Terry Coxon: "FDIC-insured bank deposits may be a better bet than T-bills"

[murphy_p_t]

from http://lewrockwell.com/orig11/coxon9.1.1.html

key excerpts:
"...Capital Preservation Fund, took conservatism to an extreme with a policy of investing only in Treasury bills. This made the fund's shares arguably as safe or safer than FDIC-insured deposits, and with no limitation on size"

"In fact, given that most FDIC-insured deposits are owned by Americans (aka potential voters) while much of the Treasury debt is owned by non-voting foreigners, FDIC-insured bank deposits may be a better bet than T-bills."

I'm not really convinced of Coxon's statement in the 2nd quote. However, I also recognize that he was a founder of the PP, so I'm thinking it might be prudent to consider what he says.

I'm wondering if I should rethink my cash allocation?

[AdamA]

I'm wondering if I should rethink my cash allocation?

No way!

If a bank fails, the government can always blame the bank.  Yes, there might be some ticked off voters, but this is nothing compared to what would happen if the government were to default on it's short debt obligations. 

[WildAboutHarry]

I'm wondering if I should rethink my cash allocation?

I think FDIC-insured CDs, etc. are perfectly fine in the PP.  For the same reason that Savings Bonds are.

FDIC-insured accounts and savings bonds represent Uncle Sam's great deal for the "little guy" since the purchase limits (savings bonds) or account protection limits (FDIC) preclude the "big guys" from using these in any meaningful way.

The FDIC exists to maintain confidence in the US banking system.  It is barely conceivable that the government would "blame" an FDIC-member bank and not honor the FDIC guarantees.  And in a crisis the US could prop up the FDIC in the same way that it would pay interest and principal on treasury bills, bonds, and notes - the printing press.

A quick check shows that a PenFed 2-year CD (ok, it is NCUA not FDIC) is yielding over 100 basis points more than a 2-year treasury note.

[Indices]

Coxon is totally wrong. Most treasury debt is owned by the American people and the US government. The US government is far more likely to ignore its FDIC obligations than its own. Most of this country's history had zero government insurance for banks. Also FDIC is based on Congressional legislation, paying our treasury debt is based on the Constitution.

[Gumby]

I think FDIC-insured CDs, etc. are perfectly fine in the PP.  For the same reason that Savings Bonds are.

That's incorrect. FDIC accounts are not appropriate for the PP. Savings Bonds are obligations of the government and the US Treasury. FDIC accounts are not. Congress has only supported the FDIC in spirit (with a non-binding resolution).

As Wikipedia says:

In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC's power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors."[35] The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding "Sense of Congress" to that effect,[36] but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
Source: Wikipedia : FDIC

In other words, Congress has only passed a non-binding resolution to stand behind FDIC.

Browne also discusses this in the following episode of his radio show:

https://web.archive.org/web/20160324133 ... -04-17.mp3

Answer starts at 13:05 of the show.

Here is a transcript of that answer...

