When all asset classes are overvalued

[Kevin K.]

I thought about adding this link to the long "Is the PP Going to Hold Up?" thread but feared it would get lost in the mix:

https://financialmentor.com/investment- ... here/21479

I think this article does an excellent job of showing both just how dangerously overvalued stocks and bonds are AND of getting at the real root causes of the Bitcoin/Cryptocurrency mania. His disdain for fiat currencies and government manipulation is rather Harry Browne-esque, I must say!

Of course having made a compelling case that the sky is falling he offers only a few vague hints at solutions while offering a course sometime in future (hopefully before the crash?) to those who want to learn more. Still I can't fault his analysis and am impressed with his lengthy track record of calling (and avoiding) market bubbles bursting. Wonder if he has heard of the Golden Butterfly?

[Kriegsspiel]

Reminds me of this quote,

Too many accumulations of money are seeking ways to grow exponentially in a world in which the physical scale of the economy is already so large relative to the ecosystem that there is not much room left for growth of anything that has physical dimensions

-Daly

[Kevin K.]

Yes.

Here's Mr. Tresider's partial list of possible alternative investments and strategies:

"While I can’t explain all the risk management strategies that are possible a few actionable ideas include:

“Deep diversification” (where you diversify by strategy and source of return, not just asset class, by identifying sources of return that inversely correlate with the stock market)
Diversify into certain business and real estate assets where the outcome is driven by a micro-economy
Diversify into alternative assets
Switch to an investment process that includes an exit discipline
Increase allocation to cash
Switch from high volatility, high beta assets to low volatility assets
Diversify into favorably valued assets that might include domestic value plays, certain emerging markets, commodities, and commodity producers
And much, much more"

Obviously there's a huge range of "actionability" here depending on the individual. Personally I think his second suggestion, which could take the form of something as simple as owning one or more rental properties or getting into the Airbnb business might make sense for many as a partial alternative to having most or all of one's nest egg tied up in overvalued stocks and bonds.

Increasing allocation to cash makes all kinds of sense and the author makes a pretty compelling case that cash or near-cash such as short-term CD's are a far better choice than bonds of any sort in a related article that I posted the link to in the Bonds forum here.

Lastly I take "exit discipline" to be stop orders and that also seems to make sense.

I don't think the PP offers much protection from the market conditions he describes. 25% cash is about the only viable part from what I can see.

[glennds]

Sorry to be a cynic, but I have trust issues with people who write about how they called previous market corrections (after the fact), and use as a confirming source -themselves. I would find it more credible if he could point to an article or video where he can be quoted calling the bubble before it happened. Do you know if he ever went on record with a prediction before it happened? Other than the written warnings he says he gave to his subscribers?

As for the list of actionable strategies, I see a lot of wordy suggestions that could mean anything and nothing, at the same time. So when quoting hindsight he is very specific, when predicting the future, not so much.

In his book Harry Browne would characterize this person as a "fortune teller". He would also tell you there's no way to predict the future. People who believe in the Permanent Portfolio, All Weather Portfolio, or any other risk parity strategy believe that except for a temporary tight money recession where no one is making money, one or more of the four asset classes will pull the load under whatever economic conditions are present. At the very least, the downside is blunted.

[Kevin K.]

Sorry to be a cynic, but I have trust issues with people who write about how they called previous market corrections (after the fact), and use as a confirming source -themselves. I would find it more credible if he could point to an article or video where he can be quoted calling the bubble before it happened. Do you know if he ever went on record with a prediction before it happened? Other than the written warnings he says he gave to his subscribers?

As for the list of actionable strategies, I see a lot of wordy suggestions that could mean anything and nothing, at the same time. So when quoting hindsight he is very specific, when predicting the future, not so much.

In his book Harry Browne would characterize this person as a "fortune teller". He would also tell you there's no way to predict the future. People who believe in the Permanent Portfolio, All Weather Portfolio, or any other risk parity strategy believe that except for a temporary tight money recession where no one is making money, one or more of the four asset classes will pull the load under whatever economic conditions are present. At the very least, the downside is blunted.

