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Richard J. Maybury portrait

Investment Strategy, Bonds and Permanent Portfolio Fund

By Richard J. Maybury

 

The following reprints are from 6/09 EWR, 5/10 EWR and 6/10 EWR.


Reprint from the June-July 2009 EWR Front Page

 

Dear Reader,

My keynote speech at the Wealth Protection Conference on May 2nd in Phoenix made several uncommon observations, and received a standing ovation. In the workshop session afterward, Jim Powell and I both stressed that one of the few things we are confident about is, some very improbable things will happen. Surprises will occur so often they will become routine.

An example is US bonds. A few years ago, I received an angry letter saying I was crazy for recommending Harry Browne's Permanent Portfolio plan, because the plan contains US bonds. I replied that I don't like bonds either, and all the smartest people I know are afraid of them, but the future always brings surprises.

Then the mortgage crisis hit. It generated so much fear that millions of investors fled into US bonds, making these instruments top performers. What should have turned to trash became instead the star of the show.

I am sure this was only the beginning of a parade of shockers.
Richard J. Maybury signature


Reprint from the May 2010 EWR

More about supercurrencies

Harry Browne's Permanent Portfolio plan, explained in his little book FAIL-SAFE INVESTING (www.harrybrowne.org), remains the best strategy I've seen for protecting against all likely possible disasters — inflations, deflations, wars, devaluations, revolutions, epidemics, recessions, crashes, depressions, you name it.

graph of permanent portfolio performance

I like diversification, so I keep a Permanent Portfolio managed account with Will Reishman at Coby Lamson Capital Management (541-773-7774), while also using the Permanent Portfolio Fund (PRPFX, 800-531-5142).

Granted, Harry's plan contains bonds, which scare me.

But bonds have scared me for forty years. I'm sure the day will come when they will plunge to near worthlessness, but when will that be?

They belong in the Permanent Portfolio mix because, hard as it is to believe, they do at times outperform everything else.

One of biggest surprises to all investment specialists — practitioners of the old Keynesian model as well as the new Austrian view— is how well bonds have done in what I call the Great Monetary Calamity. The waves of fear have been so great that people have fled into US bonds for the specific purpose of getting as close to the federal printing press as possible. The greatest weakness of the bonds — that they are denominated in dollars that can be created without limit — became regarded as their greatest strength.

What can I say? View it as a measure of how far the financial system has gone howling mad under Keynesianism.

How long will bonds remain practical? I don't know, but their strength has been a big factor in the Permanent Portfolio's amazing performance during the crisis.

Look at the chart. In the 2008 crash, PRPFX did a swan dive, but began to recover before the end of the year, and it has recently been hitting new all time highs.

How many investments do you know that are designed to maximize safety but have been hitting new highs?

Harry was a genius, no doubt about it. I spent many enjoyable hours with him and I miss him terribly.

However, you will rarely hear anyone in the financial industry extol the virtues of his plan. Like you and me, these people need to earn a living. A plan that requires very little buying or selling produces little income for them.

Here's an important…

…change in the Permanent Portfolio

One of Harry's objectives was to make the plan's inflation-adjusted yield not only positive but so stable it would give us peace of mind.

The peace-of-mind objective, I'm afraid, has been demolished by the Keynesian central banks.

I think a long-term positive yield, or something close to it, is still in the cards. I give it a 75% probability, and don't know anything else I'd rate that high. But the plan's era of stability is over. I expect the sharp drop we saw in 2008 to be repeated many times before the Great Monetary Calamity ends, somewhere between three and ten years from now.

If I am right that swings in velocity are now more dominant than swings in money supply, the economic chaos will continue, and grow a lot worse. Typically when monetary authorities are in over their heads, they cause conditions to oscillate between deflationary and inflationary with increasing frequency until big peaks and valleys happen week to week. The Permanent Portfolio's sharp drop and then rapid rise in 2008-2009 was only a small taste of things to come in all investments of every kind.

None of what I've said here is meant to imply that Harry was an infallible miracle worker. Maybe his plan will break down tomorrow morning. But at this time, it remains the most logical and promising attempt to create a bulletproof portfolio that I've ever seen.