HARRY BROWNE: In my suggested portfolio, 25% is in cash. And I have suggested that the cash portion should be either in Treasury Bills or in a money market fund that invests only in Treasury Bills. And the reason for that you don't want to be concerned about credit risk. Same thing with the bond portion, it should be in Long Term Treasury Bonds, because despite the terrible way the Treasury handles its money. And its not really the Treasury so much as [the way] Congress, and the President handle money and create all of these fiscal crises and the deficits and so forth. Despite all that, the fact is that the Treasury can always tax us or even print the money as necessary to repay the principal and interest. Now doing that, of course, creates bad problems. But it creates bad problems not just for Treasury securities, but for all types of debts. CDs, the Bonds of other companies, and Commercial Paper and all of these things are affected by it. And what you know is that there is no credit risk with any kind of Treasury securities, even though there may be an investment risk. But there is credit risk with the others. If we had sudden Deflation in this country, it may well be that banks would not have the money to repay all of the CDs that they have issued. Now, we like to think that the Federal Deposit Insurance Corporation would back up the banks. But, the Federal Deposit Insurance Corporation keeps only about 1% to 2% in a reserve fund. 1% to 2% of all the liabilities it has. So, it's in a position, the Federal Deposit Insurance Corporation to bail out a single bank when it fails, or another bank when it fails, or another bank over here when it fails. But, if we had a run on the banks in this country, and all banks were under siege from depositors who are afraid and wanting to get their money out of [them], there's no way in the world the Federal Deposit Insurance Corporation would back them up. Now Congress could appropriate money out of the General Fund for the FDIC, but I suspect that the Budget itself would be in horrendous shape at a time like that, and it wouldn't be likely that Congress would just vote to pay off all those liabilities of the banks 100¢ on the Dollar. Rather they would come up with some kind of plan that you got 50¢ on the Dollar, or only people who could show they were in need got it. Or in some other way it would renege on the promises, but attempt to pay off part of it. But, the Treasury Bills would be in a different position. They would be continually refinanced and taken care of. Now I'm talking about an extreme case here, and the situation that would exist. But, I believe that the Permanent Portfolio and the safety part of it should be set up not just for the risks that we can see in front of us, but for the unthinkable. For the things we just don't expect to happen. Like civil unrest in this country. Or other things of... A run on the banks or whatever it may be. Or hyperinflation of 20% or 30%. Whatever it might be that we don't see today as an imminent threat, the Permanent Portfolio should be able to cover all of those things so that you don't have to stay on top of it. So you don't have to keep reading the news and say, 'My gosh, are we going run into an unprecedented situation here now, and am I covered?' I want you to be covered no matter what happens...Now, the downside of the Treasury Bills is that they will not pay as much in interest as the CDs or any other short term kind of debt. And that's because Treasury Bills do have virtually zero credit risk, while the others have some measure of credit risk and that's what causes them to have a larger interest rate.

Harry Browne hits the nail on the head. If FDIC accounts were safer than T-Bills, the interest rate for T-Bills would be higher than CDs and FDIC accounts. You don't get higher interest rates with less risk. The market knows that T-Bills are safer, and the interest rates reflect that.

[WildAboutHarry]

That's incorrect.

No, that is correct, since that is what I think.

I've listened to the show where Harry discusses the potential risks of FDIC-insured accounts.  I simply think he is being overly cautious.  If you can envision a situation where the government does not back up FDIC-insured accounts (or games the system or means tests the insurance, or whatever) then what would you envision for treasury bills (or federal reserve notes) under those circumstances?  I know that Harry's approach is to always expect the unexpected, but I think you have to discount certain possibilities when you consider the unthinkable (or a situation of extreme, unprecedented chaos).

I don't know that reliance on the constitution in such an extreme situation is all that reliable.  There are numerous examples in our history of constitutional protections being stretched, modified, or interpreted in ways that make one's head spin.

CD's are currently yielding more than comparable treasuries.  Are they more risky?  Perhaps, but short-term treasury rates are being significantly manipulated by the Fed.

Not to change the subject too much, but is the counterparty risk in GLD, IAU, SHY, TLT et al. equal to, greater than, or less than the additional risk in FDIC-insured CDs versus T-Bills?  I don't know, but in order to "do" the permanent portfolio you have to assume all kinds of additional risks beyond what the underlying assets inherently have.

[moda0306]

Are short-term treasury rates being all that manipulated by the fed?  I know that is in effect what the fed is trying to do but when you look at the facts surrounding credit in our economy right now I don't think s-t rates are all-that surprising.

In a world of supply of loanable funds far in excess of demand, and given the likely return elsewhere in the market, I wonder how far off we truly are?

[Gumby]

That's incorrect.

No, that is correct, since that is what I think.

Ok. Then, you are thinking incorrectly. FDIC accounts are not appropriate for the PP as Harry Browne instructed. He was very specific about it. It doesn't mean the HB didn't have an FDIC-insured bank account — he actually did have one, and talked about it. But, he also understood the risks and my guess is that didn't have too much money in his bank account.

