Unknown Unknowns

Discussion of the Bond portion of the Permanent Portfolio

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MediumTex
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Re: Unknown Unknowns

Post by MediumTex » Mon Mar 14, 2011 11:41 pm

Adam1226 wrote: MT--

So if I read you correctly, your predicition would be that gold will ultimately be the winner in this (vs. LT bonds), it's just a question of when, which could be decades. 

(By "winner" I mean, LT bonds will come out of their long term bull market before gold).   
Gold always beats every asset if you give it enough time.

Over the next five years, though, I can see LT treasurys doing quite well.

The one PP asset that I don't like much under almost any circumstances right now is equities.  I think there is a lot more pain to be felt there before anything like a secular bull market returns.  With that said, though, the best performing PP asset for the last two years has been equities; I'm just happy that the PP has allowed me to safely own equities during that period.
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Re: Unknown Unknowns

Post by fnord123 » Tue Mar 15, 2011 1:12 pm

MediumTex wrote:Gold always beats every asset if you give it enough time.
While I'm comfortable with gold's role in the PP, I was a bit surprised at this comment.  At the risk of sounding like the anti-gold folks, gold is good at preserving wealth, but it is not inherently productive, and does have slightly negative costs (storage/insurance/etc.).  While I can see it beating cash (due to cash being devalued by Central Bankers Gone Crazy) and treasuries (due to Politicians Gone Crazy), I don't see why it would beat equities - companies actually tend to produce things that are valuable, don't they?
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Re: Unknown Unknowns

Post by MediumTex » Tue Mar 15, 2011 1:34 pm

fnord123 wrote:
MediumTex wrote:Gold always beats every asset if you give it enough time.
While I'm comfortable with gold's role in the PP, I was a bit surprised at this comment.  At the risk of sounding like the anti-gold folks, gold is good at preserving wealth, but it is not inherently productive, and does have slightly negative costs (storage/insurance/etc.).  While I can see it beating cash (due to cash being devalued by Central Bankers Gone Crazy) and treasuries (due to Politicians Gone Crazy), I don't see why it would beat equities - companies actually tend to produce things that are valuable, don't they?
Companies produce great value while they exist.  The problem is that the life expectancy of most companies isn't all that long.

As for bonds, it's the issuer that tends not to last that long.

As for "cash", it's also the issuer that tends not to last that long.

Would you rather have an ancient Egyptian stock certificate or ancient Egyptian gold?

Would you rather have a late Roman empire long term bond, or a gold Roman coin?

Would you rather have fiat currency from the American revolutionary period, or gold coins from that period?

By "enough time" I mean 100+ years in most cases.  Sometimes it takes 200 years.  Eventually, though, gold turtles past every other human mechanism for storing value, though over shorter periods of time assets like equities can dramatically outperform gold.

The key to understanding what I am saying is to see the inherently transitory nature of all human institutions.  During some periods of history, this transitory quality is not a big deal, but the problem is there is no way of knowing whether the period (and place) you happen to be living in is going to be one of long term stability or great transition.  These things are only clear in retrospect, and that's not helpful when you need to be able to make prudent real-time decisions.
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Re: Unknown Unknowns

Post by Lone Wolf » Tue Mar 15, 2011 1:49 pm

Interesting that one of the most succinct arguments for gold I've ever encountered is found in the "long-term government bonds" section of a forum  :)

I can't add much to what MT said.  While I think that a 100% precious metals portfolio is a terrible idea, I can no longer imagine ever feeling comfortable with a portfolio that didn't have a firm bedrock of hard assets (particularly gold.)
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Re: Unknown Unknowns

Post by chrikenn » Tue Mar 15, 2011 3:44 pm

MediumTex wrote: Companies produce great value while they exist.  The problem is that the life expectancy of most companies isn't all that long.

As for bonds, it's the issuer that tends not to last that long.

As for "cash", it's also the issuer that tends not to last that long.

Would you rather have an ancient Egyptian stock certificate or ancient Egyptian gold?

Would you rather have a late Roman empire long term bond, or a gold Roman coin?

Would you rather have fiat currency from the American revolutionary period, or gold coins from that period?
You're missing an option: "Would you rather have a hundred shares of a global, broadly-diversified equities index fund, or a gold coin?"

For most of history, the broadly-diversified equities index fund did not exist.  But it does now.  And I think it defeats your argument that "Gold always beats every asset if you give it enough time."
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Re: Unknown Unknowns

Post by fnord123 » Tue Mar 15, 2011 3:54 pm

chrikenn wrote:You're missing an option: "Would you rather have a hundred shares of a global, broadly-diversified equities index fund, or a gold coin?"

