Portfolio safety in extreme cases

[Libertarian666]

I'm going to recommend a modification to the PP that I'm not sure anyone has suggested.

The rule I'm suggesting is: "Never rebalance out of gold twice in a row."

This is intended to keep you from throwing good money after bad in a hyperinflationary collapse where the other assets keep going down.

Comments or improvements?

[Cortopassi]

I have heard hyperinflation since 2008. This time, it seems like it might happen, but it also seems just as likely deflation is possible.

No one is buying anything now except toilet paper. Why is $1000 in my hand going to make me go out and spend? It is going into my savings account.

The government is spending, and will continue to print like crazy. But still, there is no inflation. The dollar continues UP.

Outline a hyperinflationary scenario, please. I don't see it.

[pmward]

At the moment the dollar is screaming back up to 99.5. I think that hyper inflation is the last thing we have to worry about. We are currently in a full scale deflation. The switch doesn't just flip from deflation to inflation overnight. We also have a lot of deflationary worries in the corporate and junk bond markets... corporations have never been this heavily levered and this virus could be the spark that lights the match for a mass corporate default which would create a larger deflation than the subprime loan mass default in 2008.

[Libertarian666]

At the moment the dollar is screaming back up to 99.5. I think that hyper inflation is the last thing we have to worry about. We are currently in a full scale deflation. The switch doesn't just flip from deflation to inflation overnight. We also have a lot of deflationary worries in the corporate and junk bond markets... corporations have never been this heavily levered and this virus could be the spark that lights the match for a mass corporate default which would create a larger deflation than the subprime loan mass default in 2008.

Right. Then the $trillions that the government is printing to bail out everyone come roaring in as a tsunami of hyperinflation.

But again, my suggestion would only be relevant in a hyperinflation where gold is going straight up.

[dualstow]

A comment and a question: I’m certain that Craig said he rebalanced out of gold 3 times in 2008 or 2009, and I can probably find the post to back that up.

I don’t know if that makes a difference. Is it different this time?

I like the original post because it tells me you still believe gold is going to rise.

[Libertarian666]

A comment and a question: I’m certain that Craig said he rebalanced out of gold 3 times in 2008 or 2009, and I can probably find the post to back that up.

I don’t know if that makes a difference. Is it different this time?

I like the original post because it tells me you still believe gold is going to rise.

Yes, I think gold is going to rise a great deal once the money printing gets into the economy.

Maybe the rule should be "don't rebalance out of gold more than twice in a row", or something else.

What I want to avoid is what would have happened to people in Weimar Germany who would hypothetically have been running a PP: continually selling gold and buying bonds and stocks. That would have produced a pretty bad result compared to just hanging onto the gold.

We're not bogleheads, after all. We don't have to "stay the course" when things have changed dramatically.

[dualstow]

...
What I want to avoid is what would have happened to people in Weimar Germany who would hypothetically have been running a PP: continually selling gold and buying bonds and stocks. That would have produced a pretty bad result compared to just hanging onto the gold.
...

I just got to the season of Babylon Berlin where it's 1929 and a manic-depressive kinda-nazi figures out that the American stock market is going to crash, with Germany's economy to follow. He has just discovered short selling.

He defined the manic phase -- probably a newly coined term then -- as a phase in which for the sufferer "everything is connected."
But he's got the advantage of having his words written for him by a screenwriter and he has it right!

[pmward]

I mean, as you can see from my posts in the gold scream room, I'm incredibly bullish on gold long term. I think gold will be the best performing PP asset over the next decade. However, I do not see a hyperinflation as possible in the U.S. as all of our debt is denominated in U.S. dollars. A 70's style stagflation, sure. Hyperinflation... just no. Also, gold is not going to go straight up. It will have it's ups and downs that will offer rebalancing opportunities in both directions. This rebalancing volatility is how gold pays its rent in the portfolio after all. I see no reason to change strategies and make an exception for gold.

[glennds]

Right. Then the $trillions that the government is printing to bail out everyone come roaring in as a tsunami of hyperinflation.

