Don't replace gold with TIPS -enough already!

[FarmerD]

Just checked the Bogleheads forum earlier today.  Once again someone is back testing returns using a modified PP where the gold component is replaced by TIPS. 

Many knowledgeable economists and financial experts believe hyperinflation will result from all the money printing and soverign debt issues in the US.  Personally I have no idea if hyperinflation will occur.  I'm rather doubtful, however, since so many smart people have come to that conclusion, I must conclude there is a nonzero possibility of it happening.  Will TIPS protect your portfolio from hyperinflation?

NO!! Think about it.  TIPS are adjusted twice each year to reflect changes in the inflation rate. That does you no good if inflation is running out of control.  What you need is an asset that adjusts with hyperinflation IN REAL TIME.  Gold does that, TIPS don't. Besides, would you really trust an insolvent government to honor the TIPS committments anyway in the midst of a hyperinflationary event?  Bottom line - TIPS will quickly become worthless if hyperinflation hits.

I posted this on the Bogleheads forum some time back.  I doubt any of the readers there comprehend this simple fact.  Having a non-gold portfolio is a matter of religeous doctrine for too many of these Bogleheads.  ""Gee, John Bogle and Rick Ferri say I shouldn't own gold, so there."  These people don't grasp that they are gambling their entire life savings big time and could be wiped if the Black Swan flies overhead. 

Side note:  My post on the Bogleheads forum was locked by Taylor Larimore (a guy I previously had a lot of respect for) because my post was "too political." WTF?!?!  How in the world could posting about TIPS shortfalls be political in any sense?  Weird. 

 

[Lone Wolf]

Just checked the Bogleheads forum earlier today.  Once again someone is back testing returns using a modified PP where the gold component is replaced by TIPS. 

It's amazing how badly people want to equate TIPS and gold.  I already feel like a broken record with how often I mention this.

If a person sees TIPS and gold as the same thing, they're not thinking "permanent" enough for the Permanent Portfolio.

Under normal circumstances, TIPS do a decent job of protecting their own value from inflation.  But they have no hope of protecting the rest of your portfolio from high inflation (or the ravages of negative real interest rates in even "modest" inflation, such as now.)  Gold's volatility and violent reaction to inflation are essential to save you when the rest of the portfolio is being hammered by currency debauch.

And this is all true before you even get to the more extreme hyperinflationary scenarios where you really need gold.  But if we're talking "permanent", you don't want to leave your flank exposed, no matter how unlikely any scenario might seem.  And in a history littered with paper promises that turned out to be nothing but extraordinarily scratchy toilet paper, any "permanent" portfolio has to have hard asset exposure of some kind.  (IMO)

[MediumTex]

I will take this opportunity to trot out my TIPS parody of Percy Bysshe Shelley's "Ozymandias".

I call it "TIPSymandias":

I met a traveller from an antique land
Who said: I have seen a curious bond
This bond made a promise rare among men and kings,
Backed by full faith and credit
The bond made it clear to all who bought, purchasing power is safe
Those who look upon the bond are counseled to take comfort
That which is will always be, a promise made is a promise kept,
And other assorted platitudes and assurances.
On the back of the bond these words appear:
"Inflation is tamed for all time!
Gold is barbarous and obsolete, inflation look upon this mighty bond and despair!"
No record of the issuer of the bond remains. Round the decay
Of this curious promise, boundless and bare
The lone and level sands of change stretch far away.

[Lone Wolf]

I will take this opportunity to trot out my TIPS parody of Percy Bysshe Shelley's "Ozymandias".

Very good. 

"Ozymandias" is in fact the perfect poem to frame the Permanent Portfolio, particularly the gold portion.  Ramses and his empire are long gone, but gold is still here.

[moda0306]

Many knowledgeable economists and financial experts believe hyperinflation will result from all the money printing and soverign debt issues in the US.  Personally I have no idea if hyperinflation will occur.  I'm rather doubtful, however, since so many smart people have come to that conclusion, I must conclude there is a nonzero possibility of it happening.  Will TIPS protect your portfolio from hyperinflation?

I completely agree with your gold vs TIPS critique, but take issue with your implied "poll" of knowledgeable economists.

How many is "many" or "so many?"  Further, do they say hyperinflation "will result" or that it's a "conclusion," not a theory?  I'm not being rhetorical... I'm just simply wondering if there are better hyperinflationary predictions than the ones I've read from people who could hardly be called economists.

I haven't read one publicized prediction of hyperinflation that didn't fall into the category of "financial media hackery."  These were hardly economists.  Maybe there are some Austrian economists that predict it to this day, but I think the Austrians are more of the opinion that our monetary tomfoolery causes misallocation of resources and general devaluation, not necessarily a hyperinflationary certainty.

I think Ron Paul was screaming about the dollar collapsing back in 1980, but I don't know what economist he may have been listening to...

I guess, also, that maybe this is a long-term conclusion... to which I'd say, "Yes, of course, SOME day green pieces of paper will have no value.  Also, someday, the sun will go Red Giant and take us all out... along with our gold."

Sorry, I know this is thread-hijack... just looking for some answers.

[FarmerD]

Moda,
There's tons of books, newsletters, web sites, etc that bang the drum for the hyperinflationary scenario.  Most of these people fall into the category of gold fund managers, newsletter writers selling their unique startegy, various media attention whores, and assorted gold bugs/survivalist that live on the fringe.  I read some of their stuff but I read with a skeptical mind.  Still, there others who aren't selling stuff like Lew Rockwell, Ron Paul, Charles Goyette, John T Reed, along with various Austrian economists, etc, who seem sincere in their beliefs (at least in my opinion).  Not saying they're correct - their beliefs may turn out completely wrong.  One could argue that none of these guys have PHd's in economics but that doesn't really matter to me.  Economics is really just a branch of behavior studies and is not a science. 

My opinion regarding hyperinflation is like my attitude to buying property insurance for my house.  Odds are pretty darn slim my house will burn to the ground but if it did, it would be financially catastrophic.  The only sensible thing is to buy insurance. 

That's the beauty of the PP - it provides insurance against just about any economic situation like depression, hyperinflation etc but only if you don't tinker with it.