21 August 2013

My future plans: Why I will remove long term government bonds from my Permanent Portfolio


  1. Hi Marc,

    a) 6% a year of return is already good. Purchasing power is increased because salaries are not increased at the same rate.

    b) Drawdowns and volatility are a bit difficult to handle, and I think you are more conservative type

    c) How will you be protected against deflation?


  2. Hi Frugal :)

    In my opinion salaries are losing purchasing power. Since they increase at a rate around 2% and I estimate true inflation around 5% they are losing around 3% per year in purchasing power. Strong proof for this is that one needs 2 salaries today to cover the expenses of an average household whereas 30/40 years ago 1 salary was enough!

    I think the PP gains you around 2% per year in purchasing power. Everything ofcourse depends on how high you estimate true inflation. As you know I had a big discussion about this on the permanent portfolio forum and supported my case with hard data: http://gyroscopicinvesting.com/forum/permanent-portfolio-discussion/chances-of-losing-(and-winning!)-are-close-to-zero/msg62321/#msg62321

    I certainly have a conservative part in me that detests drawdowns and volatility. This part prefers to keep the 30y bonds. It is fearful. However fear is not a good driver to make decisions. Reason and logic is a much better one.

    One does not need protection anymore against deflation if the deflation already happened. Sure it can get worse before it gets better (interest rates continue to go down), but the worse it gets the lower the chances that it will get even worse and the higher the chances become that it will turn around (interest rates go back up).

    Interest rates dropped from +10% to 2% since 1981 for 10y german bonds. It can go to 0.5% as it has in Japan. But lower? It's possible, theoretically it could go to -2% but historically this has never happened so chances are extremely low and if chances are very low it is a very bad bet to take. Hence why I plan to liquidate them if they would hit 1% again. It's speculation, but it's rational.

    On the other hand, interest rates went also to historic highs end 70's even for the most credit worthy nations due to the unprecedented worldwide fiat system. It might be that we get negative interest rates not seen before also due to the fiat system. Maybe you are right and I should just hold those 30y bonds, sit back and enjoy the show. Thanks for your criticism and making me think more about it.

    Hugs :)

  3. Hello Marc,
    as a reference of the European Permanent Portfolio I'm very sorry you finally decided to abandon the strategy. In spite of your beliefs on the future, don't you think is still necessary to have a core portfolio protected against every possible, even improbable, outcome? Have in mind that if you think nowadays real inflation is 5%, that's far from deflation so I don't see how deflation has already happened following your logic.

    On the other hand, if you can tolerate volatility if there are chances to get a higher return, why don't you also remove the cash portion?


  4. Hi Brownehead, true deflation where the cost of living goes down has not happened since the great depression where there was still a gold standard and the amount of money printing was far less.

    As you can see on my pp returns page even in Japan where stocks and real estate collapsed for 20 years in a row by -80% and interest rates bottomed at 0.5% for 10y maturities, consumer prices went UP during that time, and this according to the official data, which is likely underestimating inflation too.

    Also here in 2008 when international trade literally came to a standstill for half a year, not even seen during the great depression, and people barely bought anything, consumer prices just corrected somewhat but over the total year still went up by again 5%!

    So I think that chances for an actual deflation where living expenses go down on a nation wide scale (eurozone) is very low in a world of unlimited money printing.

    Under deflation Harry Browne seemed to also understand falling interest rates, not so much falling consumer prices. So when judging whether deflation is played out to the max, not consumer prices but interest rates are to be judged I think. Since interest rates have already fallen to historic lows, we definitely are in deflation territory according to Harry Browne his definition.

    I'm starting to doubt though to dumb them already if it would hit 1%, considering Japan actually fell to 0.5% interest for 10y bonds and realizing that Japan was an isolated case, add mass worldwide hysteria and who knows, maybe we get negative interest rates for Germany, USA and Japan, just like we got them for a brief time in Sweden a few years back. In such case selling at 1% was a bad move.

    Why I would keep the short term bonds is not the question for me. The question is why would I kick short term bonds out? Will they always drag average returns of the PP down? Indeed, of all assets, cash, short term bonds, performed the worst the past 40 years. But will that continue? Maybe they will perform the best the coming years? They are certainly not as overvalued as long term bonds. Would not take capital losses when interest rates go up and would immediately benefit from that. Though I agree they can go broke too.

    You make a good point that having a core portfolio that is protected against most economic climates, even improbable, is a good thing to have. But let's not forget that the PP did not prove yet to survive in a great depression. What if they refuse to print and the bonds go broke like in Greece, losing 75% of the value of the long - and - short term bonds? Stock market also to the floor in such scenario, and maybe gold only doubles giving you a -50% loss in total, while consumer prices continue to go up? This is exactly what happened in Greece. Maybe this is impossible to happen over the whole Eurozone as Harry Browne said: gov will print before they go broke. But frankly that's just Harry Browne speculating. Up until today the PP has not proven yet to survive a great depression in a fiat world. We are in unprecedented territory here with no track records available. Every system works, until it doesn't... Maybe common sense to sell what is clearly valued historically high is the only thing that will save you?

