Podcast - Interview with Rick Ferri on Gold and the Permanent Portfolio

[craigr]

Here is my interview with Rick Ferri on his views of gold, the Permanent Portfolio and his own investment philosophy:

https://web.archive.org/web/20160324133 ... portfolio/

Rick Ferri of Portfolio Solutions discusses his perspective on gold, the Permanent Portfolio and answers questions about his own investment recommendations. Topics addressed:

Gold
Permanent Portfolio
Inflation
Credit Risk in Bonds

RSS Feed:

https://web.archive.org/web/20160324133 ... cast/feed/

[jhigh]

craigr,

Thanks for these podcasts - what a terrific source of information!

Not sure if this is the best place to bring this up, but I think it would be great if you could over the topic of rebalancing the Permanent Portfolio (frequency, bands, strategies, tax implications, general how-to, etc) in a future podcast.  Hopefully others will find this interesting as well. 

[craigr]

craigr,

Thanks for these podcasts - what a terrific source of information!

Not sure if this is the best place to bring this up, but I think it would be great if you could over the topic of rebalancing the Permanent Portfolio (frequency, bands, strategies, tax implications, general how-to, etc) in a future podcast.  Hopefully others will find this interesting as well. 

I will definitely address that topic in the future.

[MadMoneyMachine]

[also posted at Bogleheads.org]

Thanks for doing the interview with Rick.

In it, Rick kept saying, "Harry Brown's intent was that gold would keep pace with the rate of inflation." That is incorrect. Harry said that some parts of the portfolio may drop 25%, 30%, even 40% but that other parts of the portfolio could go up 100%, 200% or more to make up for it. He certainly included gold in that assessment. He did not state that gold would just mirror the rate of inflation.

Rick also kept saying that gold is very highly priced now and we haven't had inflation. This is incorrect. As Craig mentioned, we had inflation in house prices, tuition, health care costs and are now expecting inflation in food, clothing, and materials. But rising prices are not the cause of inflation, they are the RESULT of inflation. Inflation is an expansion of the money supply. The FED has certainly been expanding the money supply as have other central banks worldwide. Gold's price is reflecting the diminished value of the various fiat currencies through the expansion of the money supply. What is the price of gold in a Weimar Republic mark? How many trillions of marks would it take to buy an ounce of gold? Could that happen to the dollar? I look at gold as an insurance policy against Ben Bernanke.

Rick focused on returns of the portfolio but not so much on the risk. The Max Drawdown of the Rick Ferri Core Four portfolio was about 45% recently compared with the PP which was about 15%. If one wanted to take more risk to try to achieve higher returns in the PP, then one could perhaps add more stocks, but the portfolio would really suffer when stocks once again do poorly. Then one becomes tempted to reduce their stock allocation again, feeding this emotional cycle of watching the economy.

I like the PP. I don't have to worry about economic cycles. I'm not stock-heavy. I achieve adequate growth at the least possible risk (highest Sharpe ratio).

[KevinW]

Great interview.  That was remarkably cordial given the tenor of the exchanges on the Bogleheads forum.

A few thoughts:

Ferri makes what I feel is a straw man argument against Browne's position on the connection between inflation and gold.  The argument is that gold is supposed to be equated with inflation, and we have gold appreciation but no inflation right now, so that equation must be false.  However Browne's (Austrian-influenced) theory is actually that inflation IMPLIES gold appreciation.  "IF the economy is experiencing severe inflation, THEN gold goes up in value."  If A implies B, then B need not imply A.  So gold appreciation in the absence of inflation does not invalidate the theory.

Also, I thought one of the core ideas behind a buy/hold/rebalance strategy was that no one can say what prices "should" be better than the market, so why all this talk about gold's price being wrong? 

Being perfectly objective, Ferri's argument for why bond credit risk is OK is not that different for Browne's argument for why gold is OK.  In both cases, you have an asset that has shortcomings when viewed in isolation, but you can argue that the market prices those shortcomings in fairly, and that the asset works as part of a cohesive portfolio.

On balance the list of things we can all agree on seems longer than the list of disagreements.  There's no debate on buy/hold/rebalance, indexing, diversification, passive management, low costs, low turnover, multiple asset classes, etc. IMO the PP breaks from the rest of the lazy portfolio pack on two fundamental issues: whether investors can realistically succeed at holding a volatile portfolio; and whether a portfolio can exist entirely within a fiat currency, or needs to have assets outside of the fiat currency system.