I've listened to the show where Harry discusses the potential risks of FDIC-insured accounts.  I simply think he is being overly cautious.  If you can envision a situation where the government does not back up FDIC-insured accounts (or games the system or means tests the insurance, or whatever) then what would you envision for treasury bills (or federal reserve notes) under those circumstances?  I know that Harry's approach is to always expect the unexpected, but I think you have to discount certain possibilities when you consider the unthinkable (or a situation of extreme, unprecedented chaos).

You are overlooking the fact the Secretary of the Treasury already has been given the full power, by Congress, to prioritize and make all payments for Treasuries and Savings Bonds — which are obligations of the government. The Treasury payments are already fully backed by Congress.

It's incredibly easy to envision a situation where the FDIC-insured accounts are not paid back, while Treasuries are paid in full. The reason why I can envision it is because Harry Browne explained it in the transcript, above. If there is a run on the banks, the FDIC would be bankrupt and it would require a binding resolution, from Congress, to fully fund the FDIC. Congress would likely be deadlocked in that situation, since the Federal budget would also be in horrible shape, and then the FDIC would likely not be fully funded.

Treasuries would still get paid even if Congress was deadlocked. The market knows this. The interest rates reflect it. That's why US government bonds are still considered to be "risk free" by the market.

I don't know that reliance on the constitution in such an extreme situation is all that reliable.  There are numerous examples in our history of constitutional protections being stretched, modified, or interpreted in ways that make one's head spin.

Well, if that's true, I highly doubt a program with no-obligation (such as the FDIC), would be funded before a real obligation. Keep in mind that most FDIC-insured deposits depend on Treasuries being paid in order to function. If Treasuries stopped working, almost all FDIC-insured accounts would likely be bankrupt.

CD's are currently yielding more than comparable treasuries.  Are they more risky?  Perhaps, but short-term treasury rates are being significantly manipulated by the Fed.

CD's are full of commercial paper and agency debt. If they were safer than Treasuries, the market would deem them to be less risky than the supposed "manipulated" Treasury rates. The market isn't stupid — it knows which is safer.

Not to change the subject too much, but is the counterparty risk in GLD, IAU, SHY, TLT et al. equal to, greater than, or less than the additional risk in FDIC-insured CDs versus T-Bills?  I don't know, but in order to "do" the permanent portfolio you have to assume all kinds of additional risks beyond what the underlying assets inherently have.

Excellent point. This is why Browne recommended reducing counterparty risk as much as possible. I believe the counterparty risk of GLD, IAU, SHY and TLT is more than FDIC-insured accounts. They would likely all fail under the same conditions, but you might get back some (or all) of your money with FDIC-accounts if Congress was able to agree on a measure to fully fund the FDIC. If an ETF fails, you're on your own.

[MediumTex]

The fact that there is a spread between what FDIC insured accounts are paying and what similar duration treasury debt is paying means (to me) that there is obviously a risk differential between the two forms of debt.

I have always said that it is not necessarily unreasonable to use FDIC insured accounts in the PP (though it is obviously a departure from HB's PP recipe), so long as the investor truly understands the risks they are assuming by taking this approach.

I think that what happens more often is that a PP investor looks at treasury rates and looks at FDIC-insured bank rates and assumes they are interchangeable, which they are not. 

Another simple way of mitigating FDIC risk for someone who wants to use bank accounts for PP cash is to spread the cash around several banks.

It also doesn't have to be all or nothing.  A PP investor could have a total cash allocation of $50,000, with $35,000 in t-bills, $5,000 in a checking account at Bank A, $5,000 in a savings account at Bank A, and $5,000 in a 12 month CD at Bank B.  I don't think that would be a crazy thing to do, so long as the risks were understood.

[AdamA]

Not to change the subject too much, but is the counterparty risk in GLD, IAU, SHY, TLT et al. equal to, greater than, or less than the additional risk in FDIC-insured CDs versus T-Bills?  I don't know, but in order to "do" the permanent portfolio you have to assume all kinds of additional risks beyond what the underlying assets inherently have.