I apologize for rather flippantly misrepresenting the authors views and achievements. He does have an excellent track record of getting out of bubble investments before they burst but very clearly states that he is not a market forecaster. Here's a relevant quote from the bond article:

"I’m not in the investment forecasting business.

I rarely write posts like this because forecasting financial markets is a fools game that has no place in sound investing. The future is unknowable and anybody who plays in forecasting the market is destined for humility.

What I’m sharing with you here isn’t a forecast. It’s a risk/reward analysis of a broad market sector based on mathematics.

There are rare times when valuations in specific markets reach such absurd levels that the risk vs. reward ratio allows you to make investment decisions without any specific forecast.

I’ve done this twice in the past (publicly), and I’m doing it a third time right now.

How did I know to sell all my investment real estate in 2006 right before the market top?
How did I know to sell my investment management company in 1997 and remove traditional equity allocations from my portfolio 3 years too early before the big top in stocks?
Actually, I never knew either market was at or near a top. That would be a forecast.

Forecasting financial markets is a fools game - stick to sound investing principles instead.

All I knew was the risk/reward analysis was extraordinarily unfavorable to where participating in that market no longer made sense. It was based entirely on business common sense and required no forecast."

Of course I agree with Browne about their being no way to forecast the future. I held the full PP myself for nearly 5 years starting in '08 and benefitted considerably but I don't think the purist version of the allocation is well-suited to current market conditions. No one can know, obviously, what Mr. Browne would have made of a world with interest rates at today's levels, with U.S. stock valuations where they are, with paper gold taking the place of real gold (with gold prices repeatedly suppressed through massive sales of unbacked gold futures contracts on the US Comex and London exchanges) and with the "full faith and credit" of the U.S. being something a political bargaining chip rather than a sacred trust. I suspect he'd be recommending a very different portfolio today to provide parity for very different risks.

[glennds]

Of course I agree with Browne about their being no way to forecast the future. I held the full PP myself for nearly 5 years starting in '08 and benefitted considerably but I don't think the purist version of the allocation is well-suited to current market conditions. No one can know, obviously, what Mr. Browne would have made of a world with interest rates at today's levels, with U.S. stock valuations where they are, with paper gold taking the place of real gold (with gold prices repeatedly suppressed through massive sales of unbacked gold futures contracts on the US Comex and London exchanges) and with the "full faith and credit" of the U.S. being something a political bargaining chip rather than a sacred trust. I suspect he'd be recommending a very different portfolio today to provide parity for very different risks.

Hello Kevin,
Your last paragraph above makes the case that things are different now than they were in Harry Browne's time, in other words the Permanent Portfolio may be antiquated. I don't know whether I agree or not, but I do think it's a question that any prudent Permanent Portfolio investor ought to consider.

As a person who clearly has given it a lot of thought, and who has been a PP investor in the past, what is your chosen capital preservation strategy appropriate to the current environment?
Thanks
glenn

[boglerdude]

https://www.bogleheads.org/forum/viewto ... 0&t=242812

The Bogleheads arent tearing him up quite as much as usual

[sophie]

Because maybe it's not worth the effort?

It looks like a typical fear-mongering article. I shouldn't have read it as that's 10 minutes of my life I'll never get back. No, he can't predict the future any more than you can, not to mention the inaccuracies such as the flattening bond yield curve being "unprecedented" (it's not). I mean, 2008 took Hank Paulson, Larry Summers etc by surprise, and those people are not dumb or out of touch with the markets. Just by chance there were a few people predicting doom and gloom at the right time, just because there are always some of those around at any given moment in time. And of course in hindsight there were lots more of them :-)

I signed a contract on my first apartment the day before the Lehman brothers/AIG collapse in fall 2008. I wasn't paying too close attention to the markets at that time, but I wasn't completely out of it and there was no indication that something frightening was about to happen. I thought I was done for and even had friends telling me to walk out on the contract and my deposit because the real estate market was about to collapse, but it all worked out fine - better than fine actually since I'd sold my taxable stock holdings in order to hold cash for the sale. After that...well let's just say that I enjoy laughing at fear mongers and letting my passive investments continue to do their thing.