For most of history, the broadly-diversified equities index fund did not exist.  But it does now.  And I think it defeats your argument that "Gold always beats every asset if you give it enough time."
You posted this just as I was posting a similar argument.  I agree with you, and would add that if one compares holding gold from the 19th century onwards versus holding stock in the major companies of the day (ala an index fund), one would be a lot wealthier with equities.  I'd go further and argue that once one's timespan is large enough to encompass four turnings (ala http://en.wikipedia.org/wiki/Strauss_and_Howe), then gold will always be a long term loser versus equities post-18th century.

None of this is to denigrate the value of gold in the PP.  My investment horizon is significantly less than four turnings, so I appreciate gold's effect on the PP!
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Re: Unknown Unknowns

Post by MediumTex » Tue Mar 15, 2011 4:00 pm

chrikenn wrote: You're missing an option: "Would you rather have a hundred shares of a global, broadly-diversified equities index fund, or a gold coin?"

For most of history, the broadly-diversified equities index fund did not exist.  But it does now.  And I think it defeats your argument that "Gold always beats every asset if you give it enough time."
You are speculating that the future will be different from the past.

It may be.

With the PP, though, it really doesn't matter whether we have somehow overcome counterparty risk once and for all through instruments such as equity index funds.  You are protected whichever way things go.

FWIW, I imagine that every period of history had those who confidently proclaimed that institutional entropy had been conquered once and for all.

Over the last 100 years or so, we have been lulled by a remarkable burst of progress that has started to feel like the norm.  From a longer term perspective, however, such bursts of progress tend to be just that--bursts--which are then followed by cultural, economic and political plateaus or declines.

History is full of people who were just as confident as us that their way of life would continue indefinitely.  Some of them were right, while most of them were wrong.

The entire structure supporting instruments like global diversified equity index funds is fragile and doesn't impress me as being especially resilient in the face of history's grinding institutional entropy. 
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Re: Unknown Unknowns

Post by MediumTex » Tue Mar 15, 2011 4:06 pm

fnord123 wrote: I'd go further and argue that once one's timespan is large enough to encompass four turnings (ala http://en.wikipedia.org/wiki/Strauss_and_Howe), then gold will always be a long term loser versus equities post-18th century.
Which equities, though?

The right equities in the wrong political system doesn't end well.

Ask people who owned Lebanese, Rhodesian, Cuban, Russian, or French equities at various points in the last 100 years.

It's easy to pick winners in hindsight; it's harder to do in advance.

If you want to say we will just own a basket of world equities, there is still the matter of who the custodian will be, and the political system that determines property rights where the custodian is based.

Equities are a wonderful wealth creation tool, but survivor biased backtesting makes it look a bit easier than it actually is.
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Re: Unknown Unknowns

Post by moda0306 » Tue Mar 15, 2011 4:13 pm

MT, your points on institutions are really eye-opening.  All the property rights and stability that we take for granted, if questioned, could crush the value of even the best companies.  That's where even your house (whose value is based on the remaining credit institutions in society) isn't a good inflation hedge.  The value of so many things we own, including most investments, is based on the continued functioning of institutions that we don't necessarily know will continue to exist, and even if they only falter temporarily once in our lives, golds place in the portfolio as a rebalance tool will probly be much appreciated.
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Re: Unknown Unknowns

Post by fnord123 » Tue Mar 15, 2011 6:22 pm

Which equities: The largest institutions of the day, updated as the institutions grow and die. ala the DJIA or S&P500.

Gold is no better than equities under various political systems.  Try using gold as a method for preservation of value in the US from the mid 1930s-mid 1970s, in China until a few years ago, etc.  In both those scenarios one could not own gold bullion (and would lose any one had).  One could own gold jewelry, but jewelry is a huge money loser, and even that can be taken away if the situation gets dire enough.

I agree that the PP is one of the more robust ways to invest, but it isn't magic, nor is gold magic.  If one adds civilization-level and political system-level shifts into the mix, then nothing can be taken for granted. Conversely, if we are allowed to stipulate a political and legal system that respects and allows gold bullion ownership, then we should be allowed to stipulate a political and legal system that respects and allows equities ownership.
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Re: Unknown Unknowns

Post by MediumTex » Tue Mar 15, 2011 9:58 pm

fnord123 wrote:I agree that the PP is one of the more robust ways to invest, but it isn't magic, nor is gold magic.
I'm not saying it's magic, just durable.
If one adds civilization-level and political system-level shifts into the mix, then nothing can be taken for granted. Conversely, if we are allowed to stipulate a political and legal system that respects and allows gold bullion ownership, then we should be allowed to stipulate a political and legal system that respects and allows equities ownership.
I guess I am really talking about counterparty risk and how promises tend to get ever more elaborate as societies get more complex.  When societies are forced to become less complex following the upheavals that always come along sooner or later, many of these promises are simply broken.  I think that making some allowance for this "promise breaking" problem in your investment strategy is vitally important and the PP addreses this problem about as well as you can.