But again, my suggestion would only be relevant in a hyperinflation where gold is going straight up.

If that was going to happen, why didn't it happen last time they fired up the printing press?
And why hasn't it happened in Japan where they've printed even more?

[Smith1776]

I'm going to recommend a modification to the PP that I'm not sure anyone has suggested.

The rule I'm suggesting is: "Never rebalance out of gold twice in a row."

This is intended to keep you from throwing good money after bad in a hyperinflationary collapse where the other assets keep going down.

Comments or improvements?

I see exactly where you're coming from, and you make an excellent point. The same line of thinking has crossed my mind as well. In a true financial armaggedon resulting from hyperinflation, you may rebalance yourself into oblivion as your gold holdings get smaller and smaller and smaller.

A potential alternative method: make half of the 25% gold portion digital, and make the other half physical. When selling gold to rebalance, only sell the digital gold, NEVER sell any physical.

[Tortoise]

My impression from Harry Browne's books and radio shows was that the PP was designed to handle inflation, but not hyperinflation.

In a hyperinflation, the entire notion of an "investment portfolio" kind of goes out the window, and people are just trying to survive. In which case, you use your physical gold for food and other necessities, not for rebalancing investments.

[Smith1776]

My impression from Harry Browne's books and radio shows was that the PP was designed to handle inflation, but not hyperinflation.

In a hyperinflation, the entire notion of an "investment portfolio" kind of goes out the window, and people are just trying to survive. In which case, you use your physical gold for food and other necessities, not for rebalancing investments.

Looks like Libertarian666's portfolio is even better geared towards protection against said hyper-inflation. I am curious if he has a structure or theory behind that allocation, or if it is just intuitive.

I think the PP has decent protection overall in a hyper-inflation scenario.

[Tortoise]

I think the PP has decent protection overall in a hyper-inflation scenario.

Not really. As Libertarian666 pointed out, if you keep rebalancing the PP as prescribed during a hyperinflation (which can last several years, like Weimar Germany's did), you can lose most of your money.

[Smith1776]

I think the PP has decent protection overall in a hyper-inflation scenario.

Not really. As Libertarian666 pointed out, if you keep rebalancing the PP as prescribed during a hyperinflation (which can last several years, like Weimar Germany's did), you can lose most of your money.

Right, if you follow strict rebalancing practice that can happen.

But if you follow something like the 50-50 digital/physical divide and never sell the physical you should be okay. Just a minor modification.

[Kriegsspiel]

I think the PP has decent protection overall in a hyper-inflation scenario.

Not really. As Libertarian666 pointed out, if you keep rebalancing the PP as prescribed during a hyperinflation (which can last several years, like Weimar Germany's did), you can lose most of your money.

For the old-timers, isn't that the opposite of what Clive predicted on the old forum? He deleted all his posts and left before I joined here, but IIRC he said that gold was going to become devalued, and everyone was going to sell their productive assets to buy gold.

[Smith1776]

For the old-timers, isn't that the opposite of what Clive predicted on the old forum? He deleted all his posts and left before I joined here, but IIRC he said that gold was going to become devalued, and everyone was going to sell their productive assets to buy gold.

I've said this before, but I'm a relative latecomer to the PP party. I discovered the PP in 2016 and didn't find this forum until like a year later.

Clive's mysterious posts that all say [deleted] have always been my blind spot in the old Bogleheads thread. Like the forum equivalent of trying to piece together missing time from an alien abduction or something.

[Xan]

Clive was an odd duck. He would regularly go through and delete all his posts. And he didn't leave, he was actually banned. This was long before I had anything to do with the running of the site. He would regularly accuse Tex and Craig of basically stealing from HB's widow by writing their PP book. They eventually got tired of it and I don't blame them.

[dualstow]

Clive had very useful posts and charts that even Craig and Tex were impressed with, so it was a weird combination.
Every once in a while, even when Clive was still a member, a new person would join the forum and ask who this invisible guy was that we were all talking to.
He could have just saved himself the trouble and put everything but the charts in his sig line.