I think it is.  I think owning bonds and gold coins is safer than owning an ETF. 

[moda0306]

I say in today's environment the opportunity cost of holding cash (otherwise in treasury bills) in a safe is a no brainer.

How do we actually get the money our treasuries hold if banks aren't paying back deposits.  Once my bonds expire in my Vanguard account, all of a sudden I'll "receive" cash into my Vanguard money-market sweep account and I'm left with the same problem we started with.... so how do we actually get the money that our bonds are holding without using an account that is subject to FDIC bs?

[rickb]

Not to change the subject too much, but is the counterparty risk in GLD, IAU, SHY, TLT et al. equal to, greater than, or less than the additional risk in FDIC-insured CDs versus T-Bills?  I don't know, but in order to "do" the permanent portfolio you have to assume all kinds of additional risks beyond what the underlying assets inherently have.

If you're holding GLD, IAU, SHY, TLT et al. you aren't actually "doing" the PP as Browne prescribed.  It is precisely because of the counterparty risks of these sorts of investments that he recommended gold coins (not GLD or IAU), treasury backed money market funds (not SHY), and direct ownership of long term treasuries (not TLT).  If you're really doing the PP, using the assets in the form Browne recommended (i.e. gold coins, treasury backed MM, direct ownership of LT treasuries, and a broadly diversified stock index fund [not ETF]), you're minimizing counterparty risks as about as far as they can be minimized (while preserving the "no fuss, no muss" aspects of the portfolio as well).

[AdamA]

I say in today's environment the opportunity cost of holding cash (otherwise in treasury bills) in a safe is a no brainer.

How do we actually get the money our treasuries hold if banks aren't paying back deposits.  Once my bonds expire in my Vanguard account, all of a sudden I'll "receive" cash into my Vanguard money-market sweep account and I'm left with the same problem we started with.... so how do we actually get the money that our bonds are holding without using an account that is subject to FDIC bs?

You make a good point.

I have heard it said that the government would do whatever it took in these circumstances to make sure that holders of short term debt get their money...whether this would happen in reality I'm not sure. 

I do know that I can write checks out of my treasury only money market fund.  I'd hope that I'd still be able to do this during a crisis, but who knows.

[moda0306]

Wouldn't you hate to watch yourself beat the FDIC failure only to watch your bonds expire and plunk your proceeds down into your now-unaccessible non-treasury MM sweep account?

Until they reopen treasury MM's I think I'll just hope the FDIC holds up and hold "enough" cash physically to make up for it.

[AdamA]

Wouldn't you hate to watch yourself beat the FDIC failure only to watch your bonds expire and plunk your proceeds down into your now-unaccessible non-treasury MM sweep account?

Yes!

That's why I'm willing to pay .5% to use a treasury only money market fund.

It's hard for me to imagine that T-bills would just get tossed back into a distressed sweep account during a crisis.  I wonder how this would be handled...(anyone know?).

[moda0306]

One would like to think there'd be that mechanism, but what are they going to do?  Force Vanguard to transfer it to a "different" account or at least honor the transaction for treasury bill holders?

Seems like there are holes in the system.

Maybe if it's treasury direct... maybe that's a way to actually get the money... will treasury direct issue checks, or simply transfer funds to your bank (no good in FDIC-failure-land).

This are the kinds of questions that I don't like not having an answer for.  It seems like you have to be able to trace that money not just to the treasury, but how its going to result as a check in your hand.

And even then!!!!.... you have a check... with banks that aren't issuing dollars... is someone really going to recognize that check as payment?  What does a world without functioning banks look like in terms of using signed check instruments issued by the treasury as indicators of value?

[WildAboutHarry]

Thanks all for an interesting and thoughtful discussion.

If you're holding GLD, IAU, SHY, TLT et al. you aren't actually "doing" the PP as Browne prescribed.

