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A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Thu Aug 03, 2017 10:54 am
by jhogue
This draft intended to invoke reflection and—quite possibly-- spirited discussion.

-Don’t treat your cash like trash.
Cash is an investment in safety, stability, and liquidity. Don’t settle for less than the highest quality securities.

-Don’t lock up your Cash-designated assets in intermediate/long-term securities.
Your first big chunk of Cash needs to be “Shallow Cash,” dedicated to regular expenses, an emergency fund, and rebalancing.

-Don’t ignore the role of the VP in constructing your Cash portfolio.
Savings bonds that are less than one year old belong in your VP, not Cash. They are not liquid until after their first birthday party. Then you can celebrate and move them over to Cash.

-Don’t ignore the effects of inflation.
Over time, inflation can silently erode the value of your cash. Think about the role of I bonds in your Cash.

-Don’t ignore the effects of deflation.
How you will protect your Cash if interest rates fall or go negative? Think about the role of EE bonds in your Cash.

-Don’t buy TIPS.
Treasury Inflation Protected Securities (TIPS) are not suitable for PP Cash because they do not retain stability in value. (They have other bad features for the PP investor as well.)

-Don’t confuse the safety of Treasury-backed with FDIC-insurance.
The Treasury bailed out the FDIC in 2008. That alone explains why FDIC-insured securities trade at a premium to Treasury-backed securities. Mr. Market tries to tell you that every day. Are you listening?

-Don’t chase yield with your PP Cash.
Banks will try to convince you that you can get a better yield investing with them. That offer always requires that you assume additional risk in safety, stability, or liquidity in your Cash. Don’t be fooled by the sales pitch and don’t take on additional risks with your Cash.

-Don’t overload your IRA with CDs or TIPS.
The tax-deferred space in your IRA is limited. Save that space for potentially higher yielding stocks and 30 year T bonds. Buying I bonds automatically creates new tax deferred space outside of IRAs. They also offer better tax treatment after you reach age 70 ½. You are planning on living that long, aren’t you?

-Don’t choose a short term strategy over a long term strategy for your Cash.
Buy and hold for the longest term possible. This may seem like a paradox for an asset you want to be as liquid as cash, but it is not. Banks don’t guarantee that the “great rate” CD you got yesterday will be available tomorrow. Ask yourself what will you do with your cash when that happens. Then start working on your own long term strategy for Cash.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Thu Aug 10, 2017 7:53 am
by jhogue
-Don’t forget that the I bond composite rate has both a fixed and a variable component.

The variable rate is calculated from CPI-U and adjusted semi-annually. The fixed rate is assigned by the Treasury Dept. when the I bond is purchased. It does not change over the life of the bond. Composite interest accrues monthly and is compounded semi-annually. In neither case can the rate ever fall below zero, which means that I bonds are protected from deflation as well as inflation.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Sat Aug 12, 2017 1:49 pm
by blue_ruin17
  • Thou shalt not hold a separate cash "emergency fund" in addition to the cash allocation of the PP.
  • Thou shalt not attempt to juice returns by creeping up the yield curve with your cash, which is tempting in our low rate era, but especially dangerous if rates begin to rise faster than your cash's ability to rollover into them.
  • Thou SHALT consider the utility of maintaining a small portion of your cash in the form of physical bills, in order to hedge against the the possibility that you may not be able to access cash from an ATM during a local emergency, a banking crisis (capital controls), or even a financial "Ice-9" type event.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Sun Aug 13, 2017 9:20 am
by jhogue
blue_ruin 17,

All great points!

-Don’t forget that an emergency fund is an integral part of the PP. Non-PP portfolios frequently juice their returns by not including cash. Big mistake on several levels. Every saver and investor needs the safety provided by an emergency fund. Financial stuff happens. When it does, you don’t want to have to sell volatile or tax sheltered assets to get to your money.

- I consider creeping up the yield curve to come under my “don’t chase yield” admonition. Creeping up the yield curve is an acute problem for investors right now because short term yields have been so low for so long. I agree that the frustrations and temptations are great. When even long time PP investors on this forum start throwing in the towel we have entered what stock market gurus call “the capitulation phase.” My advice is take a snapshot of your PP Cash once a year and ask yourself how exposed you are to securities with more than a year in maturity. Those are most at risk of taking a hit if there is a sudden rise in rates.

- After the Great Depression, Grandpa always kept a roll of greenbacks in his overalls. He did not trusts banks to be open when he needed his cash and neither should you. He also liked silver dollars—which he never referred to as “junk”—and used both bills and coins to teach his grandkids how to count and appreciate the value of money at the same time. Grandma liked cash too. She kept it in an old cigar box and referred to it as her “egg money,” which came from her all-cash side business out at the hen house. By the way, Grandpa knew where Grandma kept her egg money, but he respected her so much that he would never have thought of touching her money without her permission.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Sun Aug 13, 2017 11:03 am
by blue_ruin17
You bring up a great point about portfolios "juicing" their returns by excluding cash from calculation of total portfolio performance.