[craigr]

On the gold price I think I made the point that historical gold value is just that: historical. And it can change quickly. There are good points about deflation vs. inflation right now from many sides. Any one of them could pan out. One of the things Browne mentioned was speaking at investing conferences and people coming up after he spoke and saying (paraphrasing): "I've heard so many opinions I don't know what is going to happen in the markets." His response would be "Good." And the reason is that uncertainty would instill the idea in investors to stay diversified and not bet on any one particular outcome to come true.

[craigr]

Being perfectly objective, Ferri's argument for why bond credit risk is OK is not that different for Browne's argument for why gold is OK.  In both cases, you have an asset that has shortcomings when viewed in isolation, but you can argue that the market prices those shortcomings in fairly, and that the asset works as part of a cohesive portfolio.

Problem with the credit risk argument is it doesn't really buy you much in terms of diversification benefits. IMO. Junk bonds act more like stocks than bonds when the markets get choppy (both go down at once). I don't think high yield bonds will provide a better return than just investing in the same stocks represented by those bonds (e.g. a value stock index fund).

In short, high yield bonds give you all the risk of stocks but the lower returns of bonds.

[jhigh]

I recall that Harry Browne mentioned several times in his podcasts that gold is first and foremost a store of value, especially in times of uncertainty.  In that regard, there have been no shortage of events in the last few years that would push the "rational market" as a whole toward gold.  If you look at gold as asset in the broader context of human history, it is certainly much, much more than simply a hedge against inflation. 

Also, I think Rick missed an important point..a stock certificate isn't worth the paper it's printed on if the corporation it represents ceases to exist, while a gold bar is still a gold bar regardless of what its spot price is on any given day.

[Wonk]

Craig,

First, you're doing an excellent job with the podcasts and interviews.  Great to see HB's mission living on.  I have a couple of points that will hopefully be constructive for future iterations:

1. Personal opinion only, but I don't think a Rick Ferri interview is helpful for most investors interested in the PP unless he is brought on solely for the purpose of dismantling his views in an audio format.  I'm sure I could have a beer with Rick, but it's absolutely maddening listening to straw man arguments for an hour. 

Asking Rick to explain gold is like asking a radiologist to explain open heart surgery.  Is the radiologist a doctor?  Sure.  An expert? Sure.  Are his views on open heart surgery credible? No.  Again, I'm not trying to personally attack Rick, but he knows nearly zero about why gold does what it does.  It's embarrassingly obvious by some of the statements he's made.  He's a stock/bond guy and that's fine.  But I don't think interviewees who lack credibility bring much to the table for others to learn.  They tend to muddle the issue and create more questions than answers.

In a world that is drowning in information and self anointed gurus, credibility is king.  I can't afford to pay attention to anyone whose ego problems create distortions in credible perspective.  Rick might have good points elsewhere, but I wouldn't know because he is fully discredited in my opinion.  That brings me to point #2:

2. I encourage you to bring guests on with excellent track records that can put a PP spin on their views.  Eric King does a nice job with his interviews and tends to invite guests with specific knowledge in the area they are questioned on.  In the gold world, there are several experts with 30+ years working directly in the markets.  Perhaps bring Terry Coxon or John Chandler to talk about their perspective working directly with Browne and the PP.  Bring Cuggino on to talk about PRPFX.  Heck, you could even bring a TSM expert on to debate a slice and dice expert.  That brings me to point #3:

3. I think in a debate format, you might be better off with two guests sharing opposing viewpoints & you acting as a moderator.  I just think it makes for a more balanced debate to have an intermediary acting as an arbiter--much the same way a news program will have a conservative and a liberal duking it out. 

Again, Craig, outstanding job with the podcast series and crawling road as a whole.  You are doing an amazing job. 

[Lone Wolf]

What a cool surprise this interview is!  I appreciated hearing Rick make his case.  To me, this is a guy doing almost everything right -- passive investing, no market timing, low costs, indexing.  But he is deeply committed to this idea that a junk bond printed on a scrap of fancy paper is always more valuable than a gold bar, regardless of the circumstances.  In the end it makes him seem... so very, very wrong.

Given how well he seems to understand that you can't time the market, he sure is hellbent on this idea that gold has its "real price" that it is obviously far above right now.  How can we possibly know this?  There is literally no limit to how far or fast a currency could fall in value.  If order and sanity returns to global fiscal policy, gold will (rightly) be in the pooper.  But I've no idea when or how this might happen and I would never want to stake my portfolio on it.

Like MadMoneyMachine pointed out, you've got prices rising all over the place (especially in food, energy, education, and health care... also known as every single expense outside of my mortgage.)  You also have the Fed (and governments around the world) printing money like crazy.  They tell us, "We sure would like to cause a lot of inflation."  Then they do stuff that looks really, really inflationary.  One cannot blame the market for at least being nervous about the risk of further inflation, rightly or wrongly.