[glennds]

I shouldn't have read it as that's 10 minutes of my life I'll never get back.

Sophie, I couldn't agree more. Plus the author is using one of the oldest parlor tricks in the book to turn the reader into a "subscriber" which conveniently results in an income stream for him.
What's the parlor trick? Playing on fear and pain avoidance, which is a nearly irresistible instinct hardwired into our reptilian brains. Add to that another trick I call Black Magic, where he and only he is privy to the complex world around us and the future. And the instinctive relief response to both tricks is to become a subscriber and send him money. How's about that?

I still say it's healthy to continually question and challenge the Permanent Portfolio, but for me, I have found no better vehicle for the money I can't afford to lose, except perhaps tweaks on the concept like GB. One of the best features of the strategy is the forced re-balancing which purposely overrides the reptilian instincts referenced above. Those instincts doom most investors. Re-balancing is as counter-intuitive as it gets when you stop and think about it. The design of the PP is partly intended to save the investor from him/herself.

[Kevin K.]

Hello Kevin,
Your last paragraph above makes the case that things are different now than they were in Harry Browne's time, in other words the Permanent Portfolio may be antiquated. I don't know whether I agree or not, but I do think it's a question that any prudent Permanent Portfolio investor ought to consider.

As a person who clearly has given it a lot of thought, and who has been a PP investor in the past, what is your chosen capital preservation strategy appropriate to the current environment?
Thanks
glenn

Hi Glenn -

I most certainly don't have any special insight but like everyone else here respect the thinking behind the PP as well as its historical performance. For me anyway the best thing to come along since the great Rowland/Lawson PP book is Tyler's Portfolio Charts site and its spin-off PP iterations such as the GB and Desert portfolios.

I am also a great admirer of Larry Swedroe's "Larry" (aka minimizing fat tails) portfolio which is probably as close to the PP as you can get without holding a significant chunk of gold. It has the same massive tracking error issues as the PP though and I am among the many who have found that difficult to live with over the years. So my personal very imperfect solution at the moment is 40% very highly diversified equities (50:50 international:U.S. with tilts to small and value using DFA funds) 50% short-term bonds (corporates, CDs and Treasuries) and 10% cash. It's basically an iteration of the Larry Portfolio but with even shorter-term bonds due to the interest rate environment we are in and 10% more stocks because my time horizon is too long (and nest egg too small) to live with his 30% played-the-game-and-won allocation.

For me the most important take-away from the Tresidder article is no different from what i get from the perma-bear FA guy I use to access the DFA funds: we are quite far along in a stock and bond market that has been fueled by smoke-and-mirrors from the Fed, stock buybacks and a lot of other shenanigans and the mainstream Wall Street narrative about how great and healthy the economy is is not supported by what is actually going on on the ground. In the U.S. we have a stock market bubble, a bond market bubble, a real estate bubble and a government which is hell-bent on destroying the few regulatory checks and balances that have been put in place since the 08 crash while also being eager to vastly increase the national debt. Sooner or later some or all of these bubbles seem very likely to burst. The PP is obviously one "bunker" portfolio that has worked well in the past but as the GB, Desert and Larry portfolios show there are plenty of other iterations that are worthy of consideration.

[Roy]

I am also a great admirer of Larry Swedroe's "Larry" (aka minimizing fat tails) portfolio which is probably as close to the PP as you can get without holding a significant chunk of gold. It has the same massive tracking error issues as the PP though and I am among the many who have found that difficult to live with over the years. So my personal very imperfect solution at the moment is 40% very highly diversified equities (50:50 international:U.S. with tilts to small and value using DFA funds) 50% short-term bonds (corporates, CDs and Treasuries) and 10% cash. It's basically an iteration of the Larry Portfolio but with even shorter-term bonds due to the interest rate environment we are in and 10% more stocks because my time horizon is too long (and nest egg too small) to live with his 30% played-the-game-and-won allocation.

