Investing, economics, finance and random thoughts.
Archive for May, 2010
An Unknown Economic Climate?
May 31st
Someone wanted to know: Are we sure there are no more than four economic investing climates that can affect the Permanent Portfolio?
What the question refers to is the core idea in the Permanent Portfolio that we have to only contend with four states in the economy:
1) Prosperity
2) Inflation
3) Deflation
4) Recession
This is a critical concept in the portfolio and why it works so well in protecting and growing money against an unknown future. Because there are only four economic climates, we need to own just four assets to deal with each:
Stocks are for Prosperity
Gold is for Inflation
Long Term Bonds are for Deflation
Cash is for Recession
So are we really sure that’s all that exists? Is there a fifth case that could blindside the portfolio?
This is an excellent question.
Aside from Harry Browne and Terry Coxon who created the strategy, a lot of other people have put many brain cycles into this. My own review of history agrees with what Browne and Coxon postulated. I’ve only ever seen four economic cycles.
A review of US market history and other market history you can find various events on the timeline and see how the markets reacted. Before we went off the gold standard there were periods of inflation and deflation in the US - During the Civil War (inflation) and Reconstruction (deflation) for instance.
In other economies we can see similar cases of how the stock market, bonds and the money supply expanded and contracted. Recently I had a person in Greece write and they are facing huge problems that could very likely impact their savings due to bad inflation if they leave the Euro. In that country people are responding by buying gold if they are able. So even in that unpredictable situation inflation is the likely predicted outcome and people are responding to it by buying gold just as the Permanent Portfolio idea would suggest.
In 2008 we had a currency crisis in Iceland that caused bad inflation and gold was again the asset to hold for Icelanders.
Yet in that same year 2008 we had a deflationary event kick off in the US and LT bonds were the asset to have. But in 2009 the markets righted themselves and the stock market recovered sharply as deflation threats seemed to fade so stocks responded well.
Are you dizzy yet?
These were different countries with different results but the economic climates were each respectively accounted for with the portfolio.
But here’s the thing: These events were not predicted by the portfolio at all. Yet they all fell into the four economic climates model perfectly fine and the portfolio weathered the storms.
Could another economic climate exist? What history we have across multiple countries shows that some pretty serious events have occurred and the four economic climate model has pretty much accommodated them all as far as I can tell. So from my view I think the four economic climates are all we need to worry about.
Mark Hulbert on the Permanent Portfolio
May 18th
Well known investment newsletter expert Mark Hulbert has written a nice article on the Permanent Portfolio concept:
Would you be interested in an all-weather portfolio that, despite hardly ever changing its composition, performs creditably in almost all market environments?
Why that does sound good doesn’t it? Click below to find out more:
Permanent Portfolio Allocation
Permanent Portfolio Historical Returns
Enjoy the article and also be sure to check out the new Permanent Portfolio discussion forum:
Permanent Portfolio Discussion Forum
Fighting Inflation by Making Cheaper Coins
May 18th
From the not-as-witty-as-he-thinks department:
Will Nickel-Free Nickel Make a Dime’s Worth of Difference?
“Making coins from more cost-effective materials could save more than $100 million a year, which isn’t just pocket change,” said Dan Tangherlini, the Treasury Department’s chief financial officer.
That Dan Tangherlini. What a card! Is that the best the PR flaks at the Treasury Department could come up with?
Still, industrial porcelain, embedded with an identification chip, is seen as an outside possibility. A more likely candidate: an aluminum alloy, used by other countries for coins. But any switch is likely to be controversial. (emphasis added)
The aluminum alloy part is concerning enough, but not nearly as bad as an RFID chip inside the money. I analyzed RFID applications and vulnerabilities in the past as an information security researcher. My feeling afterwards is that there would be a big push for RFID in all money to remove the ability to have anonymity in cash transactions. It would first be put out into the public as an “anti-counterfeiting” measure. From there it could be stepped up easily to require banks to scan all money to check for “counterfeits.”
Banks could then refuse to accept money that couldn’t be RFID scanned as a risk control measure. This would then force stores to want to RFID scan money given to them so they are not left holding the bag. Finally, having money dispensed from banks and ATMs linked to the person who took the money out could be done. Why? Well, nobody would want to have non-RFID money because it could be counterfeit and the stores wouldn’t take it. Once this is done the circle of tracking the cash can be closed completely.
What then? No anonymous cash transactions could be accomplished. Links between cash could be made between people. Bills could be tracked from the bank to the ATM to the pocket of a person to a store and back to the bank. All RFID checked along the way. Every purchase could be tracked and, if necessary, a few quick keystrokes could disable the money in someone’s pocket by marking the RFID identifier as invalid in a central database.
Not plausible? No, it’s completely plausible.
The point of the metal in the coins is that it is a commodity value just as gold and silver are. The reason the nickel and penny are worth less is because the dollar is worth less. The markets are not fooled by this kind of rhetoric of saving money. As for RFID in the money? Yikes. I don’t want to consider the implications.