Jhigh makes a good point about gold being first and foremost a store of value no matter what comes.  I further argue that this characteristic of "being a store of value" is itself a good.  The decreases and increases in the price of gold are a response to the perceived availability of this good.  With most of the world's currencies participating in a race to the bottom, the market is sensing that these currencies will no longer be able to function as reliable providers of this good.  Thus, there is an increase in gold's price as the supply of the "store of value" good shrinks (or at least the perception of the supply.)

I compare it to a situation where all of the world's corn, wheat, and rice crops are under the threat of being wiped out by a horrible new species of locust (we'll call it the Bennus Bernankus, also known as the "helicopter locust".)  With everything else under the threat of being wiped out, soybeans now become much, much more valuable because almost everybody likes to eat, just as almost everybody likes their money to retain its value.  Now imagine that we know from history that the "helicopter locust" makes regular appearances and we are watching the damn things trying to mate right in front of us.  Imagine the locusts are making regular public statements that they really hope to wipe out "just the right amount" of this year's crops for the good of the economy... well, it might make sense to have some soybeans, especially when we do not know how much the locusts will eat or how long it will be before the locusts go back on hiatus.

People will not buy soybeans because they like tofu (because man cannot live on hippie food alone.  )  They will do this because they have no other suitable alternative that guarantees that their food will be there to get eaten later.

[craigr]

Craig,

First, you're doing an excellent job with the podcasts and interviews.  Great to see HB's mission living on.  I have a couple of points that will hopefully be constructive for future iterations:

1. Personal opinion only, but I don't think a Rick Ferri interview is helpful for most investors interested in the PP unless he is brought on solely for the purpose of dismantling his views in an audio format.  I'm sure I could have a beer with Rick, but it's absolutely maddening listening to straw man arguments for an hour.  

Rick agreed to come on the air after someone asked him to on Diehards in the gold thread. I thought it would be interesting for others to hear his case. Obviously I disagree with him on the hard asset (gold) issue. But interestingly he does own hard assets himself as he said in the interview (his ranch land). So in a way he does believe portfolios should hold some hard assets perhaps?

2. I encourage you to bring guests on with excellent track records that can put a PP spin on their views.  Eric King does a nice job with his interviews and tends to invite guests with specific knowledge in the area they are questioned on.  In the gold world, there are several experts with 30+ years working directly in the markets.  Perhaps bring Terry Coxon or John Chandler to talk about their perspective working directly with Browne and the PP.  Bring Cuggino on to talk about PRPFX.  Heck, you could even bring a TSM expert on to debate a slice and dice expert.  That brings me to point #3:

There will definitely be other guests on who are more in tune with the Permanent Portfolio. You can bet on it!

3. I think in a debate format, you might be better off with two guests sharing opposing viewpoints & you acting as a moderator.  I just think it makes for a more balanced debate to have an intermediary acting as an arbiter--much the same way a news program will have a conservative and a liberal duking it out.  

Please keep in mind that conducting interviews over Skype has several problems. First of all it is not "real time" like a phone or TV interview. There is a lag time and this makes going back and forth very difficult. I agree a debate format could be useful, but there is a lot of coordination involved in that and if I have someone willing to do an interview I don't want to drag out the schedule getting things organized and miss the chance.

Also remember that just because I am silent on a point does not mean I'm agreeing with them. It just means I'm letting them talk and the listeners can form their own conclusions. I think Rick and I may agree on quite a few points (passive buy and hold with no market timing) but there are definitely differences in opinion.

I was happy to have him on the show and perhaps I can have him on again to discuss stock allocations (TSM vs. slice and dice vs. intl.) which is a specialty of his and a topic many PP followers ask about.

[Austen Heller]

Kudos to Rick Ferri for coming on the podcast, especially when he knows that the majority of PP Forum listeners will not agree with him.  I sure did appreciate the time he took to share his ideas.  Thanks to Craigr for setting it up.

Ferri mentioned repeatedly that there is no inflation - OK, so I shouldn't own gold.  Also the Fed is artificially lowering bond yields through QE - OK, so I shouldn't own long-term bonds because of the inevitable rate "snap-back".  All I am left with are stocks and shorter-term bonds, which make up his "Core-Four" portfolio.  But here is the problem for me: if I own such a portfolio, the max drawdowns and volatility are much higher, and I will probably panic out if we have another crisis like 2008.  KevinW said it well:

IMO the PP breaks from the rest of the lazy portfolio pack on two fundamental issues: whether investors can realistically succeed at holding a volatile portfolio; and whether a portfolio can exist entirely within a fiat currency, or needs to have assets outside of the fiat currency system.