[vnatale]

Clive had very useful posts and charts that even Craig and Tex were impressed with, so it was a weird combination.
Every once in a while, even when Clive was still a member, a new person would join the forum and ask who this invisible guy was that we were all talking to.
He could have just saved himself the trouble and put everything but the charts in his sig line.

I have read here that he presently exists at the Bogle Heads forum? Or, is that GhostMachine? Another forum legend.

Vinny

[dualstow]

Not sure.

[Libertarian666]

Right. Then the $trillions that the government is printing to bail out everyone come roaring in as a tsunami of hyperinflation.

But again, my suggestion would only be relevant in a hyperinflation where gold is going straight up.

If that was going to happen, why didn't it happen last time they fired up the printing press?
And why hasn't it happened in Japan where they've printed even more?

How far can you blow a balloon up before it bursts?
Just because you don't know the answer to that in advance doesn't mean that it will never burst.

[vnatale]

Not sure.

I just fixed what I wrote so that, hopefully, now it makes more sense.

Vinny

[Libertarian666]

I'm going to recommend a modification to the PP that I'm not sure anyone has suggested.

The rule I'm suggesting is: "Never rebalance out of gold twice in a row."

This is intended to keep you from throwing good money after bad in a hyperinflationary collapse where the other assets keep going down.

Comments or improvements?

I see exactly where you're coming from, and you make an excellent point. The same line of thinking has crossed my mind as well. In a true financial armaggedon resulting from hyperinflation, you may rebalance yourself into oblivion as your gold holdings get smaller and smaller and smaller.

A potential alternative method: make half of the 25% gold portion digital, and make the other half physical. When selling gold to rebalance, only sell the digital gold, NEVER sell any physical.

That would do much the same thing.
Personally, I don't have any digital gold, but you could still use the same rule with all physical gold: only 1/2 can ever be sold.

[Tortoise]

But if you follow something like the 50-50 digital/physical divide and never sell the physical you should be okay. Just a minor modification.

Agreed. But in that case, what you end up with isn't really a PP anymore -- it's just physical gold. I.e., the hyperinflation transforms the PP into ~100% physical gold, and after that happens it's technically not a PP anymore.

For the old-timers, isn't that the opposite of what Clive predicted on the old forum? He deleted all his posts and left before I joined here, but IIRC he said that gold was going to become devalued, and everyone was going to sell their productive assets to buy gold.

Good point. I guess the more general statement would be that the PP is designed to work with asset classes that fluctuate, but never get completely destroyed (i.e., devalued to near-zero). If one or more of the assets becomes a "black hole" by getting completely devalued, the PP with regular rebalancing just won't work.

Clive's mysterious posts that all say [deleted] have always been my blind spot in the old Bogleheads thread. Like the forum equivalent of trying to piece together missing time from an alien abduction or something.

Yeah, I know what you mean. Kind of like combing through the ruins of an ancient civilization, trying to figure out why all traces of it suddenly disappeared.

My memory of Clive has faded already, but I vaguely remember lots and lots of very lengthy posts filled with financial charts. And if I recall, he definitely used the word "whilst" far more than any other forum member. (In high school, my English teacher told us that "whilst" was just the more flowery, pretentious version of the simpler "while" and should never be used. So shame on you, Brits.)

[Libertarian666]

My impression from Harry Browne's books and radio shows was that the PP was designed to handle inflation, but not hyperinflation.

In a hyperinflation, the entire notion of an "investment portfolio" kind of goes out the window, and people are just trying to survive. In which case, you use your physical gold for food and other necessities, not for rebalancing investments.

I've read all of his books and even met him several times.
He did think about hyperinflation and recommended the purchase of a bag of junk silver coins against that eventuality. It would be pretty hard to get change for even a small gold coin in such circumstances; its buying power would be too great for hand-to-hand use.

Heck, even today a 1/20th ounce coin is worth $75 or so, and in a hyperinflation it might have 10x the purchasing power. Not to mention being a robbery risk.