Hi, Kevin,

The original “Larry” was and remains a reasonable choice—about 30% in diversified small cap and very valuey, like DFA (though ETFs like IJS can now do comparable domestic job). It featured 2-year Treasuries, precisely to include the environment we are in now. Even though credit risk tends to be rewarded in short term stocks, these can get whacked in environments like 2008-09, hence the Treasuries, accepting lesser return for better safety in crisis.

At times Larry played with adding 5% (or less) in CCFs but the same bet on Gold did a better job, in my view, end even he eventually admitted it could work in that capacity as a diversifier. Though, perhaps not needed.

Does take a longer-term view to realize the solid returns (that the higher expected return sticks might provide) and tracking error risk is very real along the way. It's one of those allocations that is easy to write on paper but not so easy to live through, during times when everyone who is stock-heavy is chirping. This happened to a big-time corporate exec I know. He entirely understood the strategy and accepted the risks, embraced it post-crash and held it—right up until he made 20% less than his colleagues, soon after. Then he bailed.

But a good bet if concerned about Left Tail events—providing one is equally unconcerned about the tracking, as you seem to understand.

[Kevin K.]

Hi Roy -

It's really a pleasure to see your name pop up here and it gives me the opportunity to thank you for your many insightful posts over the years.

You're right on all counts about the Larry portfolio of course and it's good to be reminded of what the original one was since he's offered so many other iterations since. And you're also more-than-correct about the proliferation of specialized ETFs in recent years that are more than adequate substitutes for most if not all of the DFA funds.

Two other iterations of the LP have also intrigued me: 70% Intermediate Treasuries with 15% Small Cap Value, 8% Int'l Small Cap and 7% Emerging Markets, and Desert's 60% ITT, 10% Gold, 25% Total U.S. Stock Market and 5% Total International Stock. Both are viable low fat tail alternatives to the PP that overcome the understandable resistance some of us have to large amounts of gold and/or owning a ton of 30 year Treasuries. I especially like the first one which comes from Swedroe's "Black Swans" book. I mean as long as you're going to take on tracking error might as well have the equities most likely to outperform given current valuations.

I couldn't post the screen shots due to lousy computer skills but it's really interesting to run these allocations vs. the PP for 2000-2014 or so on Portfolio Visualizer just to get a sense of performance over our two most recent market crashes.

[bedraggled]

I take great pleasure to see 2 original forum members, Kevin K and Roy, from 2010, posting on a topic. I often scroll through members to see who might be still active. There is so much on this forum. Too bad we've lost Machine Ghost and Melveyr (for now?).

As has been recently suggested, this forum may be for the eclectics, as opposed to the traffic jam at Bogleheads.

Thanks to all of you.

And I suspect all asset classes have been overvalued before. Correct, Tyler?

[Roy]

It's really a pleasure to see your name pop up here and it gives me the opportunity to thank you for your many insightful posts over the years.

You're right on all counts about the Larry portfolio of course and it's good to be reminded of what the original one was since he's offered so many other iterations since. And you're also more-than-correct about the proliferation of specialized ETFs in recent years that are more than adequate substitutes for most if not all of the DFA funds.

Two other iterations of the LP have also intrigued me: 70% Intermediate Treasuries with 15% Small Cap Value, 8% Int'l Small Cap and 7% Emerging Markets, and Desert's 60% ITT, 10% Gold, 25% Total U.S. Stock Market and 5% Total International Stock. Both are viable low fat tail alternatives to the PP that overcome the understandable resistance some of us have to large amounts of gold and/or owning a ton of 30 year Treasuries. I especially like the first one which comes from Swedroe's "Black Swans" book. I mean as long as you're going to take on tracking error might as well have the equities most likely to outperform given current valuations.

Kevin.

Good to see you. I recall your many fine posts. Your writings also contributed to my nostalgic bent—haha. And Bedraggled also speaks to this sensibility, so I know it’s not just me! The PP discussions attracted a great mix of guys. No doubt much of that came from the leaders. A moment in time…

Those allocations work well too. And for the equites, 15% Small Cap Value, 8% Int’l Small Cap and 7% Emerging Markets, that Larry mix is likely more robust and better diversified than the Larry original, that I recall. (I’ve seen this with 10% IS and 5% EM too.)