Ferri's Core-Four portfolio has a reasonably good probability of outperforming the PP going forward, but it is the higher volatility that precludes me from owning it.  It just depends on the type of investor you are - if you have the discipline to not panic or make frequent changes to the portfolio during a crisis, then Ferri's portfolio should be given serious consideration.

My takeaway from the interview is that the Ferri approach, including stocks & bonds and excluding gold & cash, attempts to grow wealth over time without regard to volatility, and is probably most suitable for younger folks with smaller portfolios.  The PP attempts to preserve wealth and maintain lower volatility, and is most suitable for older folks with larger portfolios.

[foglifter]

Craigr,

I've sent you some topic suggestion over PM but not sure if it went through - the UI doesn't show me history of sent messages and my typing took awhile so I might hit the session timeout or something like that.

Let me know if you didn't get anything.

Thanks

[Roy]

Kudos to Rick Ferri for coming on the podcast, especially when he knows that the majority of PP Forum listeners will not agree with him.  I sure did appreciate the time he took to share his ideas.  Thanks to Craigr for setting it up.

Ferri mentioned repeatedly that there is no inflation - OK, so I shouldn't own gold.  Also the Fed is artificially lowering bond yields through QE - OK, so I shouldn't own long-term bonds because of the inevitable rate "snap-back".  All I am left with are stocks and shorter-term bonds, which make up his "Core-Four" portfolio.  But here is the problem for me: if I own such a portfolio, the max drawdowns and volatility are much higher, and I will probably panic out if we have another crisis like 2008.  KevinW said it well:

IMO the PP breaks from the rest of the lazy portfolio pack on two fundamental issues: whether investors can realistically succeed at holding a volatile portfolio; and whether a portfolio can exist entirely within a fiat currency, or needs to have assets outside of the fiat currency system.

Ferri's Core-Four portfolio has a reasonably good probability of outperforming the PP going forward, but it is the higher volatility that precludes me from owning it.  It just depends on the type of investor you are - if you have the discipline to not panic or make frequent changes to the portfolio during a crisis, then Ferri's portfolio should be given serious consideration.

My takeaway from the interview is that the Ferri approach, including stocks & bonds and excluding gold & cash, attempts to grow wealth over time without regard to volatility, and is probably most suitable for younger folks with smaller portfolios.  The PP attempts to preserve wealth and maintain lower volatility, and is most suitable for older folks with larger portfolios.

It was nice of Rick to appear.

To acquire wealth one must grow it—and not lose it—along the way. This is the point Ferri seemed to miss with his "growth" models.  Both market declines and panic selling in Bears can cause losses.   Obviously, portfolio allocations that do not meet his criteria have also grown, while providing smoother rides (smaller drawdowns than higher beta portfolios).  But simple portfolios that are more aligned with his investment philosophy have also worked fine over the past 40 years;  and when these are conservative applications of that philosophy, they have similarly created smoother rides through the market cycles.

I'm not sure that the PP, or conservative strategies, are any less well-suited to younger folks, as risk profile matters for some of them too;  depends on the individual, as one can be 21 and still have a low tolerance for risk.

The Gold vs. inflation issue is separate, with different arguments if viewing Gold in isolation.  As always, it is how the portfolio responds that matters.

Although they are done constantly to "prove" points, portfolio comparisons are often irrelevant.  What matters is how the strategy an investor selects matches their goals and the types of risks encountered in achieving them.  Once a selection is made, observing constant comparisons between approaches may only frustrate, confuse, and cause deviations from the plan.  

[steve]

An interesting article in a market timing news letter,
Basically it is about the Gold and Oil relationship
May 2010: The Gold Standard You Didn't Know About
http://www.gleasonreport.com/newsletters.htm

Would Rick Ferri say not to buy gas because it is overpriced?
In 1970, the US national average for a gallon of regular gasoline was about  36 cents
How could he say what the price of Gold should be or what it will be in the future?

[foglifter]

Steve, you're reading my mind!  I've just suggested Tom Gleason to craigr as a potential guest for an interview. You spotted an interesting point in his analysis, and he again talked about gold-oil link in his November newsletter, which will be in open access on December 1st. He also considers gold as an important part of a portfolio and he likes PRPFX (he mentioned PRPFX again in his latest newsletter). Tom is an interesting individual, he worked as a gold bullion dealer, fraud investigator, and financial adviser. There is a free book available for download on his website - and the name itself, How To Invest If You Can't Afford To Lose,  really sings in-tune with what Harry Browne stressed out in his books - that the most important goal of a portfolio is to preserve what you earned.