    1. Hi Marc,
      Harry Browne was very clear about deflation (prices going down), I gess you have some of his books and can check it; acording to him lower interest rates is just the consequence of a higher purchasing power of the dollar. And he was also very aware of the fiat money world we live, in fact his full strategy is based on it, but anyways it doesn't matter whatever money is just paper or gold, if everything goes down except purchasing power people will buy the investment which pays more interest with less credit risk (and any goverment who prints its money has zero credit risk, including Germany with its ECB and the euro printers in Frankfurt).

      You are right that the PP has not been tested in a full depression, even that 2008 and 2011 gave us some tips about how usefull can be that part of the PP but, apart from logic, history also shows that every depression is followed by much lower interest rates:


      Of course today rates are allready very low, but I think you know the convexity property of bonds so small changes in the low rate cause a lot of volaitlity (which can translate in high gains in a real depression).

      Regarding cash and short term bonds, I really don't mean it is a good idea to drop that part, I think it is important for the stability of the PP, however if you don't mind volatily and only want growth there is no logic in maintaining it, moreover with your inflation estimations which will never be covered by short term rates. On the other hand if your reason to not drop the cash is getting some stability in a very volatile portfolio (precious metals, bitcoins and some stocks), that same reason urges for long term bonds.

      Here's my two (paper) cents ;)

  5. Hi,

    I prefer not to guess ... and keep original PP.

    Can you post this video on PP forum ?

    1. Feel free to share my work anywhere you like. I value that.

      The PP also contains guesses. That governments will always choose printing over defaulting on their bonds, is a guess/speculation. And if that guess/speculation would prove to be wrong, the PP could fail.

      That being said, the PP is still the portfolio that proved to be the most resilient in different economic climates. This fact is still widely ignored by most investors.

    2. Hi Marc!

      a)Why PP can fail because of printing ?

      b)Would you feel confortable having all ETF PP ? What do you advice?

      Thanks for your good work on EU-PP.

    3. Hi Frugal,

      You are very welcome. Thank you for valuing my work, I really like that too. I think the PP could fail not due to money printing but due to a lack of it. Harry Browne was confident that gov bonds would not go broke in a fiat world due to the fact that politicians would always choose printing over defaulting on their bonds. However it is theoretically possible that the government for example decides to bail out bank accounts but to default on their bonds.

      I agree that chances are low but it is a possibility. In such case you would get a Greek scenario, but then for the US or Eurozone. Meaning your long and short bonds become almost worthless, your stocks also, and gold only doubles in value. And this while consumer prices and real estate prices barely go down. In such scenario most people would be better off as most people have just bank accounts and real estate and barely hold any government bonds, but the wise PP investor would be fucked having 50% of his capital in it.

    4. Hi MARC!

      the Best option is to spend all saved money in some assets!

      Do you agree :-) ?

    5. lol :) It reminds me of this funny quote: "I have enough money to last me the rest of my life, unless I buy something"

      In all seriousness I still think the PP is the best solution to - protect - your purchasing power, and is a poor solution to - increase - your purchasing power.

      The best solution does not mean bullet proof. It just means that it has empirically proven to be the best solution in the past. There remains a - small - chance that it will fail in the future. But this chance is smaller than with any other portfolio I have seen, hence why it is still the best solution. But not perfect.

  6. Hi,

    I like that you are really involve thinking in your investment process. Most other PP users just do what HB suggested and don`t even try to think about that the PP perhaps only worked long term because we had sinking interest rates since 1981. But i think about cash and bonds a little different than you. Cash is the only asset where you know what you get before you invest. Currently you know that for the next year you are going to loose purchasing power with cash. So why even bother to invest in cash? When real short terms rates rise you have time to switch assets to cash to profit from that interest.
    The volatility problems are only psychological problems. So you have to find a way to get around those. (Btw. holding the PP gives you the same problems as seen in May and June this year :) ).
    In the next spike of bonds i will switch to a dividend growth strategy with a little gold position as an inflation hedge. The goal is to focus on the income/cashflow side of stocks and eliminate the psychological problems of volatility on that way. By the way if you haven`t read it already, i suggest reading "The intelligent investor" from Benjamin Graham. And yes bonds are overvalued historically! :)

    Regards frommi

    1. Dividend growth strategy remains on of the best long term strategy in my opinion.

      My main portfolio is based on this.

      Regards Gil

  7. Jan (the original one, sleepy so caveat emptor, LOL)August 25, 2013 at 8:45 PM

    I wouldn't give up your cash portion. It's useful for rebalancing into asset classes that have gone down and for taking advantage of all sorts of once in a lifetime opportunities. One could ofcourse argue that you could quickly sell any asset for these purposes but nothing is as liquid as cash and rebalancing the PP without cash... Backtests might be useful but I figure it would not be the same.

  8. Hi MARC!

    we need your comments here:



    1. Thanks for posting my work there frugal :) I replied.



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