Harry did "bless" TLT in one of the radio shows, if I recall correctly.  Not sure about GLD.

In reviewing the various incarnations of Harry's "Permanent" portfolio it is clear that his concepts changed as his thinking evolved.  He really did talk about permanent portfolios (plural) from time to time.  I don't think it is incorrect to consider alternative investment vehicles for the HBPP components.  Clearly Harry was doing that all along (i.e. from an aggressive growth fund to an index fund, etc.).  While there might be an "orthodox" HBPP, I suspect that virtually every implementation of one deviates from that orthodoxy.

The fact that there is a spread between what FDIC insured accounts are paying and what similar duration treasury debt is paying means (to me) that there is obviously a risk differential between the two forms of debt.

I have always said that it is not necessarily unreasonable to use FDIC insured accounts in the PP (though it is obviously a departure from HB's PP recipe), so long as the investor truly understands the risks they are assuming by taking this approach.

I think that what happens more often is that a PP investor looks at treasury rates and looks at FDIC-insured bank rates and assumes they are interchangeable, which they are not. 

Another simple way of mitigating FDIC risk for someone who wants to use bank accounts for PP cash is to spread the cash around several banks.

It also doesn't have to be all or nothing.  A PP investor could have a total cash allocation of $50,000, with $35,000 in t-bills, $5,000 in a checking account at Bank A, $5,000 in a savings account at Bank A, and $5,000 in a 12 month CD at Bank B.  I don't think that would be a crazy thing to do, so long as the risks were understood.

I agree with both the presence of additional risk and with the use of FDIC accounts in the PP, so long as that risk is understood.  But of course some of that risk is liquidity risk (CD withdrawal penalties).  If you are not planning on trading T-Bills then why not capture the additional return?

At the end of 2005 (the year before Harry died) the 1-year T-Bill was yielding about 4.4%.  CPI inflation ran about 3.2% for 2005.  Imagine that, a positive real return on cash!  If he were alive today (how many times has that phrase been used in this Forum?) I wonder what Harry would have done to the "permanent" portfolio in response to these economic conditions?

[MediumTex]

One would like to think there'd be that mechanism, but what are they going to do?  Force Vanguard to transfer it to a "different" account or at least honor the transaction for treasury bill holders?

Seems like there are holes in the system.

Maybe if it's treasury direct... maybe that's a way to actually get the money... will treasury direct issue checks, or simply transfer funds to your bank (no good in FDIC-failure-land).

This are the kinds of questions that I don't like not having an answer for.  It seems like you have to be able to trace that money not just to the treasury, but how its going to result as a check in your hand.

And even then!!!!.... you have a check... with banks that aren't issuing dollars... is someone really going to recognize that check as payment?  What does a world without functioning banks look like in terms of using signed check instruments issued by the treasury as indicators of value?

I think you have to be able to trace it from t-bill to groceries in your pantry.

It does, however, seem likely that any kind of banking crisis would be transitory (as all crises are).  You can only stay in crisis mode for so long before that just becomes the new normal.  I am sure that given enough time some kind of makeshift banking system would be put into place for purposes of clearing checks and electronic payments.  Depositors in such a scenario might be left waiting, but other banking functions would probably continue after the crisis passed.

[Lone Wolf]

I say in today's environment the opportunity cost of holding cash (otherwise in treasury bills) in a safe is a no brainer.

I agree.  I think these incredibly low rates make physical cash a very attractive option (assuming you can secure it in a safety deposit box and\or Fortress of Solitude.)

[Gumby]

Maybe if it's treasury direct... maybe that's a way to actually get the money... will treasury direct issue checks, or simply transfer funds to your bank (no good in FDIC-failure-land).

TreasuryDirect will issue checks to the mailing address on record when they can't complete a transfer.

And even then!!!!.... you have a check... with banks that aren't issuing dollars... is someone really going to recognize that check as payment?  What does a world without functioning banks look like in terms of using signed check instruments issued by the treasury as indicators of value?