I'd like to clarify one point - even though his website title mentions market timing, it's not that market timing we normally think about when we hear the term. In my opinion his approach is better described as passive trend following. His track record is available on the website and it's pretty solid. Yes, his model missed the biggest part of the bull market in stocks that started in March 2009, but he had reasons for that.

From the "PP mentality" standpoint I think Tom Gleason is closer to us than Rick Ferri. 

[steve]

Foglifter I agree, If I recall  besides mentioning PRPFX recently Tom Gleason also mentioned PRPFX a long time ago in one of his newsletters maybe even before it was called the Gleason Report. I also have read "How to invest if you can't aford to lose" many times. He also wrote a paper "Win With Asset Allocation" http://www.gleasonreport.com/documents/ ... on_v1-4.pd
One of his newsletters  March 2010 also covers the subject The three teirs of gold and silver safety which has in my opinion very good information for the gold allocation.

[foglifter]

It seems that this great conversation between Craig and Rick about gold has not gone in vain for Rick. I've just stumbled upon his post on BH where he announced his new blog. Shortly after the interview with craigr he posted an article on the blog where he again talks about gold and, again, talks about gold in isolation! 
http://www.rickferri.com/blog/economics ... gold-bugs/

Here's the quote (HB last name corrected by me):

"My expanded take on gold has been widely reported in the media over the past few weeks.
...
I expressed extended views on the subject in a podcast with Craig R, the voice behind the Crawling Road website and an advocate of the Harry Browne portfolio. The now deceased Harry Browne was a former broker and portfolio manager who believed in owning one-quarter of your assets in precious metals at all times."

Rick's description of Harry Browne and his approach to gold as investment looks misguiding. But I applaud Rick for including a reference to Craig and this forum.

I wonder if Rick's prediction of gold around $550 level by the end of decade will come true.

[craigr]

I wonder if Rick's prediction of gold around $550 level by the end of decade will come true.

I'm not a predictor, but if he means by 2020 then I think the chances are slim of gold being $550 an ounce or less. It may, but it's not a bet I'd be willing to take on a futures contract.

Now he did predict it would be back there by the end of this year on the Diehards forum. He has about one month left for it to come true but I get the feeling it ain't gonna happen.

[l82start]

i doubt it hits $550 unless it hits it for a short period of time in an over correction after a bubble bursts,  and even then i wouldn't try to predict it happening and i don't have any strong convictions or certainty about it....

[craigr]

i doubt it hits $550 unless it hits it for a short period of time in an over correction after a bubble bursts,  and even then i wouldn't try to predict it happening and i don't have any strong convictions or certainty about it....

Here's the secret about predicting I learned a while back:

"Predict early and often!"

Good market predictors make lots of predictions all the time. They always have something they can point to that shows they are right going forward. Also since they have so many predictions that are wrong it is human nature to ignore those and just focus on the good calls. Human psychology is a weird thing. The brain seeks out confirmation and forgets all the evidence that contradicts it. The reason accurate predictions are given so much hullabaloo in the financial news is because it is so rare they turn out to be true.

[l82start]

i doubt i will become a professional predictor,   i would either feel like a fraud or a crook or add so many exceptions and qualifications to make the prediction useless,  other than maybe the occasional OOA prediction here for fun i wont be predicting... i did fall bassackward into a good prediction about gold and did well buying some, making my record of predictions i have made and invested in 100% (i found bogleheads and the PP shortly after and that will hopefully keep my outstanding record intact) 

[dualstow]

I really enjoyed the interview. To back up what MadMoneyMachine wrote below, I want to reference a particular show from the Harry Browne "Money Talk" archives. It's 05-01-02*  If you start listening at 6:36 (minutes:seconds)  you will hear this:

So - if anybody asked {how to protect} against inflation, the obvious answer was get into gold. … But January 1980 was the end of the {gold} bull market. … It just sunk like a stone. Even though inflation was continuing to go higher. In a way gold's fall was presaging the fall that was going to come in inflation. The point is that I can't tell you why the price of gold started to drop at that particular point {in time}.

*That's Jan 2, 2005 even though the mp3 you download might be erroneously tagged with Year:2

[also posted at Bogleheads.org]

Thanks for doing the interview with Rick.

In it, Rick kept saying, "Harry Brown's intent was that gold would keep pace with the rate of inflation." That is incorrect.
... He did not state that gold would just mirror the rate of inflation.

...