction costs and gain taxes.
.
What if you can’t afford a free-and-clear house now? Buy one in the normal fashion: make a small down payment and get a mortgage for the rest. In hyperinflation, your mortgage will become super easy to pay. And your house will rise in dollar value.
.
In deflation,, your house will drop in value, but the deflation-adjusted cost of your mortgage payments will soar. You may get foreclosed.
.
You need some liquidity. You cannot buy groceries with a house. How can you have liquidity while avoiding holding USD cash? Own foreign currency that you keep OUTSIDE the US. Any gold you own should also be outside the US. Being outside the US protects it from capital controls. Those always accompany high inflation. They outlaw ownership of any currency other than the hyperinflated one. They also outlaw possession of gold. Another source of liquidity that is not adversely affected by inflation or deflation are circulating US nickels.
.
Their melt value today 2/12/20 is 81.86% of its face value. In inflation, the melt value rises. In deflation/depression its value cannot fall below the “five cents” engraved upon each one. It is a unique investment where you can win, but you cannot lose and there are no transaction costs for buying or selling nor any need for an assay as with gold coins.
.
I am a book author, I have thousands of copies of my books in my garage. No prices are marked on them. They are a hedge against inflation and are liquid in small, normal sales quantities.
.
You can also buy lots of long shelf life food, paper products, soap, razors, and all sorts of stuff you need over time.
.
Generally, you can save utility and transportation costs by living in a mild climate area—like HI—and by living near work or school or grandchildren or some other frequent destination of yours.
.
I will not put my whole book here. It’s too big and I sell it.
.
Albert Einstein said that, “Everything should be made as simple as possible, but no simpler.” Browne’s portfolio violates that rule.
.
My wife and I own some gold eagle coins. She wanted to keep them because she inherited them from her brother. I would have gotten rid of them. She let me convert half of them to junk silver, which I did. I would also get rid of the junk silver, but she wanted to keep that for the same reason.
.
Here is my article on gold, most of which applies to silver as well. The matter is not a close call and, except for one point—the nuttiness of gold bgs—inarguable.
.
https://www.johntreed.com/…/60940227-disadvantages-of-gold-…
.
Stocks lost 90% of their value in the Great Depression. I am not real big on recommending such an asset in a book about how to protect yourself from depression.
.
Bonds, USD cash, and Treasury Bills are all dollar denominated. During hyperinflation, US dollars and other dollar-denominated assets like bonds become worthless. Note that I did not say worth less; worthless. I am damned well not going to recommend dollar-denominated assets in a book about protecting yourself from inflation.
.
Bonds and Treasury bills also have credit risk. During the Great Depression, there were many safe bonds that were honestly rated AAA like top corporations and the US government. The national debt-to-GDP ratio then was 17%.
.
Those days are gone. US government bonds and bills have been lowered to AA by S&P and they are liars to say they are that good.
.
The US national debt-to-GDP ratio is now 107% (https://www.usdebtclock.org/). That is approaching the all-time record of 122% during the Korean War. That ratio was not so bad because everyone knew government spending was going to be drastically cut when about 15 million military personnel and civilian defense factory workers got fired after the wars, which they were.
.
Today’s over-100% ratio is NOT from temporary war spending. It is from PERMANENT entitlement spending. The average American has long been casually saying that they know they are not going to get their social security because the federal government is going bankrupt.
.
They are correct that will happen. That is why I wrote the book. But they are nuts to speak of that casually and not taking emergency steps to prepare for it.
.
What about buying AAA corporate bonds? There are now only two: Johnson & Johnson and Microsoft, and Johnson & johnson is being sued for asbestos in baby powder. I would not complain too much about buying them, but in a depression or hyperinflation, I expect they will sell fewer cans of baby powder and fewer copies of Windows. And even if they pay as agreed, they are US dollar-denominated. If there is high inflation, you will get all your interest and principal, but it will be worthless.
.