Note that I am simply making an argument for why the PP needs gold, not for taking on any additional gold exposure.
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Re: Unknown Unknowns

Post by chrikenn » Fri Mar 18, 2011 7:38 am

Another argument, raised by fnord, is that the statement "given enough time, gold always beats everything else," is simply unrealistic.  I don't know about you, but I'm pretty sure I'm not going to live until I'm 500 years old.  So it doesn't even make sense to ask, "would you rather own currency from the Roman empire or a gold coin?"

A more appropriate question is, "given a 30 [or 40 or 50] year time horizon, would you rather own $100 of global index fund or a $100 gold coin?"  I can imagine scenarios in which one would be better off with the gold coin, but at least 50% of the time (if not 90% of the time), $100 of global index fund is going to beat $100 of gold coin over a "short" period of a few decades.

I would agree that if instead of 30 years, the question was 300 years, the gold coin might be a better bet, simply because it's much harder to say with certainty that index funds will still exist in 300 years.  But 30 years from today, I am confident that index funds will still exist, and that they will have outperformed gold in that 30 years.  And I think pretty much all financial experts would agree.

And like fnord, this is not at all to denigrate gold.  I love gold as it functions in the PP (and as it functions in any well diversified portfolio, for that matter).  I just think your statement, "Gold always beats every asset if you give it enough time" is a bit misleading because it fails to acknowledge that today we have investments that people did not have hundreds of years ago, and it also fails to acknowledge that most people have an investment horizon of 30 or 40 years, not 300 or 400 years.
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Re: Unknown Unknowns

Post by Lone Wolf » Fri Mar 18, 2011 8:23 am

chrikenn wrote: A more appropriate question is, "given a 30 [or 40 or 50] year time horizon, would you rather own $100 of global index fund or a $100 gold coin?"  I can imagine scenarios in which one would be better off with the gold coin, but at least 50% of the time (if not 90% of the time), $100 of global index fund is going to beat $100 of gold coin over a "short" period of a few decades.
This is why you're both right.

We don't know exactly where our 50-year time horizon falls on history's windy, pothole-riddled road.  Are we in the middle of a century of uninterrupted prosperity?  If so, who would want to hang on to a lump of shiny metal?  Stocks will provide the far better return.

Or are we about to travel over a bumpy, chaotic decade where promises will be broken left and right?  In times like these, stocks, bonds and cash are just more promises, and throughout history, the value of so many promises has fallen to 0.  You want to have a real, objective store of value, and you want to have it before everybody else is stampeding for the exits.

If we knew where we were on the path of history, investing would be easy.  (Thus the desire to believe we can predict the future.)  Unfortunately, I don't believe that it's possible to reliably tell whether we will be entering dark, rocky times... or whether we are on the cusp of a golden age.  History is filled with both.
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Re: Unknown Unknowns

Post by MediumTex » Fri Mar 18, 2011 11:00 am

Lone Wolf's comments are what I was getting at.

History is full of irregular transitions and in retrospect it becomes obvious just how unpredictable the world really is.

If I sat you down in 1900 with a pencil and paper and asked you to tell me about the next 100 years, how many good calls do you think you would have made?

Would you have predicted the Wright Brothers and manned flight?

Would you have predicted manned landings on the Moon several decades later?

Would you have predicted two world wars (as opposed to one or three)?

Would you have predicted the largest disease-related human die off in history in the form of the Spanish Flu pandemic?

I enjoy reading H.G. Wells' writing. He made some great predictions about the future in his works.  What is noteworthy, though, is how off the mark some of Wells' predictions were.  Technological progress has not followed an uninterrupted upward path, world government has not occurred, and the flaws in collectivist political thinking have been exposed time and again.

At any point in time, countless very long term trends are in the process of beginning and ending.  Even a 500 year trend has a not insignificant chance of beginning or ending during an average investor's time horizon of 40 or 50 years.

The thing I like about the PP is that it protects one against upheavel, while also allowing one to participate fully in the prosperity that may come along during periods of stability.
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Re: Unknown Unknowns

Post by dualstow » Sat Mar 19, 2011 11:38 pm

Interesting thread. I'm still fairly new to gold, but this discussion reminds me that I may be willing away more than I spend. It'll be nice to leave some shiny metal in the will in addition to stocks for many reasons stated above.
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