Fact is, most people with sizable conventional portfolios also have sizable cash accounts, often approaching PP levels of cash allocation. But when they reference their portfolio's CAGR, they exclude the cash from that calculation. This creates the illusion that they are driving a Lexus portfolio, when in fact they are driving a Toyota portfolio.

This casts doubt upon all comparisons between the PP and conventional portfolios.

How do the real world conventional portfolios actually compare to the PP, when substantial cash stashes are included? Is it really a 60/40 portfolio that we are comparing the PP to, or in practice is it actually a 50/30/20 portfolio? Many portfolios that "beat" the PP in growth are probably a lot less juicy when implemented in the real world, if cash accounts are included in measuring total portfolio performance.

Try it: backtest some popular conventional portfolios, but add 10-20% cash to them. This evens the playing field and allows for a more realistic assessment of how portfolios compare to the PP. The growth 'edge' that a lot of conventional portfolios supposedly boast over the PP is considerably blunted if cash is factored in.

* * *

I'm glad you mentioned the behavior of your grandparents who lived through the Great Depression. The fact that they are stashing physical cash even decades later speaks volumes to just how traumatic that era was. Several generations later, those lessons have mostly been forgotten, or are dismissed as irrational, or the product of kooky senility.

But I think the reverse is true: it is us who are insane for entrusting 100% of our life's savings to exist in the digital matrix. Thousands of hours of labour are converted and stored as digital 1's and 0's without a second thought. The digital finance system has truly come to be a paradigm, in the same sense that water is a paradigm for a goldfish: we aren't even aware of it, it is so ubiquitous. Today, even physical fiat cash, which is itself an abstraction, is rapidly coming to be seen as basically "silly", or at least redundant.

In the 1930's, depositors thought the bank had their money. Their balance books had the numbers written right on them, afterall! But for many, that proved to be an illusion. The bank actually didn't have their money. It never really did, it was all just an accounting trick, which was revealed for what it was when everyone came for their money at once.

Anyone who has ever experienced a hard-drive crash knows just how suddenly and completely digital information can be irretrievably lost. Is it really wise to entrust 100% of one's wealth in a form of a few kilobytes of information? We perceive it to be real, which it is, while the matrix is operating without any system errors. I can convert digital capital into physical capital right now, if I chose to. So in that sense it is "real". For now. But what happens if there is some sort of 21st century digital version of what happened in the Great Depression? A foreign state could strike with a cyber Pearl Harbor. A lone hacker could unleash some sort of digital doomsday virus. A solar flare, EMP, or nuclear detonation could irreversibly fry servers. Governments can freeze retirement accounts, halt securities trades and prevent cash withdrawals with the flick of a switch, now (and there is already first-world precedent for this occurring).

My point is not that any of these eventualities will happen, it is that they could, and almost no one is hedged against that risk in the slightest. Personally, I think that entrusting 100% of your capital in a digital matrix exposed to so many systemic risks is insane. It's like owning a home without fire insurance. I wouldn't be able to sleep at night if I didn't own fire insurance. Your house probably won't burn down, but it could, and that risk is real enough that it warrants hedging against.

The same goes for "digital risk": it is real, and the consequences so dire, that risk mitigation strategies are absolutely warranted. This includes holding a small stash of physical cash, as well as holding physical precious metals (ETFs don't count!).

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Mon Aug 14, 2017 8:18 pm
by Kbg
You know I respectfully disagree on the whole money thing. When you step back from it the concept of money is almost absurd, though one of humankind's most effective inventions at the same time.

Grandpa's "money" was "unsafe" at the bank because the bank wasn't available when grandpa needed his money...but at the end of the day grandpa's money was some paper with green ink on it. If the bank burned down with the bank's ledger in it grandpa may have been screwed. Grandpa's silver dollars were useful because they had U.S.A engraved on them somewhere and Grandpa's gold, if he had any, got confiscated and replaced with that paper with green ink on it. The only reason any of it mattered was because Joe the Grocer perceived of the green stuff and the hard stuff as "money." Not sure what the cost of lead was back then but if grandpa would have brought the shiny metal's equivalent in dull metal Joe probably would have pulled the groceries back behind the counter.

There is a good case to be made for cryptocurrencies being perhaps the most effective form of "money" ever invented. It is highly secure, but not perfectly so, it is fully traceable down to the nanosecond it came into being and unlike money with USA printed on it it can cross borders ubiquitously without a government having to "back" it.