As I keep saying, fasten your emotional seatbelt. We are in for a wild ride, possibly the most ferocious in all of world history. Diversify, diversify, diversify.

On the other hand…

…maybe there is another way…

…to cope with the chaos. Martin Truax and Ron Miller at Morgan Keegan in Atlanta were two of the first brokers to set up a managed account based on my Chaostan model. If you had put $100,000 in that account in 2000, today it would be worth roughly $250,000, compared to the S&P 500, which would be down to $90,000. Better yet, Truax's and Miller's Equity Income Account, which I have also been recommending, would be at $330,000. This may be the best performance by any money managers in the US, and I put some of my own money in their hands. They lean toward the new Austrianism not the old Keynesianism. 770-673-2177. ♦

 


Reprint from the June-July 2010 EWR

Investment strategies

A crucial point to bear in mind is that we are in entirely uncharted territory. Never in 2,500 years of economic history has the entire world financial system gone so spectacularly haywire all at once.

We do not know what will happen, so we must be ready for any plausible disaster.

If previous monetary calamities in individual countries are any guide, every type of investment, no exceptions, will make increasingly wild swings1 , as political decisions cause velocity and money supply to dance around as if they were on pogo sticks. We will see ever lower lows, and ever higher highs, with shrinking time spans between.

There are essentially two investment strategies: buy-and-hold, and trading.

In buy-and-hold, you pick a group of investments you think will do well in the chaos, fasten your emotional seat belt, and drive on.

In trading, you try to guess the bottoms and tops, buying when you think an investment is near its bottom, and hopefully selling near a top.

I'm no good at trading, and in this unprecedented environment, I wonder if anyone is. The euro crisis demonstrates that politicians will lunge from one panicky decision to another, as they yank levers of power that should not exist and that no human can be wise enough to handle.

There is no investment or investment plan I consider safe, but some are safer than others.

It's nearly impossible to give one-size-fits-all investment advice. Everyone's needs and resources are different. This is why I do individualized consulting. But there are a few recommendations I can give that fit nearly everyone. Here are five:

1. The most important may be, if you have a job or business, keep it. A steady income helps you roll with the economic punches, and holds the stress level down. It's your best chance at replacing what governments manage to steal from you.

2. Use Harry's Browne's Permanent Portfolio (PP) and Variable Portfolio (VP) strategy, which I wrote about last month. This has done well for my readers since I began recommending it in the mid-1980s. See Harry's simple book FAIL SAFE INVESTING — LIFELONG FINANCIAL SECURITY IN 30 MINUTES. (www.harrybrowne.org) The Permanent Portfolio tactic is to own a variety of dissimilar investments, so that whenever some are down, others are up. The Variable Portfolio is for trading, assuming you choose to do so.

3. If you think you can do well trading in this environment, put at least 90% of your money into the PP or something like it, and experiment with the rest, in the VP, for at least two years. This will help you know if you really can trade successfully in this new extremely risky environment.

4. Have at least ten percent of your financial assets in gold, silver and platinum bullion coins; a third each. (Go to our YouTube.com video "Buying Precious Metals.")

5. You've seen the riots in Europe. Before the Great Monetary Calamity ends, I think almost every highly developed country will go through something similar, because all are welfare states. Have at least a month's worth of life's necessities, including food, water and medicines.


Even though you might not be in dire straits, sometimes it helps to consider a worst-case scenario, for the light it might shed on your own situation.

I recently heard from a reader concerned about a mentally impaired friend in a nursing home. This friend's sensitivity to risk is as bad as it gets.

Most of his income is from US Treasury bonds, which his advisor says are "the safest thing out there."

First point. If an advisor tells you US Treasury bonds are the safest thing out there, this is strong evidence the advisor's analysis is Keynesian; he is ignoring the threat of currency debasement (as we see with the euro). When velocity gets into late stage 2, bonds will turn to confetti.

Second point. Having the bulk of your money in any single class of investments is extremely high risk. No single class can stand up against all possibilities, so diversify, diversify, diversify.