As you know, the stocks are going to be the dominant driver, even at only 30%, but especially with the volatility in those classes. That was his intent—go ever more volatile, and higher expecting in return (they often go together), and then shave even more off the equity commitment. If I recall right, when he was done, he had it down to 25% and no rebalance.

And with all that volatility in a portfolio fruitcup, you get stability. Markowitz would be pleased.

To Larry’s credit he made that move in the late 90s, about 2 years too “early” in that bull run, growth, speculative top-off—but better being early than a little late.

2008-09 showed how strong the Intermediate Treasuries could be, and one cannot go badly there (guys who championed TBM should have looked more closely at what actually happened between the funds—and why). Of course, we are hundreds of basis points removed from that time. Larry’s original 2-year Treasury implementation (which he made prior to the last crash), was in expectation of all-weather, which includes this very different current climate, even as they were talking Bond Bull back then.

Fun stuff.

[Tyler]

And I suspect all asset classes have been overvalued before. Correct, Tyler?

I definitely know that there have been plenty of times historically when every asset has individually sucked, so IMHO nothing is new.

BTW, one should note that the author linked in the OP goes on for quite a bit about how stocks are overvalued, how bonds are due for a correction, and how Bitcoin is untrustworthy as an alternative store of value. You may also notice that he recommends diversifying into "alternative assets", commodities, and cash as a better store of value and I admit I am intrigued. Maybe someone should invent a portfolio that adds cash and a high-value commodity like gold to stocks and bonds in order to build a fail-safe asset allocation. I bet they could write a nice book about it.

[Kevin K.]

How gratifying it is to see this thread morph into something worthwhile thanks to the amazing caliber of so many who post and/or lurk here. And yeah, Mssrs. Rowland and Lawson certainly deserve the lion's share of the credit going way back to their epic threads on the PP on Bogleheads, their great book and of course the precursors to this forum as well as the current version.

I was chagrined to find out that one of my favorite quotes of all time ("I'm more concerned with the return OF my capital than the return ON my capital") was in fact incorrectly attributed to Will Rogers but the sentiment still stands and this forum is one of the few places where those of us who are willing to consider asset allocations other than what Wall Street is feeding us can converse.

Having Tyler chime in here so usefully is for me the icing on the cake as his posts here and on other forums and his amazing Portfolio Charts site are the most stimulating and inspiring resources to come my way in 2+ decades of fumbling my way through the investing world. He's really taken Harry Browne's wisdom to a whole new level and even if a lot of the implications are beyond my pay grade it's pretty great that such a mind is looking at this stuff.

[barrett]

BTW, one should note that the author linked in the OP goes on for quite a bit about how stocks are overvalued, how bonds are due for a correction, and how Bitcoin is untrustworthy as an alternative store of value. You may also notice that he recommends diversifying into "alternative assets", commodities, and cash as a better store of value and I admit I am intrigued. Maybe someone should invent a portfolio that adds cash and a high-value commodity like gold to stocks and bonds in order to build a fail-safe asset allocation. I bet they could write a nice book about it.

Thanks for posting what I think is obvious, Tyler. Until this morning I have recently been too busy to post but have had just enough free time to lurk. Just one question... your observations about a potential solution come free of charge, right??

[Tyler]

Just one question... your observations about a potential solution come free of charge, right??

Doh! I'm clearly not very good at this monetization thing.

[buddtholomew]

200K invested per my current PP allocation at 6:33AM PST.
I was tired of thinking what to do and pulled the trigger.

I’m now 60/40 SPY/IJS for the equity portion from 60/35.
Purchased Gold and LTT’s as well to restore 5.62 FI duration from 4.97.

Nothing more to do now.

[eufo]

Good luck to you, Budd, and good luck to us all!

[buddtholomew]

Good luck to you, Budd, and good luck to us all!

Good luck to the eu