My point here is that they can also go bad withOUT high inflation. When my wife graduated from college she went to work for the Pennsylvania Railroad which had a AAA bond rating at the time. Several weeks later they declared bankruptcy and defaulted on their bonds. That is, they went from the highest rating to the lowest, overnight.
.
The theory of the Permanent Portfolio is that it achieves some sort of ultimate diversity. Bull!
.
In terms of a single risk—hyperinflation or lesser high inflation—50% of it is worthless: bonds and cash or Treasury bills. In terms of another single risk—deflation or depression—stocks lost about 90% of their value in the Great Depression.
.
The inflation-adjusted price of one troy ounce of gold has varied from $236 to $2,164 in the space of about nine years (Dec. ’70 to January ’80). In other words, in fluctuates wildly—up to ten times or one tenth of its previous value.
.
Today, 2/12/20, it is $1,565.80. The long-term average gold price adjusted for inflation is about $650. That means it spends half its time above that and half below, which suggests it is over priced when it is above that.
.
At present, the price of silver is $17.54. It’s historical average is around $15.40 so it is less overpriced than gold but still overpriced.
.
My book takes a whole different approach than the usual financial planner. There is a simple concept that is more difficult to do in practice but still takes care of most of the objective in the title of my book. If you are currently concerned about the price of something rising in the future—and you sure as hell should be with entitlement spending on a run-away-federal government train—buy it now.
.
What if you are concerned about the price of EVERYTHING going up in the future? Buy everything now.
.
Start with your biggest expense: housing. How do you buy all the housing you’ll ever need now? Buy a free-and-clear house. That will leave you with taxes, insurance, and repairs, but one of those can be minimized by buying in low property tax areas. HI is the lowest with a tax rate of .27%.
.
And you must know a concept the financial planners seem not to know: VALUE IN USE. If you own a rental house that you do not live in, it’s market value fluctuates like any other price.
.
But a home that you LIVE IN during a time of high inflation protects you from having to pay far higher rent as you would if you were a tenant. Similarly, if the value of the house goes down as it did in the Great Depression, you as the owner occupant of a free-and-clear home are unaffected. The value IN USE is unchanged by either inflation or deflation.
.
Financial planners see FINANCIAL assets as the solution to inflation or depression. If you need money you sell asset A—like gold—and pay for what you need to buy, selling assets triggers transaction costs and gain taxes.
.
What if you can’t afford a free-and-clear house now? Buy one in the normal fashion: make a small down payment and get a mortgage for the rest. In hyperinflation, your mortgage will become super easy to pay. And your house will rise in dollar value.
.
In deflation,, your house will drop in value, but the deflation-adjusted cost of your mortgage payments will soar. You may get foreclosed.
.
You need some liquidity. You cannot buy groceries with a house. How can you have liquidity while avoiding holding USD cash? Own foreign currency that you keep OUTSIDE the US. Any gold you own should also be outside the US. Being outside the US protects it from capital controls. Those always accompany high inflation. They outlaw ownership of any currency other than the hyperinflated one. They also outlaw possession of gold. Another source of liquidity that is not adversely affected by inflation or deflation are circulating US nickels.
.
Their melt value today 2/12/20 is 81.86% of its face value. In inflation, the melt value rises. In deflation/depression its value cannot fall below the “five cents” engraved upon each one. It is a unique investment where you can win, but you cannot lose and there are no transaction costs for buying or selling nor any need for an assay as with gold coins.
.
I am a book author, I have thousands of copies of my books in my garage. No prices are marked on them. They are a hedge against inflation and are liquid in small, normal sales quantities.
.
You can also buy lots of long shelf life food, paper products, soap, razors, and all sorts of stuff you need over time.
.
Generally, you can save utility and transportation costs by living in a mild climate area—like HI—and by living near work or school or grandchildren or some other frequent destination of yours.
.
I will not put my whole book here. It’s too big and I sell it.
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