You should be able to do something with a check from the US Treasury. Maybe take it to a foreign exchange office and exchange it in for some Yen. Brokerage houses will usually take checks for deposit, and then you could pay some bills with it or something.

[rickb]

Thanks all for an interesting and thoughtful discussion.

If you're holding GLD, IAU, SHY, TLT et al. you aren't actually "doing" the PP as Browne prescribed.

Harry did "bless" TLT in one of the radio shows, if I recall correctly.  Not sure about GLD.

Here's what he actually said about TLT (on his website) - from http://www.harrybrowne.org/RadioLinksInv.htm:

[TLT is] A relatively new long-term bond fund that is 99% invested in Treasury bonds, never shorter in maturity than 20 years. Thus this is a suitable replacement you can use instead of buying the bonds directly yourself. I still prefer owning the actual bonds, but if that's not possible (for example, because of limitations in a tax-deferred account), you can use this fund. It's traded on an exchange, so any broker can acquire it for you.

He's not "blessing" TLT here - he's saying it would be an OK substitute if you can't for some reason directly own actual bonds.  Big difference.

I can't find a quote directly about GLD, but here's something I've quoted before from "Why the Best Laid Plans" (chapter 25):

Since gold is the last line of defense for you portfolio, you have to be sure to handle it properly.

Don't throw away the benefits of gold by treating it too casually.  Don't put too many pieces of paper between you and your gold.  Buy gold that you can hold in your hand.
...
Gold coins and gold bullion are the only two gold investments appropriate to the Permanent Portfolio.  Each gives you possession of the metal itself, rather than someone's promise to deliver it later.
...
I believe the following storage arrangements are the only ones to consider:
1. Gold coins in your own possession;
2. Gold bullion or coins stored in a Swiss bank;
3. Gold coins stored in a safe deposit box;
4. Gold bullion or coins stored with a U.S. bank acting as a custodian or trustee.

My takeaway from this is he would not have considered GLD or anything other than physical possession of coins or bullion to be a suitable vehicle for the gold portion.

Personally I think it's fine to do whatever you want as long as you understand what you're doing - but please don't delude yourself into thinking holding 25% of your assets in GLD and another 25% in TLT is what Browne recommended

[WildAboutHarry]

He's not "blessing" TLT here - he's saying it would be an OK substitute if you can't for some reason directly own actual bonds.

I put quotes around blessing to indicate a figure of speech, not to imply a direct Harry quote.

And he said it was a "suitable replacement" which implies identity of function to individual LT Treasury bonds in the context of an HBPP.

On GLD, Harry took a question on the 1/23/2005 show (about 11 minutes in) and stated he had not investigated the gold ETFs yet and would do so in the future.  He followed up on the 2/13/2005 show (about 7 minutes in) and stated that GLD was OK for those circumstances where an individual's accounts were largely in tax-deferred space.

Personally I think it's fine to do whatever you want as long as you understand what you're doing - but please don't delude yourself into thinking holding 25% of your assets in GLD and another 25% in TLT is what Browne recommended

In reviewing Harry's Permanent portfolios over the years, I find at least five major variants from 1977 to 1987.  He was constantly thinking and innovating, incorporating his findings into his PP concept.  And even with the 4x25 split he continued to consider various options for the four assets that provided functionally equivalent results.  He did recommend TLT and he did recommend GLD - as functional equivalents to LT Bonds and Gold.  Not his personal preferences perhaps, but "...suitable replacements..."

One of the things that makes Harry Browne such a compelling philosopher is the obvious continual learning and refining that is reflected in his work.  One fantastic aspect of this forum is that it continues, in some small measure, that learning and refining.

[craigr]

The dogma behind the Permanent Portfolio shouldn't interfere with the implementation if you have limited options. IMO.

Someone looking to do the portfolio but decides they don't have a good cash option insteads keeps it in some wonky cash money market sweep fund at their brokerage is making a mistake. They should probably put the money in a bank CD under FDIC limits if they don't have a Treasury MMF to put it into. This is a better option than what they are currently doing. It's all about making better choices and FDIC is better than an uninsured MMF.