And at the end of this day, whether paper with various shades of ink and government names on it or the newest cryptocurrency it comes down to faith. Personally, I don't see a big difference in the safety factor of any currency from the earliest known form (likely cows) to the latest digital version...perhaps we've gone down hill since the beginning. At least you could eat a cow.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Mon Aug 14, 2017 9:32 pm
by stuper1
Who was better off on the Monday after Black Friday: the guy who had some physical cash and physical gold stored outside the bank, or the guy who had all his assets saved inside the now-closed bank?

Who will be better off when the solar flare hits and knocks all the servers out: the guy who has some physical cash and gold stored outside of his electronic accounts, or the one with all his assets stored electronically? What's more, you can have this insurance at precious little opportunity cost, because holding some cash and gold is actually a great diversifier compared to a lot of stock/bond portfolios.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Mon Aug 14, 2017 10:12 pm
by Kbg
I wonder how much money has been lost due to physical theft or fire vs. solar flares?

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Tue Aug 15, 2017 2:29 pm
by jhogue
-The hallmarks of Cash are safety, stability, and liquidity. There are risks to each form of Cash and none of them is perfect. Grandpa learned this the hard way when his bank did not open during the 1933 “bank holiday.” After that life-changing experience, he mitigated future risk by diversification. He not only had a bank account, he also had his roll of greenbacks. I think what blue ruin 17 is saying is that times have changed, but the wisdom of diversification has not. I, for instance, keep three different cash accounts, each in a different kind of institution: I use a TBTF bank account to pay monthly bills and have a free nationwide ATM debit card. I use a local bank to house our safe deposit box (greenbacks and I bonds) and an account with check writing. I use a brokerage account to keep STTs on auto-roll and to funnel interest payments back into new investments.

-As far as cryptocurrencies go, you could very well prove to be right. I can understand the value in some of the qualities that you find most attractive (such as escaping the imposition of capital controls by an unstable government). Then again, there have been some wild gyrations in terms of safety, stability, and liquidity observable with bitcoin that is attracting both excitement and speculation. Excitement and speculation is not what you want with PP Cash. You should want your PP Cash to be really, really, really, BORING.

BTW, the utility of Cash is based upon trust, not faith. Trust comes from experience. With US banknotes and Treasurys, we have 200+ years of experience. With gold with have thousands of years experience.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Tue Aug 15, 2017 8:39 pm
by Kbg
For the record...I'm just poking us all to examine our assumptions on what constitutes safety and why we think that way.

At the end of the day we all need to do what we think best with our cash.

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Tue Aug 15, 2017 8:54 pm
by jhogue
Let the poking begin!

Re: A Litany of “thou shalt nots” for Cash in the Permanent Portfolio

Posted: Tue Aug 15, 2017 9:01 pm
by blue_ruin17

You got me thinking about this subject all day at work, today.

Some musings:

Money = Faith is probably too simplistic an assessment. Perhaps, on an absolute level, that statement is academically true. But on a practical level, there is more to money than mere faith, it is more real than you are giving it credit for.

Gold: if a wealthy Roman family 2000 years ago stashed their capital in the form of gold or silver, at any point in history from that point on, whether the year 300, 1400, or 1999, the distant (lucky) decedents of that family could have dug up that wealth and it would have basically have preserved its purchasing power [as measured by the metric of 1 day of labour/ounce, source]

As well, that family could have tapped into that gold or silver not only at any time, but anywhere (almost). They could taken their gold to the Islamic world, to the Orient, into Europa, pretty much anywhere that complex civilization existed, at any point in that 2000 year span, and used that store of capital as a medium of exchange.

Shared language is not required. Shared beliefs are not required. The same units of measurement are not required, as PMs are fungible. Enemies can even trade fairly with precious metals.

At what point is money (i.e. gold and silver) given credit for being REAL rather than merely dismissed as an artifact of the imagination, a collective hallucination, if you will. Given the millenniums long streak of precious metals working as money, as an effective store of capital value, and as an inter-civilizational medium of exchange, I would say that Money (gold/silver) = more than the sum of Faith.


Even the good ol' Green Back is valuable for reasons greater than mere Faith.

For example, if you want to buy petroleum on the international market (in quantities that matter on the level of nation-states) you have to buy it with U.S. Dollars. It isn't sold anywhere for any other currency. And that isn't just because everyone has collectively agreed to play by those rules, its because those who choose not to participate in that game are confronted with fire and steel, which is deadly real. The US$ may not be backed by gold any longer, but it's backed by more than faith: it's backed by the full force of the most powerful military to ever exist.

Just ask Saddam and Qaddafi, who announced they were going to start selling oil for the Euro and Gold, respectively.

I don't want to stray too far into politics, though.

At the end of the day, for a farmer in the Dust Bowl during the depths of the Great Depression, cash stuffed in a metal tin and hidden under a floor board was more than an abstraction, it is more than mere faith. It was REAL. Try to convince him otherwise, as he converts it into food for his family.