If I were the financial caretaker of…

…the friend, I'd put a quarter of his assets in PRPFX, a quarter in Will Reishman's Permanent Portfolio managed account, a quarter in Martin Truax's Equity Income account, and a quarter in Truax's Chaostan account. Then I'd pray as if the political hounds of hell were after us, which they are.

Conditions are so fast-changing that if you don't use something like this highly diversified plan, you are forced into being a trader. You must frequently switch investments, hoping to be more right than wrong in your predictions of what officials in the Fed, Treasury, etc. will try to do to us.

A diversified plan such as Harry's builds upward from the assumption that we cannot predict these people's behaviors, and must be ready for anything.

Working from within Harry's model, here are my current Variable Portfolio favorite picks to profit from the two overriding economic trends (war and currency debasement) without taking more than the minimum necessary amount of risk. The first number following the investment is my estimate of the risk level (on a scale of 1 to 5, with one being safest), and the second is my estimate of the three-year profit potential in "real" (inflation-adjusted) terms.

Best for debasement of currencies

Gold, silver and platinum bullion coins, a third each. 1.5; 200%.

Pan American Silver (PAAS), 2.5; 400%

Silver Wheaton (SLW), 2.5; 400%

Barrick Gold Corp. (ABX), 2.25; 300%

Rio Tinto (RTP), 1.75; 200%

BHP Billiton (BHP), 1.75; 200%

Best for wartime

Fidelity Select Defense (FSDAX), 2.0; 100%

Powershares Aerospace & Defense (PPA), 2.0; 100%

iShares Aerospace & Defense (ITA), 2.0; 100%

 

If you don't want to buy them all, I'd go for the coins, BHP and ITA.

This may be the most frustrating time in all of history for those who need their investments to produce income. Almost everything that does, also contains great risk from the danger of a currency panic (again, like the euro). The solution is to be in raw materials investments that have a good yield.

Unfortunately, good ones are extremely rare. The only one I'm comfortable recommending is Westshore Terminals (WTE-UN.T) 1.5; 75%.

None of these suggestions is as safe or promising as I'd like them to be, but given today's conditions, including the dominance of Keynesianism and the apparent beginning of the end of welfare statism, they are the best combination of safety and profit potential I can suggest for one-size-fits-all. ♦

arrow2,500 years of economic history show that when governments get themselves into deep financial trouble, they typically look for ways to steal whatever liquid (easy to sell) assets they can. Broker Will Reishman asks an astute question: do I think the US government will try to save itself by forcing everyone to convert some or all their savings, including pensions, into long-term federal bonds?

Yes. I first wrote about this possibility in the April 1991 EWR, and now I suspect the day may be near.

I'm sure officials in almost every country are secretly discussing schemes to force their populations to buy zero-coupon bonds redeemable in, say, 20 years. By claiming to pay a high interest rate, the scam could dupe most of the population into thinking it's a good deal.

Inflation would gradually reduce the real purchasing power of the bonds to a small fraction of their original value.

The lost purchasing power would be the value covertly stolen by the governments.

Officials can offer any interest rate needed to get the job done because they will have no intention of ever paying off.

I give this scheme a 70% probability. Twenty points of this 70% is the odds of the conversion being forced; 50 points is the odds of a sky-high interest rate being used to lure in so many millions of suckers that force will not be necessary.

Needless to say, if Washington does go the voluntary route, don't volunteer.

The possibility of forced conversion brings us to the single biggest financial problem we face today: how do we hide what's left of our savings after we've paid the taxes on them?

Computers have made it nearly impossible. There is an electronic record of almost everything. It's not illegal to hide your savings, but how do you do it?

Here is a partial solution. Governments in trouble need assets that are liquid. Convert some of your wealth into things that aren't — items that are useful to you but not to them.

The prime example is your emergency supplies: cases of food, stacks of firewood, camping equipment, and everything else that falls into the category of emergency preparation.

Also, art, antiques, tools, clothing, furniture. Again, useful to you but not to them. It's not a complete solution, but it's a help. ♦

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1Even T-bills and CDs, in the sense that the currency in which they are denominated, the dollar, will grow increasingly unstable.