Likewise for ETFs like GLD and TLT. If your option is to not implement the full portfolio or do it only with ETFs, then buy the ETFs. You are better off with GLD and TLT than no long bonds or gold whatsoever.

The take-away is that you do the best you can with the tools you have.

And for the record I completely disagree with Terry Coxon on this. If the Treasury goes kaput on paying T-Bills then FDIC is insolvent. With no FDIC insurance behind bank's accounts you'll see a run on the banks that will crater them. IMO. If there is a bad enough budget that the US govt. can't service T-bills then they can't service any debt or borrow any more money to pay the bills so all bets are off. Better have some gold tucked away overseas because they are going to start grabbing everything in sight to keep the lights on.

[murphy_p_t]

Someone looking to do the portfolio but decides they don't have a good cash option insteads keeps it in some wonky cash money market sweep fund at their brokerage is making a mistake. They should probably put the money in a bank CD under FDIC limits if they don't have a Treasury MMF to put it into. This is a better option than what they are currently doing. It's all about making better choices and FDIC is better than an uninsured MMF.

Craig, in what order of risk would you consider the following? (We have already established that a treasury only MMF is lowest risk.)

1. FDIC insured account / Bank Deposit Program
2. SHY
3. SHV

Currently, I have a scottrade account...they are doing something to incorporate FDIC into cash holdings called Bank Deposit Program (http://research.scottrade.com/public/kn ... 84265a0291)

[rickb]

The dogma behind the Permanent Portfolio shouldn't interfere with the implementation if you have limited options. IMO.

Someone looking to do the portfolio but decides they don't have a good cash option insteads keeps it in some wonky cash money market sweep fund at their brokerage is making a mistake. They should probably put the money in a bank CD under FDIC limits if they don't have a Treasury MMF to put it into. This is a better option than what they are currently doing. It's all about making better choices and FDIC is better than an uninsured MMF.

Likewise for ETFs like GLD and TLT. If your option is to not implement the full portfolio or do it only with ETFs, then buy the ETFs. You are better off with GLD and TLT than no long bonds or gold whatsoever.

The take-away is that you do the best you can with the tools you have.

Exactly.

If you can buy long term treasuries directly then you should do it.  TLT is NOT equivalent, but if for some reason you can't buy treasuries directly but you can buy TLT, then buy TLT.  Similarly, if you can buy coins or bullion then you should.  If you can't, GLD might be an acceptable alternative (I'd think very hard about GTU first).  The general principle is you should get as close to direct ownership for each asset as you can.  Mutual funds are one step removed from direct ownership.  ETFs are two steps removed.

For gold, this means gold you can hold in your hand.  Allocated gold held by a reputable third party (e.g. Swiss bank) is a close second.  IMO, pooled gold held by a reputable third party (Perth Mint, goldmoney.com, bullionvault.com) is probably third, paper interest in a closed end gold trust (GTU or PHYS) is probably fourth, and paper interest in an open end gold trust (GLD, IAU, SGOL) is a distant fifth.

For long term treasuries, this means direct ownership of LT bonds.  There really aren't any mutual funds that hold only long term treasuries, so TLT is an alternative (but it's not nearly the same). Whatever's next is a very distant third - but you're looking for the closest thing you can find to direct ownership of long term treasuries.

For cash, this means direct ownership of treasury bills.  Treasury backed money market funds are a close second.  IMO short term treasury ETFs like SHV or SHY are a distant third, but probably ahead of FDIC insured bank accounts (or CDs).

For stocks, this would mean direct ownership of all the stocks in a total stock market index.  For nearly everyone this is completely impractical so the practical choice is a total stock market fund (not ETF). 

Investing according to Browne's principles means, first, allocating your assets 25% each cash, gold, long term treasuries, and stocks - and, second, within each asset class getting as close as you possibly can to direct ownership.